'ER%        \^lOSANCnfx^  ^OFCAIIFO/?^      ^.OFCAIIFO%, 


*  -n         O 

y     I 

S0#       '^>5a3AINrt-3\<!^' 


-< 


^^omm^    "^^ornmrS^ 


.5MFUNIVER%        Ajv:lOSAMCFl[ 


i   3 


^RYQ^       ^IIIBRARYQ<^ 


^OFCAIIFOP/^ 


.^W^!)NIVER% 


^lOSANcner^ 


^c?Aavjian-i^ 


.^WEUNIVERS/A 

< 


Al^lOSANCnfj;^ 
o 


"^aaAiNn-awv 


^HIBRARYQr 


<J3i3DNVsoi^     %a3AiNn3WV^      ^^m\\m\^ 


.^,OF•CAlIF0% 


^<?AHvaaiH^ 


^^^^iUBRARY( 


^OFCAIIFOI 

llir 


''^ 

c 


o 


^losANcntr^ 

o 


"^aaAiNrt-awv 


T        O 
i        I 


- .W^ 


^>NHIBRARY<7/        ^5M11BRARY(?/: 


^    i?^ 


^lOSANCElCr^         ^OFCAllFOfl'^      ^OFCAllFO^^ 


%jiiV3do'^    ^^m\mi^      <rii33Nvsoi^ 


.^MEUNIVERJ/A 

as 


<^U3NVS01^ 


"^aaAiN 


^lOSAN^f^"" 

o 


%JUAINa3W 


V.^        ^^^^^UBRARY(9/^ 

rrs  •J 


JUITI 


^OFCAIIFO^^ 


IFO%, 


AjciosANcntrvi 

<9      .^1^  9 


5 


o 
^i^3DNVS0\^ 


^\\^EUNIVER% 


•5- 
<m33K 


"^^^SaSAINn^VkV^ 


^•lOSTWCElij;^ 


mm\w 


^UlBRARYQc.       ^5^l•UBR 


o  V  ^^  y  VI  'sy     2 


^.yOJIT^ 


^OFCAllFO^i^ 


^OFCAIIFOI' 

'^(?Aavaan#      ^(?Aavaan- 


.vj^UfiANr,'- 


-o<l.i/'\iri|j-3V^' 


^OFCAllFO«j^      ^OFCAUFOff>jk, 


WMUNIVIKV^  vvlUiANtHi 


V*4  ,^^  

<rn3DNVsoi^    "^/jasAiNfij 

•  W^EUNIVERS/^       ^lOSANCEl 


^OFCAIIFO%       ^OFCAllFOff^ 


^^WEUNIV!R5"/,5t.       ^lOSANCElCr^ 


% 


^m^iDNvsoi^^     %a3AiNfi3\ft^       ^(^Aavaan-i^ 


S 


o 


-< 


^^V^E■UMIVER%       ^lOSANCFlCr^ 


<rii33NVS01^        '^Aa3AlNn-3i\V 


5  1  ir^  ^ 


^tUBRARYj?/- 


^OFCAUFOff^ 


"^(^AHvaan^ 


^OFCAlIFOff^ 

^<?AHvaan# 


5|rtMINIVFW/^ 


^.{/ojnvDJO^^    %ojnvDjo^      ^i^uoNvsoi^ 


^^MEUNIVER%       ^ 

-n        c 

S    5 


<ril3DNVS01^       "^ 


^^^t•ll«HAlif"f■c// 


^t:llBRAfrf6>/r 


.^.OFCAllFOI?^ 


^OFCAllFOff^ 

^  L 


^^ 


*>&Aavaan# 


^^Aavaan^ 


^^MEUWW/^ 


^lOSANCElCr^ 


^\ME0Nive?y/4 

ea 

^J^33NVS01=<^ 


39 


55^lllBRARY^/ 


%jnvjjo^       ^JTuoNVSOi^     "^aaAiNrt^v^       %ojnv3io'^ 


^OF-OITO^^      _^ 


^<?Aiivaan-i'^ 


f 


AWEUNIVfR% 


^lOSANCnfx^ 


<f3UONVS01^ 


6 

u_ 

%a3AiNi]-3y\v*^ 


SO 

%a3AiN(ia\^^ 


^IIIBRARY(7a.       ^-UBRARYQ^ 


U3 

■  -^  -i 

^OJITVDJO'^ 
^OFCAlIFOff^ 


^OFCAUFOR^ 


^^Aavaan-^* 


>&Aavaan#' 


^J5l33HVSin^      "^ 

S  i 


-OFCAllFOMj^      ^0FCAIIF(% 


I 


^WUBHAHTC^       J 


^OFCAUFOI!5^      . 


B 


VfKJ 


"1 


THE    LAW 


OF 


EAILWAY  BONDS   AND   MORTGAGES 


IN    THE 


UNITED   STATES   OF  AMERICA. 


THE    LAW 


OF 


RAILWAY  BONDS  AND  MORTGAGES 


IN   THE 


UNITED  STATES  OF  AMERICA. 


WITH 


ILLUSTRATIVE  CASES  FROM  ENGLISH  AND 
COLONIAL  COURTS. 


BY 

EDWARD  LYMAN   SHORT, 

OF    THE    NEW   YORK    BAR  ; 
GENERAL  SOLICITOR  OF  THE   MUTUAL  LIFE  INSURANCE  COMPANY  OF   NEW  YORK. 


BOSTON: 
LITTLE,  BROWN,  AND   COMPANY. 

1897. 


^^^3|//t 


Copyright,  1897, 
Bt  Edwabd  Lyman  Short. 


T 

\S97 


Hnibrrsito  ^rcsg; 
John  Wilson  and  Son,  CAMmunr.E.  U.S.A. 


TO 

A.  L.  S. 


PEEFACE. 


The  idea  of  arranging  the  reported  cases  relating  to 
railway  bonds  and  mortgages  on  the  plan  here  followed 
grew  out  of  a  collection  of  the  Federal  cases  on  this  sub- 
ject begun  by  me  in  1884  for  use  in  private  practice.  At 
that  time  there  was  no  exhaustive  work  on  this  topic. 
Such  collection  was  gradually  added  to  by  including  the 
State  cases,  and  subsequently,  illustrative  cases  from  Eng- 
lish and  other  non-American  Courts  (including  one  or  two 
cases  from  Hawaii)  were  woven  into  the  book.  Cases 
involving  questions  arising  out  of  trust  mortgages  for  the 
benefit  of  holders  of  bonds  of  gas  and  water  and  other 
miscellaneous  companies  have  also  been  inserted. 

The  demands  of  an  active  practice  have  left  only  outside 
hours,  during  the  past  ten  years,  in  which  to  arrange  and 
oversee  the  arrangement  of  the  cases  embraced  herein. 

It  has  always  been  my  view  that  the  chief  value  of  the 
text-book  to  the  practitioner  lies  in  the  fact  that,  when 
properly  compiled,  it  will  enable  him  to  find  any  point  in 
the  law  of  his  subject  which  has  either  been  decided,  dis- 
cussed, or  even  referred  to  incidentally.  Ordinary  Digests 
are  incapable  of  such  detail  owing  to  lack  of  space. 

Even  if  time  permitted  any  practitioner  who  undertakes 
a  legal  work  to  cull  out  all  the  principles,  compare  and 


Tin  PREFACE. 

analyze  all  the  decisions,  and  accompany  such  comparison 
and  analysis  with  his  individual  views,  it  is  questionable 
whether  the  labor,  time,  and  expense  of  such  an  ideal 
work  would  be  compensated  for  by  the  help  he  would 
give  his  professional  brethren,  although  his  work  should 
be  thoroughly  and  ably  done. 

What  the  lawyer  mainly  wants  is  a  case,  or  cases,  on  the 
particular  points  involved  in  the  matter  before  him,  and 
these  he  must  consider  from  the  point  of  view  of  his  par- 
ticular needs.  No  writer  can  foresee  all  the  uses  to  which 
a  judicial  opinion  may  be  put.  These  considerations  are, 
of  course,  merely  general  ones.  There  are  useful  text- 
books of  all  kinds,  and  a  few  very  able  ones  which  almost 
conform  to  the  above  ideal,  —  such  as  Benjamin  on  Sales 
and  Parsons  (James)  on  Partnership,  the  latter  one  of  the 
most  unique  in  existence.  The  intelligent  and  success- 
ful practice  of  the  law  requires  book  learning,  insight  into 
principles,  original  creative  imaginative  thought,  if  I  may 
use  such  an  expression,  and,  more  than  all,  good  judg- 
ment. It  is  doubtless  the  fashion  for  lawyers  pre-eminent 
in  one  rather  than  the  other  of  these  possessions  to  dis- 
parage the  other.  A  learned  codifier  may  emphasize  the 
definiteness  and  certainty  of  statute  law ;  an  old-fashioned 
case  lawyer  may  pour  forth  his  too  often  empty  names 
and  dates ;  a  brilliant  advocate  (lacking  time  for  studious 
reading)  may  dwell  on  the  elasticity  and  adaptability  of 
the  common  law. 

No  practising  lawyer  can  do  the  work  required  to  pro- 
duce an  entirely  satisfactory  treatise  on  the  case  law  of 
the  average  subject.  The  plan  of  a  division  of  labor 
adopted  in  large  modern  encyclopcedias  of  law  is  admir- 
able, and  sliould  be  adopted  even  in  treatises  on  a  single 
subject ;   but  this  is  impracticable  if  the  present  style  of 


PREFACE.  IX 

identifying  the  author  with  his  work  is  to  be  followed. 
But  States  spend  much  money  in  codifying  their  statute 
law,  and  I  have  often  thought  that  money  should  be  spent 
by  States  in  having  their  case  law  thoroughly  digested  in 
the  form  of  text-books,  the  labor  of  the  preparation  of 
which  should  be  greatly  divided,  even  on  a  single  subject, 
and  paid  for  by  the  State,  such  works,  of  course,  not  to  be 
authoritative  statements  of  what  the  law  is.  Digesting 
should  not  be  left  as  it  is  to  the  fancy  and  uncertain  action 
of  members  of  the  bar,  who  can  ill  afford  the  necessary 
time. 

Legal  opinions  are  largely  mere  predictions  of  what 
courts  would  more  or  less  certainly  decide. 

In  the  application  of  the  principles  and  rules  of  law  to 
the  business  life  of  the  world,  it  is  safer  for  clients  that 
advice  given  should  rest,  wherever  possible,  on  known  de- 
cisions of  controlling  courts,  rather  than  on  the  clever 
guesses  of  able  counsel. 

The  author  has  attempted  to  give  out  a  work  which  will 
assist,  he  hopes,  the  bench  and  bar  in  promptly  finding 
discussions  of  points  in  which  they  are  interested.  To 
this  end  the  index  has  been  made  as  full  as  is  consistent 
with  the  proper  size  of  the  book.  This  is  the  feature  in 
which  most  text-books  fail,  although  it  is  not  necessary  to 
carry  an  index  as  far  as  was  done  in  Allibone's  well-known 
story  of  the  index  which  read,  "  Mind,  his  great,"  and  when 
the  reader  of  the  life  of  the  learned  justice  turned  to  the 
page  indicated,  found  that  he  once  had  said  ''  He  had  a 
great  mind  to  commit  the  witness." 

No  one  can  be  familiar  with  the  decisions  in  this  volume, 
especially  those  of  the  Federal  Courts,  without  being  im- 
pressed with  the  acuteness  and  vigor,  independence  and 
impartiality,  learning  and  ability,  which  they  display. 


X  PREFACE. 

It  is  hoped  that  this  book  will  assist  the  bench  in  pre- 
serving harmony  in  their  decisions,  and  thus  enhancing 
and  keeping  permanent  the  value  of  railway  bonds  in  this 
country  and  England,  so  far  as  such  value  depends  on  cer- 
tainty as  to  the  rights  and  remedies  of  bondholders.  This 
is  alike  in  the  interest  of  wage-earners  and  capitalists. 

I  believe  that  a  code  of  equity  practice  in  the  Federal 
Courts  would  be  of  benefit  to  clients  and  practitioners, 
and  that  much  of  the  practice  relating  to  foreclosures 
could  be  advantageously  codified,  so  as  to  produce  uniform 
practice  in  all  Circuits. 

E.  L.  S. 

The  Mutual  Life  Building, 

59  Cedar  Street,  New  York. 

September,  1897. 


CONTENTS. 


CHAPTER  I. 

Nature  and  Issue  op  Bonds      .... 


FAOBS 

1-41 


1.  Power  of   Railway  Companies  gen- 

erally to  issue  Bonds. 

2.  Constitutional  Provisions  as  to  the 

Issue  of  Bonds. 

3.  Special  Charter  Provisions  as  to  Is- 

sue of  Bonds. 

4.  General  Statutory  Provisions  as  to 

the  Issue  of  Bonds. 

(a)  Construction  of  Statutory  Pro- 

visions specifying  the  Pur- 
poses for  which  Bonds  may 
be  issued. 

(b)  Construction  of  Statutory  Pro- 

visions as  to  the  Considera- 
tion of  Bonds. 

(c)  Construction  of  Statutory  Pro- 

visions limiting  the  Amount 
to  which  Bonds  may  be  is- 
sued. 

5.  Rateof  Interest  at  which  Bonds  may 

be  issued. 

6.  Power  to  issue  Bonds  after  Consoli- 

dation. 

7.  Validity  of  Bonds. 


§  8.  Objections  to  the  Validity  of  the 
Bonds  on  the  Ground  of  the  Re- 
lations of  the  Purchasers  to  the 
Corporation. 
9.  Informality  of  Issue,  when  this  is  an 
Objection  of  which  only  Corpora- 
tions can  take  Advantage. 

10.  When  the  Company  is  estopped  to 

dispute  the  Validity  of  Bonds. 

11.  Bonds  not  void  because  Mortgage 

securing  them  is  unauthorized. 

12.  Deferred  Income  Bonds,   Power  to 

issue. 

13.  Validity  of  Pledges  of  Bonds. 

14.  When  the  Issue  of  Bonds  will  be 

enjoined. 

15.  Suits  to  annul  Bonds. 

16.  Certificates  of  Indebtedness  and  for 

Bonds. 

17.  State-aid  Bonds. 

18.  Convertible  Land-grant  Certificates. 

19.  Bonds  convertible  into  Stock. 

20.  Exchanges  of  Bonds. 

21.  Lloyd's  Bonds. 


CHAPTER  n. 
Rights  of  Bondholders 42-99 


Art.  I.  —  Rights  of  Bondholders  gen- 
erally,   NOT    INVOLVING  THE 

Negotiable   Character    of 
SUCH  Bonds. 
§  22.    Bonds  and  Mortgage  must  be  con- 
strued together. 


§  23.    Bonds  are   inoperative   as   Obliga- 
tions   until    the}"   are   issued   to 
Purchasers. 
24.    No  Vendor's   Lieu  in  Favor   of  a 
Seller  of  Bonds. 


xu 


CONTENTS. 


§  25.  The  Relation  of  Bondholders  to 
the  Road  is  sometimes  substan- 
tially that  of  Proprietors. 

26.  The  Relation  of  Bondholders  to 

each  other  generally. 

27.  Majority    and    Minority    Rights 

generallj'. 

28.  Powers  of  Majority  under  Express 

Clauses  in  the  Mortgage. 

29.  Subscriptions  for  Bonds,    Rights 

under. 

30.  Bondholders'  Rights  as  affected  by 

Circulars  issued  by  the  Com- 
pany. 

31.  Control  of  the  Proceeds  of  Bonds. 

32.  When    Bondholders   entitled    to 

demand  Repayment  of  the  Un- 
spent Portion  of  the  Proceeds 
of  their  Bonds. 

33.  Lien  of  Bondholders  not  lost  by 

Surrender  of  Bonds. 

34.  Bondholders'  Right  to  sue  Trus- 

tees in  Possession  for  Money 
received  by  them. 

35.  Rights  of  Bondholders  to  convert 

Bonds  into  Stock. 

36.  Priorities    where  Old   Bonds  are 

exchanged  for  New. 

37.  Transactions  raising  the  Question 

whether  Bonds  have  been  paid 
or  are  outstanding. 

38.  Effect  of  Fraud    upon   Priorities 

between  Bondholders. 

39.  Priority    of     Holders    of    Bonds 

guarantied  by  other  Holders. 

40.  Rights  of  Income  Bondholders. 

41.  Bonds,  in  what  payable. 

42.  "When  Principal  of  Bonds  becomes 

due. 

43.  Legislature  cannot  accelerate  Ma- 

turity of  Principal. 

44.  Company  not  entitled  to  pay  off 

Bonds  before  Maturity. 

45.  Acceleration  of  Maturity  of  Prin- 

cipal as  a  Consequence  of  De- 
fault in  Interest. 

46.  Acceleration  of  Maturity  of  Prin- 

cipal at  Option  of  Individual 
Bonilliolders  or  Trustees. 

47.  Rale  of  Pledged  Bonds. 

48.  Payment  of  Income  Tax  by  Bond- 

holders. 
Art.  II.  — RirjuTs  of  BoNniioi.PERs  in- 
vDi.viNG  Nkootiabi.k  Ciiar- 

ACTKIl    OF   SUCH    BoNDS. 


<  49. 
50. 
51. 

52. 
53. 

54. 

55. 
56. 


57. 

58. 

59. 
60. 

61. 

62. 
63. 

64. 

65. 
66. 
67. 
68. 

69, 


Negotiable  Character  of  Corporate 

Bonds  generally. 
Bonds  not  non-negotiable  because 

no  Payee  is  named. 
Uncertainty  in  Time  of  Payment 
or  Amount  as  affecting  Nego- 
tiability. 
On    the   Law   that   governs    the 

Question  of  Negotiability. 
Who   are  Bmia  Fide  Holders  of 
Bonds  generally. 

Bondholders  are  entitled  to  as- 
sume that  Statement  in  Bonds 
as  to  Date  of  Issue  is  correct. 

Bona  Fide  Holders  not  protected, 
if  Issue  was  uUra  vires. 

Bmia  Fide  Holders  protected  if 
Issue  was  merely  irregular, 
but  Purchaser  with  Notice  of 
Circumstances  qualifying  his 
Rights  not  protected  as  a 
Bona  Fide   Purchaser. 

Rights  of  Holders  where  there  is 
an  Over-issue. 

Rights  of  Bona  Fide  Holders  not 
affected  by  Misapplication  of 
Proceeds  of  Bonds,  by  Original 
Holders  or  others. 

No  Recovery  on  Bonds  when 
Trustee's  Certificate  is  forged. 

Amount  recoverable  where  less 
than  the  Face  Value  has  been 
paid  for  Bonds. 

Title  of  Bona  Fide  Purchaser  not 
affected  by  Fraud  of  Person 
intrusted  with  the  Negotia- 
tion of  the  Bonds. 

Purchase  of  Bonds  by  Directors  of 
Company  at  a  Discount. 

Amount  recoverable  on  Bonds 
tainted  with  Fraud  in  their 
Issue. 

Innocent  Purchaser  of  Stolen 
Bonds  entitled  to  recover 
thereon. 

Rights  of  Purchaser  of  Bonds  the 
Coupons  of  which  are  overdue. 

Pledgees  of  Bonds  as  Bona  Fide 
Holders. 

Riglits  of  Purchasers  of  Pledged 
Bonds. 

Whether  Benefit  of  Mortgage 
clear  of  Equities  passes  with  a 
Transfer  of  tlie  Bonds. 

Doctrine  of  Lis  Pendens  does  not 
apply. 


CONTENTS. 


xni 


CHAPTER  III. 
Rights  of  Coupon-holders 


PASBS 

100-113 


,70. 
71. 


to 


Introductory. 

Rate  of  Interest   on   Bonds  before 

and  after  Maturity. 
Whether  Coupons  arc   entitled 

Days  of  Grace. 
Interest  on  Coupons  after  Default. 
Negotiability  and  Transfer  of  Cou 

pons  generally. 
75.  Recovery  on  Detached  Coupons. 


72. 

73. 

74. 


§  76.    Rights  of  Purchasers   of  Stolen  or 
Lost  Coupons. 

77.  Whether  Coupons  have  been  bought 

or  paid. 

78.  Rights     of     Persons     participating 

in    Arrangements     for     funding 
Coupons. 

79.  Recoupment  of  Defaulted   Interest 

in  an   Action  to  recover  Dam- 
ages for  failing  to  accept  Bonds. 


CHAPTER  IV. 


Guaranty  of  Bonds    114-129 


^  80.   Introductory. 

81.  A    Contract    of    Guaranty    creates 

Independent    Rights    and    Lia- 
bilities. 

82.  Guaranty   for  Accommodation    not 

valid. 

83.  What    is     generally    a    Sufficient 

Consideration. 

84.  Guaranty    given    as    Part    of    the 

Consideration     of     a     Lease    is 
valid. 

85.  Guaranty  to  save  Corporation  from 

Actual  Financial  Embarrassment 
is  valid. 

86.  Guaranty  of  Obligations  of   Com- 

panies carrying  on  another 
Business,  how  far  valid. 
86  a.  Guaranty  valid  where  it  forms 
part  of  a  Compromise  Arrange- 
ment with  a  Debtor  of  the 
Guarantor. 


§87.    Guaranty  of  Bonds  owned   by  the 
Corporation  is  valid. 

88.  Guaranty    may     be     validated     by 

Ratification,  where  not  abso- 
lutely ultra  vires. 

89.  Negotiability  of  Guaranty. 

90.  Guaranty     not    invalidated    as    to 

Innocent  Purchasers  by  the 
Omission  of  merely  Directory 
Formalities. 

91.  Improper   Exercise   of   a   Power  of 

Guaranty,  Rights  of  Innocent 
Purchaser  not  impaired  by. 

92.  Rights    of    Guarantor    of    Interest 

when  postponed  to  those  of 
Eondholders. 

93.  State-indorsed    Bonds    are    subject 

to  Constitutional  Limitations  in 
Force  when  Guaranty  Act  was 
passed. 


CHAPTER  V. 
Definitions  of  "Words  and  Phrases     .     . 


94.  Introductory. 

95.  All  other  Property. 

96.  Apparatus. 

97.  Appendages. 

98.  Appurtenances. 

99.  Charge. 


§  100.  Claims. 

101.  Compromise. 

102.  Consolidation. 

103.  Corpus. 

104.  Earnings. 

105.  First-mortgage  Bonds. 


130-145 


XIV 

CONTENTS. 

§106. 

Franchises. 

§  1 21,    Preferred  Stock, 

107. 

Fuel. 

122.   Profits  used  in  Construction. 

108. 

Going  Concern, 

123.    Property. 

109. 

Income  and  Profits. 

124.    Protected. 

110. 

Income  and  Revenues. 

124  a.    Railway. 

111. 

In  such  Case. 

124  &.    Road-bed. 

112. 

Labor  and  Supply  Creditors. 

125.   Road  and  Property, 

113. 

Laborer, 

125  a.   Servant  and  Employee, 

114. 

Lien. 

126.   Sinking  Fund. 

115. 

Materials. 

127.    Stock, 

116. 

Maturity. 

128.    Tax, 

117. 

Moneys. 

129.   Terms,    Conditions,   and    Limita 

118. 

Net  Earnings. 

tions. 

119. 

Operating  Expenses. 

129  a.   Written  Assent, 

120. 

Past-due  Interest. 

CHAPTER  YI. 


Construction  Contracts 


FAOES 

146-152 


§  130.  Construction  Contracts  violating 
Constitutional  or  Statutory  Pro- 
visions. 
131.  Securities  issued  under  Construc- 
tion Contracts  held  invalid  be- 
cause Directors  were  interested. 


§  132,    Lien  of  Construction  Contracts. 

133.  The  Equities  of  the  Contractor, 

134,  Suits  to   have   Construction   Con- 

tracts declared  invalid. 


CHAPTER  VII. 
Notice 153-159 


§  135.    Of  what  the  Bond  is  Notice. 

136.  Of  what  the  Mortgage  is  Notice. 

137.  Notice  of  Extrinsic  Circumstances, 

Effect  of. 


§  138,   Statutes  relating  to  Bonds  or  Mort- 
gages which  Bondholders  are  pre- 
sumed to  have  Notice  of. 
139.   Notice  under  Recording  Statutes. 


CHAPTER  Vm. 


Mortgages  and  their  Validity 160-209 


General  Statement. 
Art,  I,  — Validity  of  Railway  Mort- 
gages AS  DEPKNDKNT  ON  THE 
POWKK  TO  MORTOAGI:. 

A.  Mortgages  of  Corporate  Prop- 
erly generally, 
§140.  Coinrnon-law  Power  to  mort- 
gage ail  Corymrate  Property. 
141.  Common-law  Power  to  niort- 
gtigc  when  implied  from  Statu- 
tory Powers, 


§142.    Common-law  Power    to   mortgage 
when  limited  by  Implication. 

143.  General     Implications     from     Ex- 

press Grants  of  Power  to  mort- 
gage 

144.  Implications  from  Grant  of  Power 

to    mortgage    for    a    Particular 
Purpose. 

145.  Power    to    execute    Mortgage    im- 

plies Power  to  insert  Provisions 
for  enforcing  it. 


CONTENTS. 


XV 


§  146.  Power  to  mortgage  not  re- 
stricted by  ytatute  declaring 
Lien  in  Favor  of  State. 

147.  Power   of  Consolidated   Compa- 

nies to  mortgage  their  Property. 

148.  Legislative  Eatiiication. 

B.    Power  to  mortgage  Franchises. 

149.  General     Principles     respecting 

Power  to  mortgage  Fran- 
chises. 

150.  Franchise   to  be  a  Corporation 

placed  by  some  Courts  on  a 
Different  Footing  from  other 
Franchises. 

151.  Existence  of  Power  to  mortgage 

Corporate  Existence  not  usu- 
ally inferred. 

152.  Power   to   mortgage    Franchises 

implied  from  Grant  of  Power 
to  sell  them. 
C.   Power    to     mortgage     After-ac- 
quired Property. 

153.  Power    expressly    conferred    by 

Statute. 

154.  Power  implied   from    Enumera- 

tion of  the  Kinds  of  Property 
which  may  be  mortgaged. 

155.  Power    to     mortgage     Uncalled 

Capital. 

156.  Limits   of  the   Power   to   mort- 

gage After-acquired  Property. 

157.  Effect  of  the  Want  of  Power  to 

hold   the   Property   attempted 
to  be  mortgaged. 
Art.  IL  —  Validity  of  Railway  Mort- 
gages     AS      affected     by 
THE    Manner   and   Circum- 
stances OF  ITS  Execution. 
§  158.   Formal  Requisites. 
(a)  Witnesses. 
(6)  The  Oath. 

(c)  Acknowledgment. 

(d)  Seal. 

(e)  Delivery. 

(/)  Special  Requirements. 

159.  When  a  Mortgage  executed  by 

a  Corporate  Agent  is  the  Deed 
of  the  Corporation. 

160.  When  a  Mortgage  is  not  vitiated 

by  Vagueness  of  Descriptive 
Clause. 

161.  Authority  of  Corporate  Officers 

generally  to  execute  a  Mort- 
gage binding  on  the  Corpora- 
tion. 


§  162.    Authority  of  Individual  Officers. 

(a)  Dii-ectors. 

(b)  President. 

(c)  Superintendent. 

163.  Requisite     Consent    of     Stock- 

holders. 

164.  Notice  of  Meeting. 

165.  Place    of    Execution,    Acknowl- 

edgment, or  Authorization. 

166.  Bondholders    entitled    to    pre- 

sume  that   the   Mortgage   has 
been  regularly  executed. 

167.  Mortgages  validated  by  Ratifica- 

tion. 

168.  Improper     Application     of    the 

Proceeds  of  the  Bonds,  Trust 
Deed  not  invalidated  by. 

169.  Fraud    inferred    from     Personal 

Interest  in  Contract  of  which 
the  Mortgage  is  a  part. 

170.  Constructive  Fraud  as  to  Credit- 

ors and  Preferences. 

171.  Effect  of   the   Chattel-mortgage 

Acts. 

172.  Mortgage  to  secure  Future  Ad- 

vances, when  not  invalid. 
Art.  III.  —  Partial  Invalidity  of  Con- 
tract, Effect  of. 
§  173.    Invalidity  of  Part  of  the  Bonds 
secured,  Validity  of  Mortgage 
not  affected  by. 

174.  Mortgage   may   be   Valid    as   to 

Part     of    the     Subject-matter 
and  Void  as  to  Residue. 

175.  Mortgage  of  Franchises  may  be 

Valid  as  to  Part  of  them. 

176.  Excess   of  Power    by   Agent   as 

regards     Part    of     the    Mort- 
gage. 

177.  Defective   Execution  as  to  One 

Kind  of  Property,  Effect  of. 
Art.  IV.  —  Who  may  and  who  may  not 
Question  the  Validity  of 
the  Mortgage. 
§  178.    The  Mortgagor  Company. 

179.  The  Stockholders  individually. 

180.  Junior  Mortgagees. 

181.  General  Creditors   of  the   Com- 

pany. 

182.  Receivers. 

183.  Purchasers  at  Foreclosure  Sale. 

184.  The  State. 


XVI 


CONTENTS. 


CHAPTER  IX. 

PAGES 

Instruments  constituting  Mortgages 210-213 


§  185.    Mortgages  directly  to  Bondholders. 
186.    Trust    Deeds    constituting    Mort- 


§  187.    Instrumeuts  operating  as  Equitable 
Mortgages. 
188.    Liens  in  favor  of  the  State. 


CHAPTER  X. 

What    the    Mortgage    covers,    including    After-acquired 

Property      214-258 


§  189.    General  Statement. 
Art.  I.  —  General  Rules  of  Construc- 
tion. 
§  190.    Introductory. 

191.  General  Laws  the  Standard. 

192.  Lex  Loci. 

193.  Construction  a  Question  for  the 

Court. 

194.  All  the  "Writings  must  be   con- 

strued together. 

,  195.  General  Words  followed  by  Par- 
ticular (Expressio  unius,  etc.). 
196.  Particular  Words  followed  by 
General  {Verba  ejusdem  gene- 
ris). 

Art.  XL  —  What  is  a  Sufficient  De- 
scription TO  PASS  Property 

OWNED  WHEN   THE  MORTGAGE 
IS    EXECUTED. 

§  197.  The  Entire  Property  will  pass 
by  an  Appropriate  Generic  De- 
scription in  a  Mortgage. 

198.  Mortgage    covers    whatever     is 

necessary   to    the    Enjoymeni 
of  the  Thing  granted. 

199.  The   same    Rule    prevails   as  to 

the    Construction    of   a    Lien 
declared  by  Statute  in  Favor 
of  the  State. 
Art.  III.  —  Principles  on  which  Mokt- 

0AGE8     purporting     TO     CON- 

VKY    After-acquired   Prop- 

KRTV   AKK    KNFORCKI). 

§  200.    General    Princij)le    that    of    an 
Kxecntory  Contract. 
201.    Subsidiary  l'iiiici])les    on  wliich 
the    Enforcement   of   the    Ex- 
ecutory Contract  rests. 


Art.  IV.  —  What  is  a  Sufficient  De- 
scription TO  PASS  Property 
acquired  after  the  Mort- 
gage is  executed.  Gen- 
eral Rules  stated. 
§  202.  The  Requirement  of  a  Specific 
Description  in  the  Case  of 
Future  Acquisitions,  on  what 
Principle  based. 

203.  The   Requirement  of  a  Specific 

Description  to  pass  After- 
acquired  Property,  applicable 
to  Statutory  Liens. 

204.  Application    of    General     Prin- 

ciples to  Property  acquired 
and  not  required  for  Railroad 
Purposes. 

205.  Property  used  for  Railroad  Pur- 

poses, What  is. 

206.  Property   acquired    by   Consoli- 

dated Company  when  covered. 
Art.  V.  —  What  is  a  Sufficient  De- 
scription TO  PASS  After- 
acquired  Interests  in  Real 
Estate. 
§  207.    General  Rules. 

208.  General  Words  limited  by  Sub- 

sequent. 

209.  Land  beyond  the  Chartered  Lim- 

its will  not  pass. 

210.  Land-grants  subsequently  made 

to  assist  in  the  Construction 
of  the  Road  not  covered. 

211.  Land  acquired   for  Depots,  etc., 

covered. 

212.  Lands    iUMinired    for    Right    of 

Way  covered. 

213.  Terminal  Facilities  covered. 


CONTENTS. 


XVll 


§  214.    Lands  liokl  by  Equitable  Title 
covered. 
215.    Leasehold  Interests,  when  cov- 
ered. 
Art.  VL  —  What    is     Sufficient    Dk- 

SCKIPTION     TO     PAS.S       AfTER- 

ACQLTiRED   Personalty. 
§  216.    General  Principles. 

217.  Materials    for   the  Track,   when 

covered. 

218.  Rolling-stock,  when  covered. 

219.  Office  Furniture,  when  covered. 

220.  Fuel,  when  covered. 

221.  Personalty   not   used    for    Kail- 

road  Purposes. 

222.  Chases    in    Action    and    Stock, 

when  covered. 

223.  Permanent  and  Temporary  Dis- 

use, Eft'ect  of. 

224.  Alterations  in  the  Subject-mat- 

ter of  the  Pledge. 

225.  Property  bought  to  replace  that 

worn    out,   embraced    by    the 
Mortgage. 
'    226.   Income,  Eevenues,  etc. 


Art.  VII. — Necessity  for  a  Specific 
Description    qualified     by 
THE  Doctrine  of  Fixtures. 
§227.    General    Rule.      Things   which 
are  absolutely  Fixtures. 
228.    Detached  Personal  Property. 
Art.  VIII.  —  Necessity  for  a  Specific 
Description    qualified    by 
the  Doctrine  that  a  Rail- 
road IS  an  Entirety. 
§  229.    The    Doctrine  of  Accession  ex- 
tended. 
230.    Objections  to  this  Extension  of 
the  Doctrine  of  Accession. 
Art.  IX.  —  What  will  pass  under  the 
Term  "  Appurtenances." 
§  231.    Realty. 
232.    Personalty. 
Art.  X.  —  What  will  pass  under  the 
Word  "Undertaking." 
§  233.    In  Instrumeuts  creating  Charges 
on  Railroad  Property. 
234.    In  Instruments  creating  Charges 
on  other  Property. 


CHAPTER  XL 

PAGES 

Priorities   between  Mortgages  and   other   Obligations   of 

THE  Company 259-280 


Art.  I.  —  Priorities  considered  with- 
out Reference  to  the  Ef- 
fect OF  AN  After- acquired 
Property  Clause. 
§  235.  Existing  Liens  are  not  displaced 
by  Mortgage. 

236.  Priorities  as  affected  by  Regis- 

tration Laws. 

237.  Priorities  as  Dependent  on  the 

Terms  of  the  Decree  ordering 
the  Sale  at  which  the  Mort- 
gagor purchased  the  Property. 

238.  Priority  of  Judgment  Lien  es- 

tablished by  State  Law  rec- 
ognized by  Federal  Courts. 

239.  Claims  not  protected  by  Specific 

Lien  necessarily  postponed  to 
Later  Mortgage. 

240.  Existing  Mortgage,  how  far  af- 

fected by  Creation  of  Subse- 
quent Obligations.  General 
Principles. 


§241. 


242. 


243. 


Art.  II. 


§  244. 

245. 

246. 
247. 


248. 


Traffic  Agreement,  when  not  a 
Lien  on  the  Corporate  Prop- 
erty. 

Priorities  expressly  reserved  may 
be  lost  by  Estoppel. 

Priorities  not  disturbed  by  Con- 
solidation. 
-  Priorities  considered  with 
Reference  to  the  Special 
Effect  of  an  After-ac- 
quired  Property   Clause. 

General  Rule. 

After-acquired  Propert)'  passes 
cum  onerc. 

Vendor's  Lien,  how  far  preferred 
generally. 

Priority  of  Vendor's  Lien  where 
the  Property  sold  is  a  Fix- 
ture. 

Lien  when  defeated  by  Vendor's 
Acts. 


XVIU 


CONTENTS. 


Art.    III.  —  Priority     of    Mortgages 

AS  MODIFIED  BY  LEGISLA- 
TION IN  Favor  of  Cehtain 
Classes  of  Creditors. 

General  Statement. 

Lien  of  Mortgage  not  displaced 
by  Subsequent  Legislation. 

General  Lien  Laws,  how  far  ap- 
plicable to  Railroads. 

Waiver  of  Mechanic's  Lien. 
Statutes  creating  Mechanics' 
and  Laborers'  Liens,  strictly 
construed. 
254.  No  Lien  obtainable  by  Contrac- 
tor except  in  Manner  pre- 
scribed by  Statutes. 


§249. 
250. 

251. 

252. 
253. 


§  255.    Bondholders,  when   not  bound 
by   Proceedings   under  these 
Statutes. 
Stockholder     in      Construction 
Company    which    Hoats    and 
guaranties  Bonds,  entitled  to 
claim  Lien. 
Statutes  declaring  Liens  in  Fa- 
vor of  Debts  arising  from  the 
Operation  of  the  Road,  Effect 
of. 
257  a.    Priorities  in  Case  of  English 
Debentures. 


256. 


257. 


CHAPTER   XII. 


Trustees 


PAQES 

281-322 


Art.  L  —  Creation   and   Termination 
OF  THE  Trust.    Appointment 
AND  Removal  of  Trustees. 
§  258.    The  Selection  of  the  Ti'ustee. 

259.  Legal   Capacity    of    Individuals 

and  Corporations  to  be  Trus- 
tees. 

260.  A  State  may  be  a  Trustee. 

261.  Resignation  of  Trustee. 

262.  Appointment,       Removal,      and 

Substitution  of  Trustees  by  a 
Court  of  Chancery,  generally. 

263.  Grounds  of  Removal. 

264.  Mortgage    Provisions   for  filling 

Vacancies. 

265.  Appointment   by  the    Company 

itself. 

266.  Election  by  the  Surviving  Trus- 

tees. 

267.  Statutoiy    Provisions  regulating 

the  Manner  of  the  Election  of 
Trustees  of  Ilailroad  Mort- 
gages. 

268.  Statutes  respecting  the  Election 

of  Trustees  cannot  ov(>ri'iile 
the  I'rovisions  of  a  Trust  Deed 
jireviously  executed. 

269.  Termination  of  the  Trust. 

Art.  II.  —  Natuiie    and     Extent     ok 
TKE   Tktstek's   Estate   and 

POWK.I'.H. 

§  270.    Tlic    Precise    Character   of    the 
IntereMt. 


§  271.  The  Trustee  takes  an  Estate 
sufficient  to  enable  him  to 
execute   his  Trust. 

272.  Quality  of  Trustee's  Estate,  how 

affected  by  Statutory  Pro- 
visions. 

273.  Devolution  of  the  Trust  Estate. 

274.  Powers  of  Trustees  generally. 

275.  Bondholders'  Rights   under   the 

Mortgages  cannot  be  altered 
by  the  Trustees  without  their 
Consent. 

276.  The  Power  to  declare  the  Prin- 

cipal due. 

277.  The  Power  of  a  Trustee  to  waive 

Defaults  in  Interest  or  Princi- 
pal. 

278.  Power  of  Entry  conferred  on  the 

Trustee. 

279.  Power  of  Sale. 

280.  Trustee  not  confined  to  the  Ex- 

ercise of  a  Single  Power 
only. 

281.  Special    Powers   of    Trustee   for 

Enforcement   of  the    Security 
cumulative    ujion    the    Right 
of  Foreclosure. 
Art.  III. — Notice  to  Tisustee,  Effect 

OF. 

§  282.  Bondholders  affected  with  No- 
tice of  Everytliing  learned  by 
Trustee  in  Course  of  Litiga- 
tion. 


CONTENTS. 


XIX 


Art. 


§  283.    Effect  of  Notice  to  Trustee  not 
given  in  Active  Litigation. 
IV.  —  Duties    of    the    Trustees 

GENERALLY. 

The  General  Duties  of  the  Trus- 
tee the  same  as  those  of  other 
Trustees. 

The  Duties  of  a  Triistee  become 
active  when  a  Default  occurs, 
and  are  not  then  merely  min- 
isterial. 

The  Duties  of  the  Trustee  are 
owed  to  the  Bondholders  sev- 
erally as  well  as  collectively. 

A  Trustee's  Duties  are  personal, 
and  cannot  be  delegated. 

A  Trustee  should  consult  the 
Court. 

Trustee's  Duty  to  report  to  the 
Court. 

Trustee's  Duty  to  account. 

Trustee's  Duty  to  prevent  Mis- 
feasance of  Co-trustees. 

Duty  of  Trustee  as  to  Invest- 
ment of  Trust  Funds. 

The  Application  of  the  Money 
which  comes  into  the  Hands  of 
the  Trustees. 


§284. 


285 


286. 


287, 


289. 

290. 
291. 

292. 

293. 


Art.  V.  — Trustees  in  Possession. 
§  294.    General  Statement. 

295.  The    Right    of    tiie   Trustee   to 

exercise  the  Corporate  Fran- 
chises after  entering  a  De- 
fault. 

296.  Trustee's    Duty  to     account   to 

Bondholders  for  the  Avails  of 
the  Property. 

297.  Relation  of  the  Trustee  in  Pos- 

session to  the  Mortgagor  or 
Corporation. 

298.  Trustee    taking    Possession  not 

an  Assignee  of  a  Lease  made 
subsequently  to  the  Mortgage. 

299.  Surrender      of     Possession     by 

Trustee. 

300.  Liabilities  to  Third  Persons. 

301.  Trustees  in  Possession  are  within 

the  Purview  of  Statutes,  etc. 

302.  Liability  of  the  Company  while 

the  Trustees  are  in  Posses- 
sion. 

303.  Fiduciary  Position    of   Trustee, 

Acts  inconsistent  with. 

304.  Trustee  not  compelled  to  coun- 

tersign and  deliver  Bonds. 


CHAPTER  XIII. 
Statutory  Liens  in  Favor  op  Bondholders 


PAGES 

323-335 


§  305.    Introductory. 

306.  When  a  Lien    is   deemed  to   have 

been  created  by  the  Statute. 

307.  Construction    of    Statutory    Mort- 

gages. 

308.  Waiver  of  the  Benefit  of  a  Statu- 

tory Lien  by  the  State. 

309.  Release  of  Statutory  Lien. 

310.  Remedies   of  Bondholders   for  the 

Enforcement  of  Statutory  Liens. 

311.  Condition  for   the    Benefit  of    the 

State  in  the  Enabling  Act  can 
only  be  taken  Advantage  of  by 
the  State. 


§  312.    Subrogation  of  Bondholders  to  the 
Rights  of  the  State. 

313.  Right   of   Holders  of  State  Bonds 

negotiated  by  Company  to  en- 
force Lien  declared  in  Favor  of 
the  State. 

314.  Unconstitutionality  of  Part  of  Act 

authorizing  Issue  of  State  Bonds 
not  a  Bar  to  Enforcement  of  Lien 
by  Bondholders. 

315.  Effect     of      Subsequent     Legisla- 

tion on  the  Rights  of  Bond- 
holders secured  by  a  Statutory 
Lien. 


XX 


CONTENTS. 


CHAPTER  XIV. 
Rolling-stock  and  Car  Trusts    .... 


PAOKS 

336-354 


Art.    I. 

§316 
317. 
318 
319, 
320. 
321 
322 
323 

324 
325 

326 
Art.  11. 


§327 
328 
329 


330 


—  Whether  Rollixg-.stock  is  a 

Fixture. 
Authorities  conflicting. 
Doctrine  in  New  York. 
Doctrine  in  New  Jersey. 
Doctrine  in  Illinois. 
Doctrine  in  Alabama. 
Doctrine  in  New  Hampshire. 
Doctrine  in  Ohio. 
Rule  under   Laws   of  California 

and  Washington. 
Doctrine  of  the  Federal  Courts. 
Legal  Character  of  Rolling-stock 

considered  in  other  Connections. 
Opposing  Doctrines  discussed. 

—  Car  Trusts  and  other  Con- 
ditional Contracts  for  the 
Supply  of  Rolling-stock. 

,    Introductory. 

.    Definition  of  Car  Trust. 

,  Vendor  of  Rolling-stock  only  a 
General  Creditor  unless  Lien 
reserved. 
Mortgage  Lien  generally  post- 
poned to  Rights  reserved  by 
Vendor  till  Price  is  paid. 


§  331.  Rights  of  Persons  lending  Money 
to  the  Company  for  the  Pur- 
chase of  Rolling-stock. 

332.  Title  of  Lessor  of  Rolling-stock 

paramount  to  that  of  Mort- 
gagees. 

333.  Car-trust  Certificates  which  are  in 

Effect  Mortgage  Bonds  of  the 
Company. 

334.  Car-trust  Agreements  in  Breach 

of  Fiduciary  Obligations  of 
Directors. 

335.  How  far  Rolling-stock  Contracts 

are  effectual  against  Creditors 
of  the  Company. 

336.  Wording  of  Contract  not  conclu- 

sive as  to  its  Real  Character. 

337.  Rights  of  Dissenting  Holders  of 

Car-trust  Certificates  where 
Modifications  are  attempted. 

388.  Rights  under  Car  Trusts,  how 
affected  by  Appointment  of 
Receiver. 

339.  Can  the  Court  authorize  a  Re- 
ceiver to  create  a  Car  Trust  ? 


CHAPTER   XV. 

Prevextive  Remedies,  or  Remedies  of  Bondholders  for  In- 
terference WITH  THE  Mortgaged  Property      .     .     .     355-370 


§  340.  Injunctions  against  Acts  of  the 
Mortgagor  impairing  the  Se- 
curity. 

341.  Injunctions  against  Acts  of  Tliird 

Persons  which  impair  the  Se- 
curity, generally. 

342.  Injunctions     against    Execution 

Sales  of  Personalty,  generally. 

343.  When  Equity  will   interefere   to 

protect  the  Lien  of  the  After- 
acfpiired  Property  Clause. 

344.  Inade<iuacy  of  Legal  Remedy  as 

a  ground  for  Interference  of 
E(|uity. 

315.  Public  Interest  in  Operation  of 
lioail  a  O round  for  Interference 
of  Ef|tiity. 

346.  Injunction  to  restrain  Levy  on 
Net  Revenues  specifically  ap- 
propriated to  Payiiieiit  of  State 
Loan. 


§347 


Injunctions     against     Sales     of 
Pealty. 

348.  Injunctions    against     Execution 

Sales     where     Trustees     have 
gone  into  Possession. 

349.  Injunctions   to  prevent  a  Bond- 

holder  from   obtaining  an  In- 
e([uitable    Preference   over   his 
Co-bondholders, 
lixecution    Sale    when    enjoined 
at   the  Instance  of  the  Mort- 


350. 


351. 


352. 


Ijxccution  issuing  out  of  State 
Court  cannot  be  enjoined  by 
Federal  Court. 
Injunctions  in  Aid  of  Holders  of 
Income  lionds. 
353.  Injunctions  against  Enforcement 
of  a  Railroad  Commission 
Law. 


CONTENTS. 


XXI 


CHAPTER  XYI. 

PAGES 

Remedies  of  Bondholders  for  the  Enforcement  of  Bonds. 

—  Remedies  in  General 371-379 


§  354.    Introductory. 

355.  Bondholders    not    restricted    to 

any  Single  Remedy. 

356.  General  Powers  of  ilquity  for  the 

Relief  of  Bondholders. 

357.  State   when   not   a    Trustee    for 

Benefit  of  Junior  Mortgagees. 


§  358.  Chancery  Powers  of  Federal 
Courts  independent  of  State 
Laws. 

359.  Statutes  affecting  Remedies  only, 
not  unconstitutional  as  im- 
pairing the  Obligation  of  Con- 
tracts. 

350  a.  Illustrative  Cases  on  English 
Debentures. 


CHAPTER   XVn. 

Remedies    of   Bondholders    for  the  Enforcement   of  their 

Bonds.  —  Actions  on  the  Bonds  and  Coupons  .     .     .     380-385 


§  360.  Right  of  Individual  Bondholders 
to  maintain  an  Action  at  Law  on 
their  Bonds. 

(a)  General  Rule. 

(b)  Right  restricted  in  the  Bonds 

and  Mortgage. 

(c)  Right  not  suspended  by  Impli- 

cation merely. 

(d)  Right  of  Personal  Action  when 

Money  is  lent  (m  the  Credit 
of  the  "  Undertaking." 
361.   Individual  Bondholders  cannot  levy 
upon  the  Property  mortgaged  for 
the  Security  of  the  Whole  Class. 


§  362.    Suit  maintainable  on  Bonds  though 
Mortgage  is  void. 

363.  Coupons  payable  out  of  Revenues, 

no  Recovery  on,  unless  Existence 
of  Fund  is  shown. 

364.  In  whose  Name  an   Action   on   a 

Bond  may  be  brought. 

365.  Demand  of  Payment,  how  far  nec- 

essary before  bringing  Suit  on  a 
Bond  or  Coupon. 

366.  Suits  on  Lost  Coupons. 


CHAPTER   XVni. 
Remedies  of  Bondholders.  —  Suits  for  Possession 


386-390 


§367.    Generally. 

368.  The  Trustee's  Right  of  Entry  must 

be  exercised  in  Strict  Accordance 
with  the  Provisions  of  the  Mort- 
gage which  confer  the  Right. 

369.  The   Right  of  a  Trustee  to  bring 

Suit  for  Possession  is  sometimes 
implied. 

370.  When    a    Business    is    "unprofit- 

able "  so  as  to  authorize  Trustee 
to  enter. 


§  371.  Trustees  of  First  Mortgage  cannot 
be  ousted  from  Possession  by 
Junior  Mortgagees. 

372.  Special  Powers  of  Trustee  not  avail- 

able to  Bondholder  suing  on  his 
own  Behalf. 

373.  Equitable  Jurisdiction  of  Suits  for 

Possession. 

374.  Possession     by     the     Corporation 

under    Scrutiny   of    Court    and 
Parties  to  the   Suit. 

375.  What   Law  governs  in   Suits   for 

Possession. 


xxu 


CONTENTS. 


CHAPTER  XIX. 


Foreclosure  and  Sale 


PAGES 

391-409 


Art.  I.  —  In  General. 

§  376.  Right  to  foreclose  on  Default 
in  Payment  of  Interest  inher- 
ent in  Mortgage  Contract. 

377.  Provisions  negativing  the  Right 

to  foreclose  and  sell. 

378.  Mortgagee  not  required  to  resort 

to  Sinking  Fund  for  Payment, 
when. 

379.  Improper  Motives  of  Complainant 

,  no  Ground  for  denying  Relief. 

380.  Right  of  Prior  Mortgagee  of  Part 

of  Property  to  foreclose  pend- 
ing Suit  to  foreclose  Mort- 
gage on  whole. 

381.  Matters  not  considered  in  Fore- 

closure Suits. 

382.  Right  to  file  a  Bill  ceases  when 

the  Company  is  dissolved. 
Art.  II. —  Remedy  of  Foreclosure  cu- 
mulative     UPON      Special 
Remedies  provided  by  the 
Mortgage. 
§383.    General  Rule. 

384.  Application  of  Rule  where  Trus- 

tee is  preckided  from  taking 
Possession  until  the  Default 
has  continued  a  Specified 
Period. 

385.  Application  of  Rule  where  a  Re- 

(juest  from  the  Bondholder  is 
a  Prerequisite  to  Entry  by  the 
Trustees. 
Art.  III. —  When  the  Default  is  com- 
plete for  Purposes  of  Suit. 
§386.    Generally. 

387.  Right     to     foreclose,     how     far 

affected  by  Special  Agree- 
ments. 

388.  Words  of  Bonds  controlling  as  to 

whether  Default  has  occurred. 

389.  What     amounts    to    a    Default 

when;  Bondholders  are  re- 
ceiving the   Income. 


§  390.  Defaults  in  the  Payment  of  In- 
terest on  Divisional  Bonds  not 
available  in  a  Suit  to  fore- 
close a  Consolidated  Mortgage. 

391.  What    is   a   Sufficient  Demand, 

where  that  is  required. 

392.  Presentation  of  Coupons  at  Place 

designated  for  Payment  not  a 
Condition  Precedent  to  Suit. 

393.  Waiver   of    the    Right   to   have 

Instalments  of  Interest  paid  at 
a  Particular  Place. 

394.  Ko  Relief  in  Equity  against  Con- 

sequences of  Default  without 
Excuse. 

395.  Benefit    of    Alternative    Agree- 

ment not  available  after  De- 
fault. 
Art.  IV.  —  Powers  of  Trustees  and 
Bondholders  respectively 
IN  Regard  to  commencing 
Foreclosure  Suits. 
§  396.  Power  of  Trustee  to  foreclose 
considered  with  Respect  to 
Provisions  for  a  Request  from 
the  Bondholders. 

397.  Bondholder  estopped  by  Decree, 

though  no  Request  made. 

398.  Default  may  be  taken  Advantage 

of  by  a  Single  Bondholder. 

399.  Majority    of    Bondholders    may 

sometimes  prevent  Foreclos- 
ure. 
Art.  V.  —  Effect  of  Provisions  accel- 
erating THE  Maturity  of 
THE  Debt  on  Default  in 
the  Payment  of  Interest. 
§  400.    Generally. 

401.  Default  when  complete  so  as  to 

render  Piincii)al  due. 

402.  Riglits  of  Minority  P)ondholders. 

403.  Acceleration    of    Maturity    pre- 

vented  by  Words   of  Statute 
authorizing  Issue  of  Bonds. 


CONTENTS. 


XXIU 


CHAPTER   XX. 
Remedies  of  Bondholders,  —  Strict  Foreclosure  . 


PAOES 

410-411 


§  404.   Generally. 
405.  Remedy  not  generally  applicable  in  the  Case  of  Railroad  Mortgages. 


CHAPTER  XXI. 
Jurisdiction 412-431 


Art.  I.  —  How  FAR  THE  Prior  Control 
OF  THE  Subject-matter  in- 
vests A  Court  with  Ex- 
clusive Jurisdiction,  and 
Jurisdiction  generally. 
§  406.  The  General  Rule  as  to  the  Con- 
trol of  Litigation  by  Courts  of 
Concurrent  Jurisdiction. 

407.  Application  of  General  Rule  to 

Process  from  Different  Courts. 

408.  Possession  of   Receivers  not  in- 

terfered with. 

409.  Jurisdiction  of  Court  exclusive 

as  to  Proceedings  taken  to  set 
aside  Decrees  or  Judgments 
rendered  by  it. 

410.  Exclusiveness  of  Jurisdiction  in 

Respect  to  the  Subject-matter 
of  Foreclosure  Suits. 

411.  Suit  in  Co-ordinate  Court   per- 

missible where  Possession  of 
First  Court  is  not  interfered 
with. 

412.  Second   Court   may    pass    upon 

Questions  not  raised  in  First 
Suit. 

413.  Jurisdiction  as   to    Decrees    ob- 

tained by  Fraud  in  other 
Courts. 

414.  Citizenship  of  Parties  to  Ancil- 

lary Proceedings  is  not  ma- 
terial. 

415.  Exclusiveness    of    Jurisdiction, 

how  far  affected  by  Territorial 
Limits. 


§  416.  Rule  that  Equity  acts  in  Per- 
sonam applied  so  as  to  give 
Extra-territorial  J  urisdiction. 

417.  When  Jurisdiction  attaches. 

418.  Jurisdiction   not    lost    by    Dis- 

missal of  Bill  on  Demurrer. 

419.  What  Possession  is  necessary  to 

give  a  Court  Control  of  the 
Res  as  against  a  Co-ordinate 
Tribunal. 

420.  Who  may  assert  the  Exclusive- 

ness of  the  Jurisdiction  of  the 
Court  which  first  obtains 
Control. 

421.  Procedure  and  Practice. 

Art.  II.  —  To  WHAT  Extent  the  Pen- 
dency OF  A  Suit    in    One 
Court  is  a  Bar  to  a  Suit 
in  another. 
§  422.    Introductory. 

423.  Suit   not    barred    by   Pendency 

of  Suit  in  Foreign  Jurisdic- 
tion. 

424.  Plea   of  Lis   Pendens   not   sus- 

tainable unless  there  is  an 
Identity  between  the  two 
Suits. 

425.  Second  Suit  not  barred  if  Parties 

are  different. 

426.  Prior    Suit    not    barred    where 

Different  Relief  is  asked  for. 

427.  Second  Suit  allowed  to  proceed, 

because  best  calculated  to  lead 
to  Decision  on  Alerits. 


XXIV 


CONTENTS. 


CHAPTER  XXII. 

CiTIZEXSHIP    AND    REMOVAL    OF    CaUSES      .       . 


PAOES 

432-448 


Art.  I.  - 

§428. 

429, 

430. 

431 

Art.  II. 
§432. 

433, 

434, 
435, 
436, 
437, 
438, 

439 


—  Citizenship  of  Corporations. 
,  Introductory. 

Corporation  is  Citizen  of  State 
where  it  was  organized. 

Citizenship  of  Corporations  doing 
Business  in  Foreign  States. 
.  Corporation     suable     in     Sister 
State. 

—  Removal  of  Causes. 
Right  of  Removal  must  exist  at 

the  Commencement  of  the  Suit. 
Right     not     affected    by    State 
Legislation. 

,  What  is  a  "  Controversy." 
Removal  by  Consent. 

,  Who  may  remove  a  Cause. 

,   Amount  involved  in  Suit. 

,  Removal  when  there  are  Several 
Parties  on  either  Side. 

.  Arrangement  of  Parties  accord- 
ing to  their  Real  Interests. 


§  440. 


441. 

442. 
443. 

444. 
445. 
446. 

447. 
448. 

449. 
450. 

451. 
452. 


Introduction  of  New  Party  in- 
effectual to  divest  Jurisdic- 
tion. 

Rule  where  a  State  is  Party  to 
the  Suit. 

Separable  Controversies. 

What  does  not  affect  the  Right 
to  remove. 

Removal  takes  the  whole  Cause. 

What  bars  the  Right  of  RemovaL 

When  the  Petition  and  Bond 
must  be  filed. 

Contents  of  Application. 

Formal  Requisite  of  Record  and 
Petition. 

Bringing  up  the  Record. 

Irregularities  in  the  Removal  do 
not  vitiate  it. 

Waiver  of  Objections  to  Removal. 

Requisites  of  Removal  Bonds. 


CHAPTER   XXni. 
Pleadings 449-456 


§  453.    Introductory. 

454.  The  Bill  in  Foreclosure  Suits  and 

Demurrers. 

455.  The  Bill  in  Suits  for  Possession. 


§  456.  Supplemental  Bills. 

457.  The  Answer. 

458.  Cross-bills. 

459.  Dismissal  of  Bill,  and  its  Effects. 


CHAPTER   XXIV. 

Parties  in  Suits  relating  to  Corporate  Securities   . 


457-491 


§  460.    Introductory. 
Art.  I.  —  Rli-e  KEQUiiiiNr,  all  Parties 

MATlClilALLY     INTEllESTEl)     IN 
TlIK  MoilTOAGE   TO  I?K  .JOINED 

EITHER  AS  Plaintiffs  or 
Defendants. 
§  461.  Wlio  sliould  be  l';irti(ts  I'inintiir 
gf'iii-r.'iliy. 
462.  Bondliolilcr.s  ns  I'mtics  I'liiintiH' 
and  Committees  of  lloml- 
holders. 


§  463.  Effect  of  pledging  the  Bonds  on 
the  Question  of  Projjcr  Parties 
Plaintiff. 

464.  Wlio      are      Necessary      Parties 

Defendant. 

465.  Pi'ior  Mortgagee,  when  Necessary 

Party. 

466.  Sub.siMiucTit  Mortgagee,  Necessity 

of  joining. 

467.  Mortgagee  of  Divisional  Mortgage. 

468.  Mortgagor  Comi)any. 


CONTENTS. 


XXV 


§  469.   Stockholders     when     sufficiently 
represented. 

470.  Directors  of  Construction    Com- 

pany to  whom  Bonds  have  been 
issued,  when  l'ro[ier  Parties. 

471.  Guarantors  of  the  Bonds. 

472.  Receivers. 

473.  States  as  Parties  Defendant. 

474.  United   States   as    a    Party    De- 

fendant. 

475.  States  and  United  States  bound 

by  Decree,  if  actually  Parties. 

476.  Intervention  of  Parties  materially 

interested. 
Art.  II. — Parties  in  Suits  by  or  against 
THE  Trustees  or  Represent- 
ative Bondholders. 
§  477.    Introductory. 

478.  Representation  of  Bondholders  by 

one  or  more  of  their  Number. 

479.  Bondholder  allowed  to  sue,  when 

Trusteeship  of  Foreign  Corpo- 
ration is  vacant. 

480.  Bondholder  allowed  to  sue  when 

Trustee  is  Non-resident. 

481.  Suit  by   a  Representative  Bond- 

holder, when  not  permissible. 

482.  Partici]iation  of  Bondholders  in 

a  Suit  begun  by  one  of  their 
Number. 

483.  Representative  Position  of  Trustee 

in  Suits    affecting   the    Trust 
Property  generally. 

484.  Request  to  begin  Suit  must  come 

from  Owner,  not  merely  Holder 
of  Bond. 


§  485.    Suits  in  which  the  Trustee  is  the 
Proper  Party  Plaintiff. 

486.  Bill  tiled  by  or  against  Trustees 

alone  not  demurrable  for  De- 
fect of  Parties. 

487.  Defences    available    against    the 

Bondholders  are  available 
against  the  Trustee. 

488.  Trustee     as      Party     Defendant 

generally. 

489.  Joinder  of  Non-resident  Trustee, 

whether  necessary. 

490.  Trustee's  Control  of  Suits  affect- 

ing the  Trust  Property. 

491.  Proper  Way  to  raise  Question  of 

Trustee's  Unfitness.  Interven- 
tion by  Bondholder  in  Trustee's 
Suit. 

492.  Proper  Time  to  intervene. 

493.  Intervention   must  be  to  enforce 

Rights  accruing  under  Mort- 
gage. 

494.  Intervention  by  Trustee  in  Bond- 

holder's Suit. 

495.  Actionof  Trustees,  to  what  Extent 

binding  on  Bondholders  gen- 
erally. 

496.  Discretionary  Acts  of  Trustee  are 

binding. 

497.  In  what  Matters  Trustee  cannot 

bind  Bondholders. 

498.  Action     of    Trustee     inures     to 

Benefit  of  Bondholders. 

499.  Remedies    of  Dissatisfied    Bond- 

holder after  Rendition  of 
Decree. 


CHAPTER   XXY. 

PAGES 

Control  and  Disposition  of  the  Mortgaged  Property  while 

THE  Company  is  in  Possession 492-503 


Art.  I.  —  Control  of  the  Corpus  of  the 

Property. 
§  500.    Control  usually  left  by  Mortgage 
to  the  Railway  Company. 

501.  Power   to  mortgage  Property  al- 

ready   charged     bj'    Way     of 
"  Floating  Security." 

502.  Liability  of  the  Mortgaged  Prop- 

erty to  be  levied  on. 

503.  Power  of  Judgment  Creditor  to 

sell  the  Mortgagor's  Equity  of 
Redemption. 


Art.  11.  —  Control  and  Disposition  of 
THE  Income. 
§  504.    Company    generally   entitled    to 
dispose   of    Income,     even    if 
pledged. 

505.  Same  Rule  as  against  Holdei's  of 

Income  Bonds. 

506.  Specific    Appropriations    of    the 

Income. 

507.  Stockholder's  Right  to  a  Dividend 

when  complete  or  against  the 
Mortgagor. 


XXVI 


CONTENTS. 


§  508.   Attachment    of    Income     while 
Mortgagor  is  in  Possession. 
509.    When  the  Mortgagee's  Right  to 
the  Income  becomes   absolute 
in  Suits  for  Possession. 


§  510.  When  the  Mortgagee's  Eight  to 
the  Income  becomes  absolute  in 
Suits  for  Foreclosure. 
511.  Effect  of  the  Divestiture  of  the 
Company's  Control  by  the  Suit 
of  a  Party  other  than  the  one 
claiming  the  Earnings. 


CHAPTER  XXVI. 

Appointment,  Removal,  and  Discharge  of  Receivers 


PAGES 

504-545 


§  512. 

Art.  I.  - 

§513. 

514. 

515. 

516. 

517. 

518. 

519. 

520. 

521. 
522. 

523. 

524. 


Art.  II. 


526. 


Introductory. 

■  Appointment  of  Keceivees 
generally. 

For  what  Objects  a  Receiver  is 
appointed. 

Reluctance  of  the  Courts  to  ap- 
point a  Receiver. 

Jurisdiction  to  appoint  a  Re- 
ceiver. 

Who  should  be  appointed  Re- 
ceiver. 

Necessity  of  Notice  to  Parties 
who  will  be  affected  by  the 
Appointment. 

The  Court  will  not  go  into  the 
Merits  of  the  Case  on  the 
Hearing  of  an  Application. 

A  Full  and  Fair  Denial  of  the 
Allegations  of  the  Bill  will 
prevent  Appointment. 

When  the  Mortgagor  Company 
may  obtain  the  Appointment 
of  a  Receiver. 

At  whose  Instance  a  Receiver 
may  be  ap])ointed,  generally. 

When  the  Mortgagor  Company 
may  obtain  the  Appointment 
of  a  Receiver. 

Receiver  not  usually  appointed 
at  the  Instance  of  General 
Creditors. 

Successive  A])plications  for  Re- 
ceivers in  the  .same  Court, 
how  treated. 

Ap[)oiiitment  of  Additional  Re- 
ceivers in  other  States  or  Dis- 
tricts. 

-  ClIUMTMSTANCKS   UNDKR  WHICH 

A   Rkckivkk  will  or  will 

NOT    nV.   API'OINTKD. 

General  Principles  on  which  Re- 
ceivcra  are  appointed. 


§  527.  Limits  to  the  Discretionary  Pow- 
ers of  the  Courts  in  ajipoint- 
ing  Receivers. 

528.  The  Appointment  of  a  Receiver 

not  justifiable  merely  because 
convenient. 

529.  No    Receiver    appointed  unless 

Appointment  will  give  Effec- 
tual Relief. 

530.  Existence   or   Non-existence    of 

Danger  to  the  Fund  deter- 
mines whether  Receivership 
shall  be  granted  or  denied. 

531.  Adequacy     of     Legal     Remedy 

Reason  for  Refusal  to  ap- 
point. 

532.  Default  of  Mortgagor  alone  not 

sufficient  to  justify  Appoint- 
ment. 

533.  No    Receiver   appointed    if    the 

Existence  of  a  Default  is 
doubtful. 

534.  Prevention  of  Fraud. 

535.  Prevention  of  Waste. 

536.  A  Long-continued  and  Hopeless 

Condition  of  Insolvency. 

537.  Dissensions     among    Corjiorate 

Officers. 

538.  Indisposition    of    Company    to 

pay  its  Debts  to  the  Extent 
of  its  Ability. 

539.  Wrongful  Failure  to  apply  Rev- 

enues to  Bonded  Debt. 

540.  Danger   to    Fund    arising   from 

Mismanagement  of  the  Cor- 
porate Property. 

541.  Numerous  Kxecutions  threaten- 

ing Integrity  of  Property. 

542.  Circunista!ic{!s    under    wliich    a 

Judgment  Creditor  will  be 
granted  a  Receivershiii  of 
Mortgaged  Property. 


CONTENTS. 


XXVll 


§543. 
544. 


545. 


Right  to  Receiver  lost  by  Laches. 
Effect  of  Provision  iu  Mortgage 
authorizing   Trustee  to   take 
Possession. 
Last  Subject  continued. 
546.  Appointment  of  a  Receiver  after 
Rendition  of  Foreclosure  De- 
cree, when  proper. 
Art.  in.  —  Removal,  Substitution,  and 
Final    Discharge   of    Re- 
ceivers. 
§  547.   Generally. 

548.  Power  of  Removal. 

549.  Jurisdiction  to  remove  Ancillary 

Receivers. 

550.  Questions   which    will    not    be 

decided   on  Applications  for 
Removal. 


§  551.  Removal  on  Account  of  Circum- 
stances existing  at  tlie  Time 
of  the  Appointment. 

552.  Removal  of  Receivers  appointed 

cj:  parte. 

553.  Right  to  object  to  Appointment 

lost  by  Delay. 

554.  Removal  on  Account  of  Circum- 

stances arising  after  Appoint- 
ment. 

555.  Termination     of     Receiverships 

generally. 

556.  No  Formal  Discharge  necessary 

to  terminate  Receivership. 

557.  Receiver  himself  cannot  be  heard 

in  Opposition  to  a  Motion  for 
his  Discharge. 

558.  Effect  of  the  Discharge. 


CHAPTER  XXVIL 
Title,  Possession,  Office,  and  Duties  of  Receivers 


PAGES 

546-580 


Art.  L  - 

§  559. 

560. 

561. 

562. 
563. 

564. 

665. 
Art.  IL  - 


§  566. 
567. 


568. 


-  Title  and  Possession  gener- 
ally. 

Existing  Rights  not  changed  by 
Appointment  of  Receiver. 

To  what  Property  Receiver  ac- 
quires Title. 

Jurisdiction  of  Property  ille- 
gally in  the  Custody  of  the 
Receiver. 

Interference  with  Possession  by 
Strikers. 

Possession  not  allowed  to  in- 
terfere with  Public  Improve- 
ments. 

Exercise  of  corporate  Franchises 
by  Comiiany  after  Appoint- 
ment of  Receiver. 

Duty  of  Officers  to  deliver  Cor- 
porate Property  to  Receiver. 
-Territorial  Limits  of  Juris- 
diction OF  Court  Appoint- 
ing Receiver. 

General  Rule. 

General  Rule  not  affected  by 
Fact  that  Road  extends  into 
another  State  or  Judicial  Dis- 
trict. 

Ancillary  Courts  exercise  only 
Limited  Jurisdiction  over  the 
Properties. 


§  569. 


§570. 
571. 

572. 

573. 
574. 

575. 


Operation  of  General  Rule  qual- 
ified  by  Powers    of  Court   of 
Equity  to  act  in  Personam. 
Art.  III.  —  Office  and  Duties  of  Re- 
ceivers. 

Nature  of  Office  generally. 

Receiver  appointed  for  Benefit 
of  all  Parties  interested. 

Receiver  represents  Creditors  in 
Litigation. 

Fiduciary  Position  of  Receivers. 

Receiver's  Transaction  of  Busi- 
ness with  other  Lines. 

Duties  and  Powers  of  Receiver 
as  to  his  Employees  gener- 
ally. 

576.  Receiver's  accounting. 

577.  Receivers    asking   Advice    from 

Court. 
Art.  IV.  —  Suits  affecting  Mortgaged 
Propehty  during  the  Re- 
ceivership. 
§  578.    Right  of  Receiver  to   maintain 
Actions. 
579.    Permission  of  Court  necessary  to 

bring  Suit  in  same  Court. 
680.    Co-ordinate     Courts     precluded 
from     entertaining      Jurisdic- 
tion     Suits     affecting    Trust 
Estate. 


SXVlll 


CONTENTS. 


§  581,  Principle  precluding  such  Inter- 
ference recognized  by  Co-ordi- 
nate Courts. 

582.  Co-ordinate  Court  will   not  ap- 

point Receiver  where  Proj^- 
erty  already  under  Control  of 
Pieceiver, 

583.  This  Rule  not  applicable  where 

Prior  Appointment  was  a 
Nullity. 

584.  Assignee  in  Bankruptcy  cannot 

dispossess  Receiver  appointed 
by  a  State  Court. 

585.  Suits   affecting    Property  main- 

tainable in  other  Courts,  if 
his  Possession  will  not  be  in- 
terfered with. 

586.  Suits    affecting    Property   after 

termination  of  Receivership. 

587.  Suits   against   Receivers    gener- 

ally. 

588.  Kule  as  to  Suits  for  Damages. 


§  589.  The  Proper  Procedure  to  enforce 
Claims  against  Property  in 
Receiver's   Hands. 

590.  Failure  to  obtain  Leave  to  sue 

Receiver  can  be  taken  Advan- 
tage of  by  him  alone. 

591.  General  License  to  sue  Receiver 

in  other  Courts  sometimes 
given. 

592.  Claims  against  Employees  of  Re- 

ceiver subject  to  Exemption 
Laws  of  State  where  the  Re- 
ceiver was  ajipointed. 

593.  Enforcement     of     Taxes     upon 

Property  in  the  hands  of 
Receiver. 

594.  Federal  Legislation  altering  the 

Former  Rules  of  Equity 
Courts. 

595.  Exclusive  Control  of  Receivers 

of  Federal  Courts  not  affected 
by  State  Legislation. 


CHAPTER  XXVIII. 


Preferred  Debts 


FAOES 

581-628 


Art.  I.  —  General  Principles. 
§  596.   Introductory. 

597.  Substance  of  Leading  Case,  Fos- 

dick  V.  Schall. 

598.  Preferred  Debts  not  Liens. 

599.  Superior    Equity    of    Preferred 

Debts  based  upon  the  Charac- 
ter of  Railroad  Business. 

600.  What  Corporations  are  Subject 

to  the  Rule. 

601.  Anomalies   of  the   Doctrine   as 

now  administered. 

602.  Tlieory  that  Comymny  becomes 

Agent    sub    Modo    of    Bond- 
holders, if  allowed  to  remain 
in  IVjssession. 
Art.  II.  —  TiiK,      Priority     of      Back 
Claims. 
§  603.    Power  of  Court  on  Ap]ioiiitnient 
of   Receiver   to  im])ose  Con- 
ditionfl     an     to    Payment    of 
Back  Claims. 
604.  Limits   of  Discretionary    Power 
of  Court  to  impose  Conditions 
as  to  payment  of  Back  Claims. 


§  605.  Claimants  referred  to  in  Order 
of  Appointment  not  invested 
with  Absolute  Right  as  against 
Bondholders. 

606.  Upon  whom  Conditions  of  Order 

are  binding. 

607.  Back    Claims    to    be    preferred 

need  not  be  particularized  in 
the  Order. 

608.  Limits  of  Power  to  prefer  Unse- 

cured Debts  wiien  no  Provi- 
sion 's  made  for  their  Payment 
in  Order  appointing  a  Re- 
ceiver. 

609.  Assignee  of  Pniferred  Debt  en- 

titled to  Preference. 

610.  Debts    will    not     be    preferred 

merely  because  Bondholder 
has  ])romised  Priority. 

611.  Judgment  of  another  Court  not 

conchisive  as  to  whctlier  a 
Claim  is  to  be  preferred. 

612.  Back  Claims  not  ordinarily  Lien 

on  Corpus. 


CONTENTS. 


Xxix 


§  613.  Back  Claims  Lien  on  Corpus 
where  Diversion  of  Earnings 
is  established. 

614.  Payments  of  Interest,  wlien  not 

Diversion  of  Earnings. 

615.  Back  Claims  may  be  made  Lien 

on  Corpus  if  Preservation  of 
Property  requires. 

616.  Assumption  of  Floating  Indebt- 

edness by  Purchasers  does  not 
create  Lien,  etc. 

617.  Back  Claims  not  Lien  on  Corpus, 

because   Licome  of  Receiver- 
ship insufficient  to  pay  them. 

618.  Preferential  Debts  of  any  Part  of 

Composite  System    a   Charge 
on  whole  Property. 

619.  Doctrine  of  Diversion  not  appli- 

cable to  Ordinary  Creditor's 
Suit. 
Art.  IIL  — Within  what  Period  Back 
Claims  must  have  accrued 
to  be  allowed  prefer- 
ENCE. The  Six  Months' 
Rule. 
§  620.   Generally. 

621.  The  Six  Months'  Rule. 

622.  Rule  where  there  is  a  Running 

Account. 

623.  Payment   of   Unsecured   Claims 

antedating    Period    fixed    in 
Order. 


Art.  IV.  Classes  of  Back  Claims  en- 
titled TO  Priority. 
§  624.    Generally. 

625.  Debts    for   Freight   and  Ticket 

Balances. 

626.  Debts  incurred    in   Transporta- 

tion of  Passengers  and  Freight. 

627.  Debts  for  Wages  due  Employees. 

628.  Claims   for   Legal  Services  not 

preferred  unless  they  have 
inured  to  Benefit  of  Bond- 
holders. 

629.  Debts    for    Supplies    and    Ma- 

terials. 

630.  Debts   for   Materials  or  Equip- 

ments furnished  on  Credit  not 
preferred. 

631.  Kentals  due  by  Mortgagor  Com- 

pany as  Lessee  of  another 
Line.     Rule. 

632.  Diversion  of  Earnings  immaterial 

where  Credit  is  given  for  Ma- 
terials furnished. 

633.  Debts    contracted    for   Original 

Construction  not  preferred. 

634.  Damages  for  Breach  of  Contract 

not  preferred. 

635.  Debts   for   Damages  caused  by 

Operation  of  Koad. 


CHAPTER   XXIX. 

PAGES 

Position  of  Creditors  who  make  expenditures  either  con- 
tributing TO  Preservation  or  enuring  to  benefit  of 
Mortgaged  Property 629-637 


§  636.  Mortgage  Lien  usually  prefeiTed  to 
Claim  of  Lender  to  Company  to 
pay  Interest  or  Operating  Ex- 
penses. 

637.  Lender,  how  far  entitled  to  Benefit 

of  Statutory  Lien  held  by  Cred- 
itor paid. 

638.  Rule  when  Lender  is  a  Court  Offi- 

cial. 

639.  Lender  of  Money  to  pay  for  Roll- 

ing-stock, when  not  entitled  to 
Preference  on  Ground  of  Subro- 
gation to  Vendor's  Lien. 


§  640.    Preference  for  Lender's  Claim  as- 
serted on  Ground  of  Esto])pel. 

641.  What    Protection  is  accorded   or 

Preferences  given  to  Sureties  on 
Bonds  given  by  Company  dur- 
ing Litigation. 

(a)  Appeal  Bond,  Sureties  on. 

(b)  Surety  on  Injunction  Bond. 

642.  Status  of  Persons  paying  Taxes  on 

Mortgaged  Property. 


XXX 


CONTENTS. 


CHAPTER  XXX. 

PAOEg 

Powers    of  a    Court   and   its   Receiver  in  Management   of 

Railway 638-683 


Art.   I.  —  In  General. 

§  643.  Power  of  appointing  Court  ple- 
nary in  Regard  to  the  Manage- 
ment of  the  property. 

644.  Nature    and   Extent    of  Powers 

exercised    by    Receiver,    how 
determined. 

645.  Receivers  have  only  such  Powers 

as  are  conferred  by  Court. 

646.  Principles  upon  which  Contract 

Claims  against  Eeceivers  will 
be  allowed  or  rejected. 

647.  Powers   conferred    on    Appoint- 

ment liberally  construed. 

648.  Power   of    Court   to    cease   run- 

ning a  Section  of  Composite 
System. 

649.  Receiver's  Right  to  revoke  Run- 

ning Powers  given  by  Com- 
pany to  a  Connecting  Road. 

650.  Receiver  authorized  to  take  Lease 

of  another  Road. 

651.  Limited  Powers  of  Receiver  ap- 

pointed for  Special  Purpose. 

652.  Control  over  Property  sometimes 

reserved  by  Court  after  Sale. 
Art.  n.  —  Disposition  of  Trust  Fund 
DURING  Receivership  gen- 
erally. 
§  653.    General  Rule  as  to  Expenses  of 
Management. 

654.  Claims      against      Receivershi]i 

should    be    paid    before    Re- 
ceiver discharged. 

655.  Expenses  of  Company  after  Ap- 

pointment   of    Receiver    not 
Proper  Charge  on  Property. 

656.  Expenses  of  Refunding  Scheme, 

when  not  allowed  ex  parte. 

657.  Expenses  of  carrying  out  Reor- 

ganization Scheme. 

658.  When  the    Payment  of  Interest 

on  Bonds  will  be  ordered. 

659.  Property  in    Hands  of  Receiver 

not  exemfit  from  Taxation. 

660.  General  Principles  on  Allowance 

of  Op'-raling  Expenses  in  Re- 
ceiver's Accounts. 

661.  Expenditures  for  Supplies. 


§  662.    Office  Rent. 

663.  Interest  on  Money  borrowed  by 

Receiver. 

664.  Interest  paid  on  Bonds. 

665.  Expenditures  usual   in  Business 

with  Dependent  Road. 

666.  Expenditures   to    prevent    Con- 

struction of  Rival  Road. 

667.  Receiver's  f  ower  to  purchase  on 

Credit. 

668.  Liabilities  arising  from  Contracts 

of  Company  adopted  by  Re- 
ceiver. 

669.  Liabilities  arising   out  of   Torts 

incident  to  Operation  of  Road. 

670.  Compensation    to    Injured   Em- 

ployees. 

671.  Consolidated     System    adminis- 

tered as  Entiret}'. 

672.  Restoration  of  Earnings  diverted 

from  Payment  of  Operating 
Expenses  during  Receivership. 
Art.  III.  — Power  of  Receiver  to  raise 
Money  for  Operating  Ex- 
penses BY  Issue  of  First- 
lien  Certificates. 
§  673.  Receiver  cannot,  on  his  own 
Motion,  contract  Debts  charge- 
able upon  Fund  in  Litiga- 
tion. 

674.  Expenses  of  Management  some- 

times made  First  Lien  on 
Property  by  Order  appointing 
Receiver. 

675.  General   Principles   upon  which 

Power  to  issue  First-lien  Cer- 
tificates depends. 

676.  Purchasers  take  Property  Subject 

to  Lien  for  Operating  Expenses, 
when. 

677.  Lien   of   Certificates   when    not 

transfeiTed  to  Proceeds  of 
Sale. 

678.  Issue  of  Certificates  to  pay  Op- 

erating Expenses  may  be  au- 
thorized without  Consent  of 
Lien  Creditors. 

679.  Dissent  of   some   Parties  inter- 

ested a  Material  Circumstance. 


CONTENTS. 


XXXI 


§  680.  Consent  of  Bondholders  Pre- 
requisite to  Issue  of  First-lien 
Certificates. 

681.  Notice  should  be  given  to  Par- 

ties interested. 

682.  Necessity    for    Issue     must     be 

clearly  established. 
Art.  IV. — Purposes  for  which  First- 
lien  Certificates  may    be 

ISSUED. 

§  683.  Funds  required  to  keep  Road  in 
Operation  may  be  procured  by 
Issue  of  First-lien  Certificates. 

684.  Issue  of  First-lien  Certificates  to 

pay  Taxes. 

685.  Issue  of  First-lien  Certificates  to 

pay   Back    Claims   for  Labor, 
Supplies,  etc. 

686.  Issue  of  First-lien  Certificates  to 

keep   up   Single    Divisions    of 
Consolidated  System. 

687.  Issue  of  First-lien  Certificates  to 

pay    for    Construction    Work 
generally. 

688.  Certificates  to  pay  for  Construc- 

tion Work  cannot  be  made  First 
Lien  on  Road  without  Consent 
of  Prior  Lienors. 
Art.  V.  —  Rights  of  Holders  of  Receiv- 
er's Certificates. 
§  689.  Receiver's  Certificates  not  Nego- 
tiable Instruments. 


§  690.  Purchasers  charged  with  Notice 
of  all  Circumstances  attending 
Issue  of  Certificates. 

691.  Rank  of  Certificates  depends  on 

Final  Decree. 

692.  Negotiation  and  Sale  of  Certifi- 

cates a  Trust  personal  to  Re- 
ceiver. 

693.  Property  is  not  liable  for  Pay- 

ment of  Receiver's  Certificates 
unless  Proceeds  come  under  his 
Actual  Control. 

694.  Purchasers  not  bound  to  see  to 

Application  of  Proceeds. 

695.  Rights  of  Purchasers  not  affected 

by  taking  Collateral  Security. 

696.  Bondholders,  when  estopped  to 

dispute  Validity  of  Certificates. 

697.  Receiver,  when  estopped  to  dis- 

pute Validity  of  Certificates. 

698.  Court,  when  bound  to  recognize 

the  Estoppel  against  Receiver 
to  dispute  Validity  of  Certifi- 
cates. 

699.  Amount  recoverable  by  Holders' 

Certificates. 

700.  Usury  Laws   applicable  to  Cer- 

tificates. 

701.  Holders   need   not  present  Cer- 

tificates for  Paymeat  before 
Foreclosure  Sale. 


CHAPTER   XXXI. 

PAGES 

Liabilities    op    Company    and    Receiver    during    Receiver- 
ship          684-701 


Art.  I.  —  Liabilities  of  Company  dur- 
ing Receivership. 
§  702.  Contract  Liabilities  of  Company 
suspended  by  Appointment  of 
Receiver. 
703.  Company's  Liability  in  Tort 
ceases  after  the  Receiver  as- 
sumes Control. 

Liability  of  Company,  after  be- 
ing restored  to  Possession,  for 
Claims  arising  during  Receiv- 
ership. 

-  Liabilities  of  Receiver. 

Liability  of  Receiver  that  of 
Common  Carrier. 


704. 


Art.  II. 
§705 


§  706.   Liability  of  Receiver  not  usually 
personal. 

707.  Receiver  officially  liable  to  Third 

Persons  for  Torts  of  his  Em- 
ployees. 

708.  Receiver,  whethersuable  on  Cause 

of  Action  arising  prior  to  Ap- 
pointment. 

709.  Receiver's  Liability  for  Injuries 

to  his  own  Emploj'ees. 

710.  How  far  Receiver  is  bound  by 

Company's  Contracts  generally. 

711.  Receiver  succeeds  to  Company's 

Rights  as    to   Annulment    of 
Contracts. 


XXXll 


CONTENTS. 


§  712.  "What  Contracts  of  Company 
should  be  carried  out  by  Re- 
ceiver. 

713.  Contract  Liabilities  of  Receivers 

in  liegard  to  Leased  Roads. 

714.  Withdrawal  of  Consideration  of 

Lease  a  Sufficient  Ground  for 
renouncing  it. 


§  715.   Receiver    cannot    enjoy   Benefit 
of  Contract  without  assuming 
Burdens. 
716.  When   Receiver's    Liability,    as 
such,  ceases. 


CHAPTER  XXXII. 

PAGES 

Compensation  of  Trustees,  Receivers,  and  others,  and  At- 
torneys, IN  Suits  relating  to  Mortgaged  Property      702-725 


Art.  L  —  Personal    Compensation   of 
Trustees,  Receivers,   etc., 
FOR  THEIR  Services. 
§  717.  Introductory. 

718.  Personal  Compensation  of  Trus- 

tees. 

719.  Amount    allowed    for    Personal 

Compensation    of  Trustee. 

720.  Apportionment  of  Compensation 

between  several  Trustees. 

721.  Compensation      of     Discharged 

Trustee. 

722.  Compensation    of    Successor    of 

Deceased   Trustee. 

723.  Compensation  of  Representative 

Bondholders. 

724.  Com])ensation  of  Receivers. 

725.  Method   of   determining   a   Re- 

ceiver's Compensation. 
Art.  IL  —  Expenses  of  Trustkes,   Re- 
ceivers, AND  OTHERS. 
§  726.  Expenses  of  Trustees. 

727.  Expens(!s      of      Representative 

Bondholders. 

728.  Exjienscs  of  Pledgees  of  Bonds. 

729.  Expenses  of  Receivers  in   Con- 

duct of  Litigation. 

730.  E.xpenses  of  Mortgagor  in  Con- 

duct of  Litigation. 

731.  Costs  an  between  Different  Mort- 

gagees. 

732.  Costs    of    Unsecured    Creditors 

seeking    to     enforce     Claims 
against  Receivers. 


§  733.  Sheriff's  Fees. 
734.  Amount  of  Attorney  and  Coun- 
sel Fees  allowed  in  Foreclos- 
ure  Suit  is  in    Discretion  of 
Court. 
Art.  in. — Out  of  what  Funds   Com- 
pensation   AND     Expenses 
IN  Foreclosure  Suits  are 
paid. 
§  735.  Mortgaged     Property    must    in 
general  bear  Expenses  of  its 
Administration    in    Court   of 
Equity. 

736.  Necessary     Charges      Lien     on 

Mortgaged    Property. 

737.  Lien  for  Counsel  Fees. 

738.  General  Fund,  when  chargeable 

and  when  not. 

739.  Liability  of  Prior  Mortgagee  for 

Expenses   of  Suit    by  Junior 
Mortgagees. 
Art.  IV.  —  Practice. 

§  740.  Proper  Time  to  settle  Compen- 
sation and  Expenses. 

741.  Trustee's  Claim   for  Compensa- 

tion and  Expenses,  how  as- 
serted after  Redemption  of 
Property. 

742.  Rehearing  after  Remand  by  Ap- 

pellate Court. 

743.  Exceptions  to  Amounts  allowed 

by  the  Master,  etc. 


CONTENTS. 


xxxm 


CHAPTER   XXXIir. 


Foreclosure  Decrees 


PAOES 

726-751 


Art.  I.  —  Provisions  of  Decree. 

§  744.    Conformity  of  Decree  to  Provi- 
sions of  Mortgage. 

Conformity  of  Decree  to  Bill. 

Conformity  of  Decree  to  Man- 
date of  Appellate  Court. 

Provisions  of  Ordinary  Foreclos- 
ure Decree. 

Deficiency  Juiigments. 

Provisions  of  Decree  foreclosing 
Mortgage  ou  Koad  in  Posses- 
sion of  Junior  Mortgagee. 

Provisions  of  Decrees  directing 
Sale  subject  to  Liens. 

Provisions  of  Decree  directing 
Sale  before  Settlement  of  Con- 
troversies regarding  Final  Dis- 
position of  Assets. 

Decree  preserving  Lien  of  Un- 
matured Part  of  Debt. 
753.  Decree  ordering  Trustee  to  sell 
before  Maturity  of  Bonds, 
thougli  not  authorized  by 
Trust  Deed. 


745. 
746. 

747. 

748. 
749. 


750. 


751. 


752. 


§  754.  Decree  may  find  Amount  due 
on  Bonds,  before  Proof  of 
same. 

755.  Decree  nisi  may  be  rendered  be- 

fore Production  of  Bonds. 

756.  Allowance  of  Time  for  Payment 

of  Amount  found  due. 

757.  Provision    of    Decree   reserving 

Control  of  the  Property. 

758.  Modifications    of    Decree,    and 

what  is  Final  Decree. 
Art.  II.  —  Effect  of  Decree. 

§  759.    Effect    of    Foreclosure     Decree 
generally. 
760.    Conclusiveness  of  Decree. 
76L    Federal  Courts  bound  by  Deci- 
sion of  State  Courts  respect- 
ing State  Statutes. 

762.  Estoppel  by  Decree. 

763.  Decree  pro  corifesso. 

764.  Decree  by  Consent. 

765.  Estoppel  by  Acquiescence  in  De- 

cree. 

766.  Estoppel  of  Junior  Lienor. 


CHAPTER   XXXIV. 

Distribution  of  Proceeds  of  Foreclosure  Sale 


752-764 


§  767.  Introductory. 

768.  Master  or  other  Person  appointed 

to  make  Distribution  is  bound 
by  Decree. 

769.  Lien  Creditors,  with  some  Excep- 

tions, always  preferred. 

770.  Holders  of  Equitable  Debentures 

entitled   to  share  pari  passu 
with  Legal  Holders. 

771.  Undisputed  Prior  Claims  may  be 

paid  immediately. 

772.  When  Distribution  is  to  be  made 

according  to  Maxim  "  Equal- 
itj'  is  Equity." 

773.  Coupons    usuall}'   payable    pari 

passu  with  Bonds. 

774.  Priorities  between   Bondholders 

and  Lenders  of  Money  to  take 
up  Coupons. 

775.  Priorities  of  Persons  surrender- 

ing Securities  and  thereby  in- 
creasing the  Corporate  Assets, 


§  776.   Priorities   affected   by   Funding 
Interest. 

777.  Pelative  Piank  of  Preferred  Stock- 

holders and  Bondholders. 

778.  Judgments   against  Corporation 

for  Damages. 

779.  Priorities  of  Builder  of  Extension 

of  Road  duiing  Eeceivership. 

780.  Receiver's    Operating    Expenses 

not  payable  out  of  Proceeds. 

781.  Amoiint  recoverable  by  Pledgees 

of  Bonds. 

782.  Pledgee  not  entitled  to  share  in 

Proceeds  when  Pledge  is  ultra 
vires. 

783.  Lienholder    on    Part    of   Road, 

when  entitled  to  be  paid  out 
of  whole  Proceeds. 

784.  Surplus,  after  paying  Bondhold- 

ers,    belongs     to     Unsecured 
Creditors  of  Company. 


XXXIV 


CONTENTS. 


CHAPTER   XXXY. 
Sales  of  Mortgaged  Property 


PAOE8 

765-778 


§  785.    Manner  of  Sale  generally. 

786.  Sale  of  Property  as  Entirety. 

787.  Power  of  Court  and  Officers  to 

postpone  Sale. 

788.  Conduct  of  Sale  under  Power  in 

Mortgnge  generally. 

789.  Sale  under  Power  not  postponeil 

till  Number  of  Bonds  justly 
due  ascertained. 

790.  Place  of  Sale. 


§  791 


Advertisement    of    Sale    under 
Power. 

792.  Reserved  or  Upset  Prices. 

793.  Bids. 

794.  Deposits  of  Bidders. 

795.  Liability    of    Bidders  for   Loss 

upon  Resale. 

796.  Payment  in  Bonds. 

797.  "Who  may  be  Purchaser. 

798.  Confirmation  of  Sale. 


CHAPTER   XXXVI. 

Rights   of  Purchasers  at  a  Sale  of  the  Mortgaged  Prop- 
erty         779-807 


Art.  I.  —  Effect  of  Sale  as  regards 
THE  Mortgagor. 
§  799.    Corporation    not    dissolved   by 
Sale. 

800.  How  far  Rule  affected  by  Stat- 

utes permitting  Purchasers  to 
incorporate. 

801.  Extent   to   which    Liability   of 

Mortgagor  Company  ceases 
with  Foreclosure  Sale. 

802.  Efl'ect  of  Sale   upon  Rights  of 

Debtors     and     Creditors    of 
Mortgagor  Company. 
Art.  IL —Rights    of    Purchasers   at 
Foreclosure  Sales. 
§  803.    Purchaser  bound  by  Decree. 

804.  What    passes   to   Purchaser  at 

Trustee's  Sale. 

805.  Right  to  Municipal  Aid  does  not 

pass  by  Foreclosure  Sale. 

806.  Purchaser's  Right  to  Earnings 

of  the  Road  accumulated  in 
the  Receiver's  ILands. 

807.  Right  to  use  Lands  appropriated 

by  Company  not  lost  by  Non- 
use  of  Mortgagor  Company's 
Franchises. 

808.  Statutory    Right    to    regulate 

Tolls   does   not   pass. 

809.  Exeniiition  from  Taxation  some- 

times passes  to  Purchaser. 


§  810.    The    same    Principle    of    Con- 
struction is  applied  where  the 
Rights  of  Purchasers  are  de- 
fined by  Statute. 
811.    Vested    Rights    of    Purchasers 
cannot  be  impaii'ed  by  Leg. 
islation. 
Art.  III.  —  LiAEiLrriEs  or  Purchasers 
AT  Foreclosure  Sales. 
§  812.    Generally. 

(a)  Purchaser   takes   free  from 

Subsequent  Liens. 
(6)    Purchaser  sometimes  takes 
free     from    Liens     held 
by   Persons    not   Actual 
Parties. 

(c)  Purchaser   takes   free  from 

Liens  which  he  had  a 
Right  to  suppose  dis- 
charged. 

(d)  Purchaser   takes   free  from 

Tax  Lien  sometimes. 

(c)  Purchaser  takes  subject  to 
Liens  absolutely  para- 
mount by  Statute. 

(/)  Purchaser  takes  subject  to 
Statutory  Obligations  as 
to  Operation  of  Road. 

{(j)  Purchaser  takes  subject  to 
Obligations  and  Kestric- 
tions  imposed  by  Mort- 
gagor's Charter. 


CONTENTS. 


XXXV 


§813.  Contracts  of  Mortgagor  Com- 
pany are  not,  as  a  General 
Rule,  binding  on  its  Successor. 

814.  Trust  availing  against  Purchaser 

avails  against  his  Assignee. 

815.  Purchaser  takes  subject  to  Ven- 

dor's Lien  sometimes. 

816.  Assumption   of  Obligations  in- 

ferred from  Fact  of  Purchase 
under  a  given  Decree. 

817.  Purchaser  affected  with  TsTotice 

of  Proceedings  in  Foreclosure 
Suit. 

818.  Liability  of  Purchaser  by  Rea- 

son of  its  Occupation  of  Land 
acquired  by  Mortgagor. 

819.  Assumption  of  Obligations  in- 

ferred   from    Agreements    of 


New  Company  or  its  Trans- 
ferrers. 
§  820.    Purchaser   not  generally  liable 
for  Mortgagor's  Torts  in  Oper- 
ation of  Road. 

821.  Liability  of  New  Company  for 

Damages  caused  by  Operation 
of  Road  by  Trustees. 

822.  Liability  of  Purchasers  for  Dam- 

ages caused  by  Operation  of 
Road  by  Receiver. 

823.  No    Liability   attaches   to    Pur- 

chasers   until    Sale    is    con- 
firmed. 

824.  Purchasers  organizing  as  a  New 

Company  not  liable  for  Debts 
of  Mortgagor. 

825.  The  Right  of  Redemption. 


CHAPTER  XXXVII. 
Remedies  in  Cases  of  Objections  to  Sales  . 


PAGES 

808-824 


Art.  L 


§  826. 


■Stay    of    Sales    by    Injunc- 
tion. 


When      Injunction      will      be 
granted. 

827.  Sale  not  restrained  merely  be- 

cause Mortgagee  had  no  Right 
to  make  it. 

828.  Sale  not  restrained  if  Defendant 

capable  of  responding  in 
Damages. 

829.  Trustee's  Sale  not  restrained  be- 

cause Amount  of  Bonds  justly 
due  has  not  been  ascertained. 

830.  Sale  under  Power  in  Mortgage 

securing  Bonds  issued  by  Di- 
rectors to  themselves  will  be 
restrained. 

831.  Sale  restrained  if  Default  caused 

by  Misconduct  of  Debtor's 
Agent. 

832.  Sale    when    not    restrained    at 

Instance    of    Junior    Incum- 
brances. 
Art.  II.  —  Setting   aside   Foreclosure 
Sales. 
§  833.    Methods  of  Procedure  to  vacate 
Sales. 

834.  Who  may  except  to  Sale. 

835.  Right  to  Relief  as  affected  by 

Laches  of  Petitioner. 


§  836.  Errors  in  or  prior  to  Decree  not 
reviewable  on  Motion  to  set 
aside  Sale. 

837.  Remedy  by  Annulment  of  Sale. 

838.  Declaring  Purchaser  a  Trustee 

equivalent  to  Annulment. 

839.  Confirmation  of  Fraudulent  Sale 

by  Legislature. 

840.  Effect  of  declaring  Sale  void  for 

Fraud, 
(a)  As  to  Corporation  itself, 
(i)   As  to  Bondholders  and  other 
Creditors. 
Art.  III.  —  Grounds    for    vacating    a 
Sale. 
§  841.    Inadequacy  of  Price. 

842.  Actual  Fraud. 

843.  Collusion  between  Trustees  and 

Purchasers. 

844.  Collusion  between  Trustees  and 

Corporate  Officers. 

845.  Collusion     between     Corporate 

Officers  and  Combinations  of 
Bondholders. 

846.  Surprise,  Mistake,  etc. 

847.  Breach   of    Professional   Duties 

by  Attorney. 

848.  Sale  not  set  aside  because  same 

Person  is  Trustee  under  both 
Mortgages  foreclosed. 


XXXVl 


CONTENTS. 


§  849.  Extension  of  Benefits  of  Reor- 
ganization to  Bondholders 
alter  Time  for  coming  in  has 
passed  not  Ground  for  invali- 
dating Sale. 


§  850.    Foreclosure  before  Maturity  of 
Principal. 
851.    Excessive     Amount     of    Judg- 
ments. 


CHAPTER  XXXVIII. 

Appeals  from  Decrees  and  Orders  in  Foreclosure  Suits     825-840 


Art.  I.  — 

§852. 
853. 


854. 
855. 
856. 
857. 

858. 

859. 

860. 

861. 

862. 

Art.    II. 

§863. 
864. 
865. 
866. 


Jurisdiction  and  Parties  to 

Appeals. 
Jurisdiction  in  general. 
Jurisdiction  of  Supreme  Court  of 

United    States   as   dej^endent 

on  Amount  involved. 
Supersedeas  Bonds. 
Who  may  appeal  in  general. 
Who  cannot  appeal  in  general. 
Purchaser  at  Foreclosure  Sale  as 

Appellant. 
Appeals    from    Decrees    against 

Receivers. 
Junior  Incumbrancers  as  Appel- 
lants. 
Stockholders  as  Appellants. 
Company  as  Party  to  A]ipeal. 
Trustee  as  Party  to  Appeal. 
—  Appealable   Decrees  _    and 

Orders. 
Consent  Decrees. 
Discretionary  Orders. 
Final  Decrees  in  general. 
Decree      dismissing      Cross-bill 

not  final. 


§  867.    Foreclosure  Decree  final. 

868.  Decrees  final  on  Confirmation  of 

Sale. 

869.  Decrees  setting  aside  Sales   not 

final. 

870.  Finality   of    Decrees    providing 

for  Reference  to  Master. 

871.  Appealability    of    Interlocutory 

Orders. 

872.  Appeal     from    one     of    several 

Decrees. 
Art.  III.  — What  Appeal  brings  up  for 
Review  and  Effect. 
§  873.    What  Rulings  of  Lower  Court 
reviewable. 

874.  Rulings  not  prejudicial  to  Ap- 

pellant not  reviewable. 

875.  Objections     not     presented     to 

Lower    Court    not    reviewable 
on  Appeal. 

876.  Effect  of  Appeal  on  Control  of 

Property. 

877.  Decree  for  Deficiency,  when  not 

appealable. 


CHAPTER   XXXIX. 

Railway  Reorganizations,  Reconstructions,  and  Compromise 

Agreements 841-867 


Art.  I.  —  State    Statutes    governing 
Rkokganizations. 
§  878.    References  to  General  Statutes 
governing  Reorganizations. 

879.  Purcliasera   organize   subject  to 

certain     Constitutional     Pro- 
visions. 

880.  Distinction  betw('pn   Inc()rf)()ra- 

tion  and  Organization  of  New 
Company. 


§  881.    Existing    Companies    not    pre- 
venteil  by  General  Reorganiza- 
tion Statutes  from  purchasing. 
882.    Special    Statutes  governing  Re- 
organizations. 
(«)  As   affected  by  the    United 

States  Constitution. 
{b)  Rule    in     Countries     where 
there     is     no     Provision 
against  iin))airing  the  Ob- 
ligation of  Contracts. 


CONTENTS. 


XXXVll 


§  883.  Statutory  Provisions  must  be 
strictly  complied  witli  by  auy 
one  taking  Advantage  of 
them. 

884.  Statutes    prohibiting   Fictitious 

Increase  of  Stock. 

885.  Statutes  fixing  Rate  of  Interest 

on  Loans. 

886.  Statutory  Powers  of  a  Majority 

of  Bondholders. 
Art.  II. — Mortgage   Provisions    gov- 
erning Reorganizations. 
§  887.    Mortgage  Provisions  as  to  Dis- 
tribution  of    Stock    in   New 
Company. 
888.     Plights  of  Majority  under  Mort- 
gage or  Debenture  Provisions. 
Art.  III.  —  Agreements  betw^een  Par- 
ties  HAVING  Interests   in 
Mortgaged  Property  gov- 
erning Reorganizations. 
§  889.   General  Considerations. 

890.  Reorganization  Agreements  are 

favorably     viewed     by     the 
Court. 

891.  Power    of   Majority    of    Bond- 

holders under  Agreement. 

892.  Subscribers   to   Agreement    not 

bound  unless  carried  out  sub- 
stantially as  made. 

893.  When  Right  to  share  in  Benefits 

of  Scheme  terminates. 

894.  Rights  of  Parties  to  Agreement, 

when  complete. 

895.  Reorganization :    Trustee's  Con- 

trol of  Scheme. 


§  896.  Power  of  Reorganization  Com- 
mittee to  fix  Date  for  Maturity 
of  New  Issue  of  Bonds. 

897.  Discretion     of     Reorganization 

Trustees  as  to  Issue  of  Stock 
in  New  Company. 

898.  Discharge  of  Liens  of  Creditors 

participating  in  Schemes, 
when  inferred. 

899.  Bondholders  accepting  Preferred 

Stock  in  New  Corporation 
give  up  their  Rights  as 
Creditors. 

900.  Restoration  of  Bondholder  to  his 

Rights  as  Creditor,  when  prop- 
erly refused. 

901.  Who  estopped  to  object  to  Re- 

organization Scheme. 

902.  Plans    held    Equitable,    or   the 

Contrary. 

(a)  Bondholders. 

(b)  Stockholders. 

(c)  Unsecured  Creditors. 

903.  Rights  of  Stockholders  after  Re- 

organization. 

(a)  Right  to  take  Part  in  the 

Management  of  the  Prop- 
erty. 

(b)  Right  to  join  in  Division  of 

Earnings. 

904.  Effect   of   Reorganization   upon 

Liabilities  of  Old  Company. 

905.  Costs  in  England  on  Reconstruc- 

tion. 

906.  In  Conclusion. 


Index 


PAGE 

869 


TABLE   OF  CASES   CITED. 


THE  FIGURES  KEFEK  TO  PAGES. 


Abbot  v.  Johnstown,  &c.  Ry.  Co.         170 
Abbott  V.  Jewell  843 

Ablenian  v.  Booth  552 

Ackerson  v.  Lodi  Branch  R.  Co.  461 

Acres  v.  Mayne  843 

Adams'  Cotton  Mills  v.  Diminick  4 

Addison  v.  Lewis  587,  616,  633 

Agar  ('.  Life  Assn.  Co.  87 

Agra  &  Masterman's  Bank,  In  re  30 

Agricultural  Society  v.  Paddock  163 

Ahern  v.  Evans  218 

Ahl  V.  Rhoades  10,  192 

Alabama  v.  Montague  131,  143,  219 

Alabama  &  Chatt.  R.  R.  Co.  v.  Jones 

413,  419,  426,  567 
Alabama    &    Georgia    Mfg.    Co.    v. 

Robinson  408,  431,  731 

Alabama  Iron  &  Ry.  Co.  v.  Anniston 

L.  &  T.  Co.  681,  682,  683 

Alabama  Nat.  Bank  v.  Mary  Lee  C. 

&  R.  Co.  243,  247,  471 

Alabama  Ry.  Co.,  In  re  844,  849,  855 

Albert  v.  Grosvenor  Invest.  Co.  400 

Albert  Life  Assn.  Co.,  Be      844,  849,  855, 

867 
Alden  v.  Boston,  H.  &  E.  R.  Co.  568 

Alexander  v.  Atlantic,  Tenn.  &  Ohio 

R.  Co.  72,  385 

V.  Central  R.  Co.  of  Iowa      397,  399, 

459,  471,  487 
Alexandria,  &c.  Ry.  Co.  i'.  Graham  184 
Alexandria,  Wash.  &  Georgetown  R. 

Co.  V.  Alexandria  &  Wash.  R.  Co.  773 
Allaire  v.  Hartshorne  96 

Allan  V.  The  Manitoba  &  N.  W.  Ry. 

Co.  463 

Allen  V.  Central  R.  Co.  572 

V.  Dallas  &  W.  Ry.  Co.  96,  266, 

517,  529,  534,  539,  541,  676 

V.  Dillingham  693 

V.  Montgomery  &  W.  P.  R.  Co.  167, 

176,  198,  202,  208,  768,  819 
Allentown  Nat.  Bank,  Appeal  of  40 

Allis  V.  Jones  26 

American  Biscuit  Co.  v.  Klotz  524 

American  Bridge  Co.  v.  Heidelbach  68, 

496,  535 


American  L.  &  T.  Co.  v.  East  &  W. 

R.  Co.  285,  286,  430,  453,  619 

f.  Toledo  C.  &  S.  R.  Co.       516,  526, 

527,  528 
American     Nat.     Bk.    v.    American 

Wood-Paper  Co.  2,  43,  78 

American    Tabe,  &c.    Co.    v.    Ken. 

Southern,  &c.  Co.  472 

American  Water  Works  Co.  v.  Farm- 
ers' Loan  &  T.  Co.  166,  196,  776 
Ames  v.  N.  0.,  Mob.  &  Tex.  R.  Co.   40,  58, 

853 

V.  Pacific  Ry.  Co.  651 

V.  Ry.  Co.  855 

V.  Trustees  of  Birkenhead  Docks  280 

V.  Union  Pac.  Ry.  Co.  554,  555,  560, 

561,  562,  625,  666,  673,  694,  698,  700 
Ammant  v.  New  Alexandria   Tpke. 

Co.  165,  170 

Amy  v.  Supervisors  413 

Anderson  v.  Gold  Mine  Co.  .30 

Andrews  v.  Nat.  Foundry  Co.     17,  2.5,  252 

V.  Smith    418,  427,  428, 429, 463,  545, 

570 
2\nglo-American  Leather  Cloth  Co., 

Lim.,  In  re  280,  603 

Anglo-Australian  Inv.  Fin.  &   Land 

Co.,  In  re  4,  104 

Ansted  v.  Land  Co.  of  Australia  '  164 

Antietam    Paper    Co.    v.    Chronicle 

Pub.  Co.  207 

Arbuckle  i:  Illinois  Mid.  Ry.  Co.  273, 278 
Arkansas  River,  Land,  ']\)wn,  &  Canal' 

Co.,  etal  V.  Farmers'  Loan  &  T.  Co. 

et  al.  g 

Arms  V.  Conant  195 

Armstrong  v.  Burkitt  213 

Arnot  V.  Erie  Ry.  Co.  118,  125,  128 

Arthur  v.  Oakes  5.-)0 

V.  Pres.  of  Commercial  Bk.  170 

Ashbury    Ry.    Carriage,   &c.    Co.    v. 

Riche  121,  r22 

Ashley  Wire  Co.  v.  111.  Steel  Co.  '  196 
Ashuelot  R.  Co.  v.  Elliot  104,  317,  321, 
322,  410,  805 
Ashurst  V.  Montour  Iron  Co.  373 

Astbury,  Ex  parte  342 


xl 


TABLE    OP    CASES    CITED. 


Astor  V.  Westchester  Gas  Light  Co.  167 
Atchison,    Top.    &   S.   F.  Ry.  Co.  v. 

Fletcher  125,  128 

Atheiiajuiii  Society,  /n  ra  86 

Atkins  o.  Petershurg  U.  Co.    587,  6^0,  674 

V.  Wabash,  St.  L.  &  Pac.  R.  Co.    512, 

519,  522,  538,  542,  553,  739 
Atkinson  v.  Marietta  &  Cin.  Ry.  Co.     134, 

170,  780 
Atlantic  City   Water  Works   Co.  v. 

Read  84 

Atlantic  &  Gulf  R.  Co.  v.  Allen  787 

Atlantic,  Tenn.  &  Ohio  R.  Co.  v.  Car. 

Nat.  Bk.  72 

Atlantic  Trust  Co.  v.  The  Vigilanion 

et  ul.  196 

Attorney-General  i".  Joy  842 

V.  Sittingbourne    &    Sheerness 

Ry.  Co.  548 

V.  Southern  Minnesota  Ry.  Co.      49 

V.  W.  Wisconsin  R.  Co.  49 

Auerbach  v.  Le  Sueur  Mill  Co.  29 

Augusta  Bank  v.  City  of  Augusta  107 
Augusta,  &c.  R.  Co.  v.  Kittel  188,  205 
Aurora  City  v.  West  78,  104,  107 


Baass  v.  Chicago  &  N.  W.  R.  Co. 

Bailey  v.  Railroad  Co. 

Baily  r.  Smith 

Bainbridge  v.  Louisville 

Baker  v.  Guarantee  T.  Co.     84,  85,  87 

Baldwin  Investment  Co.  v.  Bailey 


464 
36 
93 
108 
96, 
181 
408 
Ballou  V.  Farnum  319,  320 

Baltimore  &  L.  Turnpike  Co.  v.  Moale   280 
Baltimore  &  Ohio  Ry.  Co.  v.  Cary  433, 434, 

438 

V.  Gallahue  434 

Baltimore  Tr.  &  Guar.  Co.  v.  Atlanta 

Traction  Co.  692 

Range  v.  Flint  ■  93 

Bank  v.  Cheney  30 

V.  Tennes.«ee  254 

Bank  of  Ashland  v.  Jones  23,  127 

Bank  of  Genesee  v.  Patchin  Bank     126, 

128 

Bank  of  Little  Rock  v.  McCarthy         189 

Bank  of  Midiliebiiry  v.  Edgerton  175 

Bank  of  Montreal  v.  Chicago,  C  &  W. 

R.  Co.  642,  647,  678,  679,  680 

V.  Thayer  689 

Bank  of  So.  Australia  v.  Abrahams     181, 

225 
Banque  Franco-Egyptienne  i'.  Brown    62, 

452 
Fiarhor  v.  Barber  416 

Bardstown  &  ]..ouisville  R.  Co.  v.  Met- 
calfe    2,  8,  175,  190,  295,  394,  475,  477, 
478,  731,  708,  775 
Barnard,  /;/  /v  577 

I'arnard  v.  Norwich,  &c.  Ry.  Co.     224, 236 
Barnes  r.  Chicago,  Milw.  &  St.  1'.  Ry. 
Co.  293,  478,  818,  864 

r.  Mobile  &  N.  W.  R.  Co.  45 

Barney  v.  Latham  440 


Barr  v.  New  York,  L.  E.  &  W.  R.  Co.    28, 

147,  150 
Barrowes  v.  Molloy  392 

Barry  v.  Merchants'  Exch.  Co.  175 

V.  Missouri,  K.  &  T.  Ry.  Co.     40,  58, 

65, 66, 139,  368,  369, 441,  472,  478, 853 
Barter  v.  Wheeler  319 
Bartlett  v.  Keim  571 
V.  Northumberland  Ave.   Hotel 

Co.  645 

V.  Tramwaj's  769 

V.  West  Met.  Tramway  Co.  509 

Barton  v.  Barbour    268,  508,  573,  574,  593 
Barton-upon-Humber      &       District 

Water  Co.,  In  re  378 

Batchelder  v.  Council   Grove  Water 

Co.  381, 407 

Batten  v.  Dartmouth  Harbour  Commrs. 

708 

V.  Wedgwood  Coal  &  Iron  Co.     712, 

720 
Baughman,    Petitioner,  v.    Superior 

Court  840 

Baxter  v.   Nashville,    &c.   Turnpike 

Co. 
Bayard,  Appeal  of 
Bayles  v.  Kansas  Pac.  R.  Co. 
Bayliss  v.  Lafajette,  &c.  R.  Co, 


Beach  v.  Miller 

Beadleston  v.  Knapp 

Beals  V.  111.,  Miss.  &  Tex.  R.  Co. 


165 

170 

645 

137,612, 

616,  635 

589 

290 

487,  488, 

741 

274 

337 

102 


Bear  v.  Burl.,  C.  R.  &  M.  R.  Co. 

Beardsley  v.  Ontario  Bank 

Beck  with  v.  Trustees 

Beebe   v.    Richmond   Light,  Heat,  & 

Power  Co.      12,  145,  175,  182,  192,  193, 

300,  311 
Beecher  v.  Marquette  &  Pac.  Rolling 

Mill  Co.  24,  29,  33,  204 

Beecher  Ex.  v.  Chicago  &  N.  W.  R. 

Co.  39 

Beekman  v.  Hudson  R.,  &c.  Ry.  Co. 

208,  236,  405,  429,  472 
Beers  v.  Wabash  R.  Co.  54 1 ,  550,  552,  559 
Belden  v.  Burke  53,  84,  92,  292,   472 

Belfast  &  Moosehead  Lake  R.  Co.  v. 

V\iy  of  Belfast  140,  141 

Bell,  In  re  280,  603 

Bell  V.  Chicago,  St.  Louis,  &  N.  0.  R. 

Co.  178,  226,  742,  791 

V.  Ohio  Life  &  Trust  Co.  423 

Belmont  v.  Erie  Ry.  Co.  34,  89,  540 

Heloit  V.  Morgan  742 

Bement  v.  Plattsburg  &  Montreal  R. 

Co.  261 

Benedict  ?-.  Danbury  &  N.  R.  Co.  274 

V.  Ileinebcrg  165 

('.  St.  Joseph,  &c.  Ry.  Co.      530,  536, 

771 
Benjamin  v.  Elmira,  &c.  Ry.  Co.    207, 217, 
224,  745,  746 
Benson  v.  Heathon  147 

Bergen  v.  Porpoise  Fisliing  Co.     199,  200 
Bessemer  S.  &  O.  Co.,  In  re  849 


TABLE   OF   CASES   CITED. 


Xli 


Beverly  v.  Brooke  506,  507,  547,  571 ,  688 
Bibb  V.  Montgomery  Iron  Works  35 

Bickford  v.  G.  J.  Ky.  Co.  24,  1G2 

BifiL4il  V.  Taylor  470 

Bill  V.  New  Albany,  &c.  R.  Co.  312,  417 
Bliikert  o.  Wabash  Ky.  Co.  217,  339,  792 
Birdsall  v.  Russell  154 

Birmingham,  &c.  R.  Co.,  In  re  609 

Bischoffsheim  i\  Brown  54 

Black  V.  Delaware,  &c.  Canal  Co.       165, 

170 

Blackburn  v.  Selma  M.  &  M.  R.  R.     15, 

422,  426,  435,  436,  437,  444,  774,  819 

Blackman  ;;.  Lehman  78 

Blair  v.  St.  Louis,  H.  &  K.  R.  Co.   55,  514, 

527,  566,  597,  602,  603,  665,  611, 

613,  615,  635,  665,  716,  720,  774 

V.  St.  Louis,  K.  &  T.  R.  Co.    140,  156 

V.  Walker  744,  747 

Blake  v.  Ala.  &  Chatt.,  &c.  R.  Co.         567 
V.  Board  of  Commrs.  of  Living- 
ston Co.  78 

y.  Pine  Mt.  Iron  &  Coal  Co.     270,614 

Blakely  Ordnance  Co.,  //;  re  30 

Blaker  w.  Herts  &  Essex  Water  Works 

Co.  378,  762 

Blanchard   v.  Portland   &   Rumford 

Falls  R.  Co.  137 

Bleckley,  Re  712 

Blond heim  v.  Moore  525 

Blood  V.  La  Serena  L.  &  W.  Co.  196 

Bloomer  v.  Union  Coal,  &c.  Co.     178,  258 
Blossom  V.  The  Milwaukee,  &c.  Rv. 
Co.  830,  838 

0.  Railroad  Co.        738,  772,  775,  778 

Blumenthal  v.  Brainerd  688 

Board  of  Commrs.  of  Hamilton  Co.  v. 

The  State  243,  784,  842 

Board  of  Supervisors  v.  Mineral  Point 

R.  Co.  297,  487,  742 

Boggs  V.  Lakeport  Agri.  Park  Ass'n  196 
Bondholders  of  York  &  C.  R.  Co.,  In  re 

284,  292 
Bonner  v.  City  of  New  Orleans  126 

Boom  Co.  V.  Patterson  438 

Booth  V.  Brown  561 

V.  Clark  506,  522,  552,  642 

Borden  v.  Croak,  Admrx.  221 

Borough   of    Portsmouth,  &c.  Tram- 
ways Co.,  In  re  378 
Boss  V.  Hewitt  95 
Boston  &  Co.  V.  dies.  &  Ohio  R.  Co.    277 
Boston,  Concord,  &  Montreal  R.  Co. 
V.  Boston  &  Lowell  R.  Co.                  526 

V.  Gilmore  340 

Boston  &  N.  y.  Air  Line  v.  Coffin     183, 
230,  232,  235,  476 
Boston  &  Prov.  R.  Co.  v.  New  York  & 

N.  E.  R.  Co.  205,  532,  749,  797 

Boston  Safe  Deposit  Co.  v.  Chamber- 
lain 710,  719 
Boston  Safe  Deposit  &  Trust  Co.  ;•. 

Groome  620, 668 
V.  Holders  of  $130,500  of  Receiv- 
ers' Certificates  620, 668 
V.  Hudson  280, 628 


Boston   &  Worcester    Ry.   Corp.   v. 

Haven  723 

Bostwick  i\  BrinckerhofE  739 

Botst'ord  V.  New  Haven,  M.  &  W.  R. 

Co.  236,  274 

Bound  V.  South  Car.  Ry.  Co.         592,  593, 
616,  618,  619,  622,  650,  730,  733,  735 
Bowen  v.  Brecon  Ry.Co.  379 

Bower  v.  Breen  Ry.  Co.  384,  732 

Boyd  V.  Chesapeake  «&  Ohio  Canal 

Co.  367 

V.  Kennedy  78,  81 

Boy  Ian  v.  Kelly  843 

Boyle   V.   Bettws    Llantwit    Colliery 

Co.  556 

V.  Zacharie  375 

Bradford,  Eldred,  &  Cuba  R.  Co.  v. 

N.  Y.,  L.  E.  &  W.  R.  Co.  121 

Bradley  v.  Chester  Valley  R.  Co.         302, 

310,  373,  374,  414,  772 

Brady  v.  Johnson     270,  361,  365,  366,  367 

V.  State  358,  361,  365,  498 

Brainerd  o.  N.  Y.  &  N.  H.  R.  Co.      78,  81 

V.  Peck  &  Colby  219,  228,  243 

Branch  v.  Jesup  184 

V.  Macon  &  Brunswick  R.  Co.     468, 

469 
Branch,  Sons  &  Co.  v.  Atl.  &  Gulf  R. 

Co.  1,  158.  163,  177,  184,268 

Braslin  v.  Somerville  Horse  R.  Co.       170 
Brassey  v.  New  York  &  N.  E.  R.  Co. 

529,  533,  540 
Bridgeport  City  Bank  i'.  Empire  Stone 

Dressing  Co.  128 

Brine  v.  Ins.  Co.  806 

Brinsley  v.  Lynton  Hotel  Co.         384,  730 
Bristol  &  N.  S.  Ry.  Co.,  In  re  844 

British  Linen  Co.  v.  So.  American  & 

Mex.  Co.  645 

Brockert  v.  Cent.  Iowa  Ry.  Co.    685, 686, 

791 
Brocklebank  v.  The  East  London  R. 

Co.  655 

Brockway  v.  Innes  137 

Bronson  v.  La  Crosse  &  M.  R.  Co.         26, 

155,  158,  207,  452,  451,  718,  724.  761, 

827,  828 

V.  McKinzie  376,  378 

V.  Railroad  Co.       453,  466,  467,  471, 

8.34 

I'.  Schulten  739 

Brooks  V.  Railway  Co.  274 

V.  Vermont  Cent.  R.  Co.        46,  289, 

293,  419,  4.30,  462,  570 
Brooks  &  Hardy  v.  O'Hara  Bros.  741 

Brown,  Ex  parte  831 

Brown  v.  Chesapeake  &  Ohio  Canal 

Co.  529 

V.  Comer  685 

V.  Duluth  M.  &  N.  R.  Co.  17 

V.  New  York  &  Erie  R.  Co.     612,  648 

V.  Ohio  Val.  Ry.  Co.  614 

V.  State  of  Maryland,  &c.     2,  3,  168, 

328,  773,  810 

r.  Toledo  P.  &  W.  R.  Co.      659,  698 

V.  Ward  97 


xlii 


TABLE   OF   CASES   CITED. 


Brown  v.  "Warner  693 

Bruce  v.  Manchester,  &c.  Ry.  Co.        413, 

417,  826 
Bruffett  V.  Great  Western  E.  Co.  170,  781 
Brunswick  &  Albany  R.  Co.  v.  Hughes 

280,  302,  326,  772 
Brunswick  Gaslight  Co.  v.  Brunswick 
Gas  Co.  368 

V.  United  Gas,  &c.  Co.  172,  366 

Buck  V.  Colbath  414,  418,  425,  430 

V.  Memphis,  &c.  Ry.  Co.  247 

V.  Seymour  219,  226,  228,  242 

Buell  V.  Cm.,  E.  &  Q.  Const.  Co.  443 

Buenos    Ayres    Water    Supply    Co., 

In  re  866 

Buffalo  V.  Buffalo  &  N.  Y.  City  R.  Co.   837 
Buftulo  L.  T.  &  S.  D.  Co.  V.  Medina 

Gas  &  E.  L.  Co.  28,  103 

Buffalo,  N.  Y.  &  Phila.  R.  Co.  v.  Har- 
vey 798 
Bunting's  Admrs.  v.  Camden  &  A.  Ry. 

Co.  79,  118,  385 

Burgess  r.  ^lemphis,  &c.  R.  Co.  274 

Burke  r.  Dillingham  693 

V.  Shortt  741,  756 

Burlington,  &c.  Ry.  Co.  v.  Simmons     835 

Burnham  v.  Bowen         593,  596,  602,  603, 

604,  606,  608,  611,  612,  618,  636.  661 

V.  Chicago,  D.  &  M.  R.  Co.    439,  442 

Burnley  v.  Stevenson  414 

Burro wes  r.  MoUoy  400 

Burt  r.  Batavia  Paper  Mfg.  Co.  792 

V.  Rattle  759 

Burt,  Boulton,  &  Co.  v.  Bull  689 

Butler  f.  Ed ger ton  20 

r.  Mver  20 

V.  Rahm    83,  199,  203,  211,  217,  261, 

461 
Butterfield  v.  Cowing  299 

V.  Usher  835 

Byers  v.  Union  Trust  Co.  319 


Cake  v.  Woodl)ury  712 

Caley  r.   Cobourg,  P.  &  M.  R.  &  M. 

Co.  57 

Callioun  r.  Memphis,  &c.  Ry.  Co.  231,268 

V.  St.  Louis,  &c.  R.  Co.     38,  601,  606 

Cal.  Safe  Deposit  Co.  v.  Cheney  Elec- 
tric Liglit,  &c.  Co.  396,  459 
Cambrian  I{y.  Co.'s  Scheme,  In  re        844 
Camden  Safe  Deposit  &  Trust  Co.  v. 

Burlington  Carpet  Co.         169,  186,  188 
Cameron  v.  Tome  110,  757 

Camj)  V.  liarney  689 

Cami)bell    v.    Argenta,   &c.    Mining 

Co.  204,  206 
/•.  Compagnie  Generale  de  Belle- 
garde  645 

)..  Pitts  &  W.  II.  Co.  800,  802 

/•.  Railroad  Co.        472,476,  478,  485, 

487,  490 

r.  T.xas  &  New  Orleans  R.  Co.      21, 

101.  267,  335,  733,  768 
Canada  Soutiiern  li.  Co.  v.  Gebhard     46, 

47,  49,  847  |      Co. 


Canal  Co.  v.  Gordon  275 

Cardos  v.  Barney  689,  690 

Carey  v.  Houston  &  Texas  Cent.  R. 

Co.  416,  421,  745,  824,  843,  865 

Carpenter  r.  Black  Hawk  Co.  175 

r.  Catlin  59,  858 

V.  Northern  Pac.  R.  Co.  439 

V.  Rommel  83 

Carr  v.  Le  Fevre  79,  118 

V.  United  States  470 

Carrick  v.  Wigan  Tramways  Co.  708 

Carswell  v.  Farmers'  L.  &  T.  Co.  699 

Case  V.  Terrell  470 

Casey  c  Northern  Pac.  R.  Co.  687 

Cass  County  v.  Chicago,  B.  &  Q.  R. 

Co.  143 

Caylus  V.  N.  Y.,  K.  &  S.  R.  Co.        44, 155 
Central  Bank  v.  Empire  Stone  Dress- 
ing Co.  126 
Central   Electric    Co.   v.  La   Grande 

Edison  El.  Co.  460 

Central  Gold  Mfg.  Co.  v.  Piatt  210 

Central  Nat.  Bank  v.  Hazard  797 

Central  Railroad  Bk.  Co.  v.  Georgia  845 
Central  R.  &  Bkg.  Co.  v.  Pettus  717,  721 
Cent.  R.  &  Bkg.  Co.  of  Ga.  v.  Farmers' 

L.  &  T.  Co.  020,  794 

Central  Transportation  Co.  v.  Pull- 
man Pal.  Car  Co.  150,  105 
Central  Trust  Co.  i\  Bridges         279,  413 

V.  Carter  856 

r.  Central  Iowa  Ry.  Co.  263 

V.  Charlotte,  C.  &  A.  R.  Co.     472,  622 

1-.  Chattanooga,  R.  &  C.  R.  Co.      566 

('.  Chattanooga    &  Southern  R. 

Co.  603,  616 

V.  Cincinnati,  J.  &  M.  Ry.  Co.     637, 

710,  776,  777,  853,  862 

V.  Condon  208 

V.  East  Tenn.,  &c.  R.  Co.     554,  555, 

596,  624,  627,  643,  692,  760 

V.  Grant  Locom.  Works        739,  830, 

832,  833 

V.  Kneeland  235 

r.  Louisville,  St.  L.  &  Texas  R 

Co.  204 

V.  Madden  627,  828 

V.  Marietta  &  North  Ga.  Ry.  Co.     60, 

187,  206,  668 

V.  Moran  357 

V.  New  York  R.  Co.  29 

V.    N.  Y.   City    &   Northern   R. 

Co.  397,  398,  577,  654 

V.  Ohio  Central  R.  Co.  346,  347,  350, 

698 

V.  St.  Louis,  A.  &  T.  R.  Co.         678, 

679,  603,  612,  827 

V.  Seasongood  303,  838 

V.  Sloan  263,  687 

V.  Texas  &  St.  Louis  Ry.  Co.        135, 

274,  278,  312,  399,  485,  547,  574, 
609,  612,  814 

V.  Thurman  583,  051 

r.  Toledo  R.  Co.  353 

r.  United  States  Rolling  Stock 

854 


TABLE   OP   CASES   CITED. 


xliii 


Central  Trust  Co.  v.  Valley  Ry.  Co.     712 

V.  Wabash,  St.  Louis,  &  Pac.  R. 

Co.         132,  386,  418,  445,  408,  496, 
502,  521,  551,  653,  554,  557,   571, 
577,  592,   605,  GOD,  024,  035,  042, 
649,  659,  663,   674,   675,  097,  698, 
703,  709,   711,  719,  722,  724,  733, 
748,  796 
Central  Trust  Co.,  Trustee,  v.  Conti- 
nental Iron  Works  '       262,  264 
Cliaffe  V.  Ludeling  791 
Chaffee  v.  Middlesex  R.  Co.             57,  104 

V.  Rutland  &  Burlington  R.  Co.     31, 

38,  297,  759 
Chamberlain  v.  Connecticut  Cent.  R. 
Co.  401,  480 

V.  N.  y.,  Lake  Erie,  &  W.  R. 

Co.  439, 685 

V.  St.  Paul  &  S.  C.  R.  Co.   44,  331,  333 

Chambers   v.  Manchester  &  Milford 

Railway  Co.  2,  88 

Chandler  v.  Cushing-Young  Shingle 


Co. 


835 
465 
78,  81 
375 
226 


— —  V.  O'Neil,  Delany,  &  Murphy 
Chapin  v.  Vt.  &  Mass'.  R.  Co. 
Chapman  v.  Borer 

V.  Pittsburg  &  S.  R.  Co. 

Charlebois  v.  Great  N.   W.  Central 

Ry.  Co.  149,  162 

Charles,  Exparte  575 

Charlotte,  C.  &  A.  R.  Co.  v.  Chester 

&  L.  Narrow  Gauge  R.  Co.  694 

Chase  v.  Peck  211 

Chattanooga  Terminal  Ry.  Co.  v.  Fel- 

ton  537,  538,  572 

Cheever  v.  Rutland  &  Burlington  Ry. 

Co.     19,  71,  102,  103,  104,  187,  194,  284, 

291,  301,  431,  479,  487,  489,  535 

Cherry  r.  North  &  South  R.  Co.  277 

Ches.  &  Ohio  R.  Co.,  Case  of  487 

Chesapeake  &  Ohio  Ry.  Co.  v.  Miller  786, 

844 
Chicago  &  Alton  Ry.  Co.  v.  Union 

Rolling  xMill  Co.  455,  450, 830 

Chicago,  Danville,  &  Vincennes    R. 

Co.  V.  Fosdick    74,  77,  300,  393,  403,  404, 

405,  407,  459,  472,  730,  738,  751,  709, 

833,  840 

V.  Loewenthal  26,  99,  770 

Chicago  Deposit   Vault   Co.  v.  Mc- 

Nulta  644,  648 

Chicago  &  Erie  R.  Co.  v.  Towle  803 

Chicago  &  I.  R.  Co.  v.  Pyne  74,  144 

Chicago,  Kansas,  &c.  R.  Co.  v.  Hazels    842 
Chicago,  Mil.  &  St.    Paul  R.  Co.  v. 

Keokuk  Nat.  Line  Packet  Co.         552 

V.  Pfaender  790 

Chicago  &  N.  W.  R.  Co.  v.  Borough 

of  Fort  Howard  341 

Chicago  &  0.  R.  Co.  v.  McCammon       796 
Chicago  Ry.  Equipment  Co.  v.  Mer- 
chants' Bank  73 
Chicago,  St.  Louis  &  New  Orleans  Ry. 

Co.  V.  McComb  27,  437,  440,  446 

Chicago,  St.  Paul,  M.  &  C.  R.  Co.  v. 

Lundstrom  802,  842 


Chicago  &  S.  E.  Ry.  Co.  v.  Cason 


515, 
537 
547 


Chicago  Title  &  Tr  Co.  ?'.  Smith 
Chicago  Title  &  Tr.  Co.,  Rec,  v.  Cald- 
well 836 
Chicago  &  W.  L  R.  Co.  v.  Dunbar  134 
Chickering,  In  re  474,  490 
Child  V.  New  York  &  N.  E.'R.  Co.  Ill, 
129,  756,  851 
Chittenden  v.  Brewster  423 
Chouteau  v.  Allen  77 
Christian  v.  Atl.  &  N.  Car.  R.  Co.  469 
Cincinnati  City  v.  Morgan  326 
Cincinnati,  S.  &  C.  R.  Co.  v  Sloan  506, 
536,  537,  837 
City  V.  Lamson  106 
City  Bank,  Ex  parte  80 
City  of  Batli  v.  Miller  225,  242,  361 
City  of  Chicago  v.  Cameron         7,  14,  34, 

744 
City   of  Dubuque  v.  111.  Central  R. 

Co.  341 

City   of    Menasha   v.  Milwaukee    & 

North  R.  Co.  793,  844 

City  of  Palestine  v.  Barnes  165 

City  of  Quincy  v.  Chicago,  B.  &  Q.  R. 

Co.  178 

City  of  Rochester  v.  Bronson  531 

Claflin  V.  Railroad  Co.  262,  264 

V.  So.  Carolina  R.  Co.  14,  58,  83, 

90,  110,  112,  187,  191,  307 
Clap  V.  Interstate  St.  Ry.  Co.  521,  675 
Clark  V.  Bever  5 

17.  Cent.  Ry.  &  Bkg.  Co.  619 

V.  Flint  &  Pere  Marquette  Ry 


Co. 

V.  Iowa  City 

v.  Reyburn 

V.  St.  Louis,  &c.  R.  (^o. 

V.  Williamsport  R.  Co. 

Clarke  v.  Cent.  Ry.  &  Bkg.  Co. 


321 
78,  106 

410 
314,  490 
584,  .595 
542,  543, 
557,  6.52 

103 

170 
68,  499 


c.  Janesville 

(;.  Omaha,  &c.  Ry.  Co. 

Clay  y.  E.  Tenn.  &V.  R.  Co 

Clay  et  al.  v.  Selali  Valley  Irrigation 

Co. 
Cleveland  v.  Booth 
Cleveland,  C.  &  S.  R.  Co.  v.  Knicker- 
bocker T.  Co. 
Cleveland  Iron  Co.  i'.  Ennor 
Cleveland,  &c.  R,  Co.  v.  Penn. 
Clews  &  Co.  V.  First  Mortgage  Bond- 
holders ,3.32,  .576, 
Clokey  v.  Evansville  &  T.  H.  R.  Co. 

100,  127 
Close  V.  Glenwood  Cem.  29 

Clyde  V.  Richmond  &  D.  R.  Co.    289,  460, 

699 
Clyne  Tin  Plate  Co.,  In  re  645 

Coal  Co.  V.  Blatchford  440,  471,  477 

Cockcroft,  Ex  parte  828 

Coddington  v.  Gilbert  23,  45 

r.  Railroad  Co.  157,  7-50,  814 

Codman  v.  Vermont  &  Canada  Rv. 
Co.  19,  103,  104,  119 


358 
392 


653 
52 


748 


xliv 


TABLE   OF   CASES   CITED. 


Coe  V.  Columbus,  P.  &  I.  R.  Co.        6,  20, 

134, 155,  158, 104,  170,  177.  18U,  S40, 

357,  3U(3, 483, 495,  7ly,  754,  767,  769, 

775,  782 

V.  Delaware,  &c.  Ry.  Co.  208 

V.   East  &    W.  R.  Co.   of  Ala- 
bama et  al.  5,  18,  28,  207,  208, 

264,  278 

1-.  Johnson  211 

V.  Knox  County  Bk.  268,  359 

V.  McBrown  211,  362 

V.  New  Jersey  Mid.  Ry.  Co.  21, 

234,  260,  269,  295,  340,  856,  394 

V.  Peacock  357,  359 

V.  Peunock  221,  344,  362,  303 

Colegate  v.  Mich.  &  Lake  Shore  Ry. 

Co.  837 

Coleman  v.  Llanelly  Ry.  «S:  Dock  Co.     378 
Coler  V.  Grainger  Co.  549 

CoUingham  v.  ISloper  55 

Collins  c.  Central  Bank  326 

Colonial  Trust  Corp.,  In  re  181,  370 

Colorado  Midi.  Ry.  Co.  v.  Jones  438 

Colt  V.  Barnes  134,  328,  331,  332,  729 

Columbia  Finance,   &c.  Co.  v.  Ken- 
tucky Union  Ry.  Co.  236,  467 
Columbia,  &c.  Ry.  Co.  v.  Gibbs  843 
Col.,  H.  &  G.  R.  Co.  V.  Braden  252 
Columbus,    H.    V.   &  T.  Ry.  Co.  v. 

Burke  53,  54 

Combs  V.  Smith,  Rec.  692 

Comer  v.  Felton  690 

Commercial  Bank  v.  Great  Western 

Ry.  Co.  2,  162 

Commrs.  v.  Aspinwall  87,  107 

Commrs.  of  Craven  Co.  v.  Atl.  &  N.  C. 

R.  Co.  2,  3,  19,  20 

Commonwealth  v.  Central  Passenger 
Ry.  781,  782,  804,  843,  846 

V.  Chesapeake  &  Ohio  Canal  Co.   104, 

106,  107,  112 

V.  Inhabitants  of  Williamstown     134 

V.  Lehigh  Valley  R.  Co.  144 

V.  Louisville  Tr.  Co.  394 

V.  Owensboro  &  N.  R.  Co.  788 

V.  Smith     1,  16,  24,  91,  164, 170, 171, 

175,  206 

V.  Susquehanna,  &c.  R.  R.  Co.  294, 

309,310,  311,  362,367,  384 
Company    of    Free    Fishermen     of 

Faversliam,  In  re  378 

Compton  V.  Jcsup  180,  215,  229,  422, 

425,  733,  742.  766,  836,  864 

Conant  v.  Nat.  Ice  Co.  848 

Conkling  v.  Butler  563 

Conn.  M.  I-ife  Ins.  Co.  v.  Cleveland, 

C.  &  C.  Ry.  Co.     78,  104,  105.  117,  118. 

123,  124,  128 

Consolidated  Assn.  v.  Avegno  95 

Consolidaled  Kansas  City  Smelting  & 

Refining  Co..  In  the  matter  of    843,  845 
ConHolidatcd  'I'ank  Line  Co.  v.  Kan- 
sas City  VarniHh  Co.  207 
Continental    'iV.    iUi.    v.  Toledo,   St. 

Lf.ui.H,  ><  K.  C.  R.  Co.  560,  768,  843 

Cook  V  Burley  427 


Cooke  V.  Detroit  &  Mil.  R.  Co.     516,  803, 

804,  805,  842 
Cooley  V.  Brainerd  320 

Cooper  V.  Corbin  339,  791,  792 

V.  Wolf  244 

Cooper  et  ul.  v.  Gaboury  et  al.  276 

Coquard  v.  Bank  of  Kansas  City  141 
Corbett  v.  Woodward  194 

Corcoran  v.  Chesapeake  &  Ohio  Canal 

Co.  71,  104,  385,  460,  487,  488 

Cornwall  Minerals  Ry.  Co.  353 

Corp.  of  Quebec  v.  Quebec  C.  R.  Co.  24 
Cotton  V.  Imperial  Agency  844 

County  of  Beaver  v.  Armstrong  104, 105 
County  of  Gloucester  Bank  i-.  Rudry 

Merthyr,  &c.  195,  220 

County  of  Leavensworth  v.  Chicago, 

R.  1.  &  Pac.  R.  Co.  395 

County  Commrs.  of  Hampshire,  Pe- 
titioners 320 
County  Court  of  Taylor  Co.  v.  Bait. 

&  Oliio  Ry.  Co.  198,  434 

Covey  V.  Pittsburgh,  &c.  Ry.  Co.  166, 
180,  199,  239,  240,  268 
Covington  &  Lex.  R.  Co.  v.  Bowler's 

Heirs  816 

Cowdrey  v.  Galveston,  H.  &  H.  R. 

Co.  655,  656,  657,  658,  713,  722 

V.  Railroad  Co.       539,  562,  563,  641, 

642,  644,  709,  711 
Cozart  V.  Georgia  R.  &  Bkg.  Co.  122, 126 
Craig  V.  City  of  Vicksburg  78,  81 

Crampton  i-.  Zabriskie  84 

Cranston  i-.  Union  T   Co.  275 

Crawford  v.  Houston  &  T.  Cent.  R. 

Co.  701 

Crawshay  v.  Soutter  804 

Credit  Co.  v.  Arkans.is  Cent.  R.  Co.  399, 
405,  478,  487,  750,  769,  816 
Cromwell  r.  Sac  County  93,  95,  102, 103 
Crosby  v.  New  London,  W.  &  P.  It. 

Co.  381 

Crouch  V.  Credit  Foncier  80 

Crumlin  Viaduct  Works  Co.,  Tn  re  280 
Crumlish's    Admrs.    r.    Shenandoah 

Val.  R.  Co.  655 

Gumming  v.  Metcalfe's  London  Hy- 
dro, Lim.  731,  807 
Cunningham  v.  Macon  &  Brunswick 

R.  Co.  287,  468,  469 
V.  Penn.,  Slatington,  &  N.  E.  R. 

Co.  23 

Curtin  v.  Decker  437 

Curtis  V.  Leavitt  204,  294,  304,  305 

Cushnian  r.  Benfield  849 

Cutting,  AV  /xiric  828,  832 

Cutting  V.  Florida  R.  &  Nav.  Co.  560 

V.  Tavares,  O.  &  A.  R.  Co.     603, 616 

Cutts  r.  Brainerd  688 


Daooktt  v.  Rankin  212 

Damarin  v.  Huron  Iron  Co.  199 

Daniels  v.  Hart  819 

Da  Ponte  v.  Northern  Pacific  R.  Co.   2,  6, 

192 


TABLE   OP   CASES   CITED. 


xlv 


Davenport  v.  Receivers  528,  690 

Davidson  v.  Mexican  Nat.  R.  Co.  856 

Davies  v.  Bolton  &  Co.  280 

IK  Vale  of  Evesham  Preserves       606 

Davis  V.  Duncan  545,  670,  571,  685,  686, 
687,689,  09 1 

V.  Gray  416,  469,  606,  509,  557, 

673,  574,  642 

V.  Old  Colony  R.  Co.  '  121 

V.  Railroad  Co.  568 

Day  V.  Micon  435 

V.  Newark  Mfg.  Co.  436 

V.  Ogdensburgli  &  L.  Champlain 

Ry.  Co.  69,  70,  369,  498 

V.  Sykes,Walker,  &  Co.  556 

Dean  v.  Biggs  243 

De  Betz,  Petition  of  310,  472,  484 

Decker  v.  Gardner  691 

De  Graff  v.  Thompson  497,  499,  500 

De  Gralienied  v.  Brunswick  &  Albany 

R.  Co.  573 

De  Grille,  Houdret,  &  Co.  v.  Bull  689 
De  Kay  v.  Voorhis  32 

Delaware,    Lackawanna,  &  W.    Ry. 

Co.  v.  Erie  Ry.  Co.  509 

r.  Oxford  Iron  Co.  277 

Denniston  v.  Chicago,  A.  &  St.  Louis 

R.  Co.  585 

Denny  v.  Cleveland  &  Pitts.  R.  56 

Denver  &  R.  G.   Ry.  Co.  v.   United 

States  T.  Co.  312 

De  Ruyter  v.  St.  Peter's,  &c.  Church  162 
Des   Moines  &  Fort  Dodge  R.  Co.  v. 

Wabash,  &c.  R.  Co.  265,  280 

Des  Moines  Gas  Co.  v.  West  31,  516,  534 
Despatch  Line,  &c.  v.  Bellamy  Mfg. 

Co.  162,  187,  188,  191,  203 

De  Visser  v.  Blackstone  565,  566 

Devon  H.  Co  ,  In  re  844 

De  Witt  V.  C,  B.  &  Q.  R.  Co.  40 

De   Wolf  V.  A.  &  W.  Sprague  Mfg. 

Co.  306 

Dexter  v.  Long  197 

V.  Ross  842 

i\  Union  Pac.  Ry.  Co.  645 

Dexterville  Mfg.  &  Boom  Co.,  Tn  re  597 
Dickey  v.  Bates  547 

Dickson  v.  Swansea  Vale  &  N.  &  B. 

J.  Ry.  Co.  30 

Dillingliam  v.  Hawk  575 

V.  Scales  693 

Dillon  V.  Barnard  132,  148 

V.  Oregon,  &c.  R.  Co.  5:^)8 

Dimpfel  v.  Oliio  &  M.  Ry.  Co.  22,  204 
Dinsniore  v.  Duncan  78 

V.  Racine,  &c.  Ry.  Co.    228,  2.32,  247, 

250,  251 
Dominion    of  Canada  F.   &  T.  Co., 

In  re  849 
Doolittle,  In  re  650,  560 
Dorn  &  McKee,  Trs  ,  v.  Crank  670 
Dougan  v.  Evansville  &  T.  H.  R.  Co.  127 
Douglass  V.  Cline  158,  496,  523,  584.  687, 
598,  599,  612,  615,  688 
Dow  V.  Beidleman  786 
V.  Iowa  Cent.  R.  Co.  858 


Dow  V.  Memphis  &  Little  Rock  R.  Co.   68, 

138,  388,  389,  390,  399,  500,  530,  531, 

545,  648,  554,  577,  578,  597,  OUO,  015, 

618,624,  663,706,707,712 

Downs  V.  Farmers'  L.  &.  T.  Co.  785 

Drury  v.  Cross  816,  822 

V.  Midi.  Ry.  Co.  799 

Dubuque   &    Sioux    City   R.    Co.  v. 

Pierson  296 

Dudley  r.  Collier  285 

Dummer  v.  Lindley  673 

Duncan  v.  Atlantic,  Miss.  &  Ohio  R. 

Co.  574,  705,  710,  771 

V.  Mobile  &  Ohio  R.  Co.        105,  107, 

110,  298,  596,  630,  754,  706,  776 

V.  Trustees  584,  597,  615 

Duncomb  v.  N.  Y.,  H.  &  N.  R.  Co.     2,  14, 

24,  29,  33,  94,  96,  166,  762 

Dunham  v.  Cinn.,  Peru,  &c.  Rv.  Co.     73, 

224,  623,  755 

V.  Earl  et  al.  242 

V.  Isett  64,  68,  177,  178,  268,  361,  496 

Dupont  V.  Bushong  365 

Durant  v.  Iowa  County  101 

Dutchess  Co.  M.  Ins.  Co.  v.  Hatch- 
field  95 
Dutenhoferw.  Adirondack  R.  Co.          12, 

857,  860 
Dwight  V.  Central  Vt.  R.  Co.       428,  430 

V.  Smith  56,  289,  316 

Dynevor   D.  &  N.  A.  Collieries  Co., 
In  re  849,  864 


East  Boston  Freight  Ry.  Co.  r.  East- 
ern R.  Co.  170,  203,  2.34 

V.  Hubbard  12,  170 

East  Tenn.,  V.  &  G.  R.  Co.  v.  Atlanta 
&  Florida  R.  Co.  567 

?'.  Frazier  627 

P.astern  Electric    Cable  Co.  v.  Great 

Western  Mfg.  Co.  45,  -322 

Eastern  &  Midi.  R.  Co.,  Tn  re        .3.53,  357, 
370,  620,  (597,  865 
Eastern  Railroad,  Tn  re  288,  312 

Eastern  11.  Co.  i\  Rogers  140 

Eastern  Township  Bank  v.  St.  Johns- 
bury  &  L.  C.  R.  Co.  119,127 
Easton  v.  Houston  &  Texas  Cent.  H. 

Co.  613,  624,  695,  706,  713,  719 

Eaton  &  Hamilton  R.  Co.  v.  Hunt       399, 

422,  428 
Eckfelt  V.  Starr  363 

Edison  Gen.  El.  Co.  v.  Edmonds  143 

Edwards  v.  Edwards  501 

r.  Martin  392 

V.  Standard  Rolling  Stock  Syn- 
dicate 370,  506,  532,  556 
Eells  ('.  Johann  136,  359 
Elder  v.  Wiiitesides  550 
Eldridge  v.  Smith  177,  220,  228 
Elevator  Co.  v.  Memphis  &  C.  R.  Co.  120 
Elizabethtown,  &c.  R.  Co  v.  Trustees 

of  Elizabethtown  341 

Ellis  V.  Boston,  H.  &  E.  R.  Co.  68, 497, 499, 

601,  547,  599,  642,  694,  696,  697,  721 


xlvi 


TABLE   OF    CASES   CITED. 


Ellis  I'.  Vernon  Ice  Co.  594,  670 

Ellsworth  V.  St.  Louis,  Alton,  &  Terre 

Haute  Ry.  Co.  ii3,  26,  53,  87 

Eimira  Iron  and  Steel  Eolling  Mill 

Co.  V.  Erie  Kj.  Co.  649 

Eiwell  V.  Eastern  R.  Co.  35 

V.  Fosdick  49,  489 

V.  Grand  Street,  &c.  Ry.  Co.       204, 

234 
Emerson  v.  Eur.  &  N.  Am.  R.  Co.  501 
Emien  v.  Leliigh  Coal  &  Nav.  Co.  105 
Empire  Mining  Co.,  In  re  849,  855,  865 
Eng.  &  Scot.  Inv.  Co.  i'.  Brunton  265 

Engel  V.  So.  Met.  Brewing  Co.  645 

English,  Scottish,  &  Australian  Char- 
tered Bank,  In  re  850,  865 
Enthoven  v.  Hoyle  81 
Equitable  T.  Co.  v.  Fisher             289,  773 
Erie  Ry.  Co.  v.  Del.,  Lack.  &  W.  R. 

Co.  507 

Erskine  v.  Mcllrath  689 

Ettlinger  v.  Persian  Rug  Co.  473 

European  &  N.  Am.  R.  Co.  v.  Poor  147 
Evans  v.  Boston  Heating  Co.  171,  191, 193 
Evansville,  H.  &  N.  R.  Co.  v.  Com- 
monwealth 787 
Evertson  v.  Nat.  Bank  of  Newport  81, 
104,  106,  107,  108,  109 
Ewing  V.  Oroville  Mining  Co.  5 
Exhall  Coal  Co.,  Lim.,  In  re  280,  712 
Exmouth  Docks  Co.,  In  re  378 
Express  Co.  v.  Railroad  Co.                  696 


Fahs  v.  Roberts  359 

Fargo  V.  Oil  Creek,  &c.  Ry.  Co.  373 

Farley  v.  St.  Paul  M.  &  M.  R.  Co.        559 
Farlinger,  &c..  In  re  30 

Farmers'  L.  &  T.  Co.,  Petitioner    833,  836 
Farmers'  L.  &  T.  Co.  v.  Bankers'  & 
Merchants'  Tel.  Co.  631 

V.  Can.  &  St.  Louis  R.  Co.  274 

V.  Candler  278 

V.  Cape  Fear  R.  Co.  461,  514 

V.  Cary  243,  247 

V.  Central  R.  of  Iowa     476,  489,  545, 

559,  562,  570.  050,  689,  700,  701,  711 

D. Central  R.  of  Montana  487 

r.  Cliicago  R.  Co.  699 

V.  Chicago  &  A.  R.  Co.    284,  285,  352, 

399. 405,  423,  526, 599,  044,  738,  796 

V.  Cliicago  &  N.  P.  R.  Co.     286,  396 

V.  Cliicago,  P.  &  S.  W.  Ry.  Co. 

443,  445,  447 

V.  Commercial  Bank     138,  239,  247, 

251,  256,  2(i7 

• V.  Detroit,  B.  C.  &  A.  R.  Co         200, 

626 

r.  r.fjnity  Gas  Light  Co.  192 

V.  Fisher  2.'5G 

V.  Grape  Creek  Coal  Co.        670,  732 

V.  Green  720 

V.  Green  Bay,  &c.  Ry.  Co.     395, 599, 

624,  727,  777,  814 

I'.  [Inrmony  Ins.  Co.  28f) 

V.  Jlendrickson  200,  261,  337 


Farmers'  L.  &  T.  Co.  v.  Houston  & 
Texas  Cent.  R.  Co.  414 

V.  Hughes  288,  312 

V.  Iowa  Water  Co.  1 12,  190 

V.  Kansas  City,  &c.  Ky.  Co.      487, 

507,  617,  523,  588,  595,  596,  603, 
612,  615,  623,  636 

V.  McHenry  484 

V.  Missouri,  L  &  N.  Ry.  Co.  268,  764, 

866 

V.  Newman  739,  763,  815 

V.  N.  Y.,  Lake  Erie,  &  W.  R.  Co.   414 

V.  New  York  &  Northern  Ry.  Co. 

301,  395,  477 

V.  Northern  Pac.  R.  Co.  290, 4i  0, 511, 

513,  560,  614,  626,  635,  636,  698 

V.  Nova  Scotia  Ry.  Co.  398 

V.  Oregon  &  C.  Ry.  Co.         392,  740, 

757,  768,  769 

V.  Oregon  Pac.  Ry.  Co.  774,  778 

V.  Pine  Bluff  R.  Co.  46,  605,  623 

V.  Rockaway  Valley  R.  Co.      18,  22, 

27,  393,  745 

V.  St.  Joseph,  &c.  Ry.  Co.     248,  262, 

340 

V.  San  Diego  St.  Car  Co.     5, 17,  239, 

243,  396,  549 

V.  Staten   Island   Belt   Line   R. 

Co.  640 

V.  Toledo,  A.  A.  &  N.  M.  Ry.  Co.   26, 

27,  28,  396,  695 

V.  Vicksburg  &  Meridian  R.  Co. 

606,  615,  618,  632 

V.  Waterman  826,  828,  829 

V.  Winona  &  S.  W.  Ry.  Co.         398, 

459,  472,  532 
Farmers'     &     Mechanics'     Bank    v. 

Butchers'  &  Drovers'  Bank  86,  187 

Farmers'   &,   Merchants'   Nat.   Bank 
V.  Waco  Electric  Ry.  &  Light  Co.     27, 
99,  431,  582,  765 
Farrell  v.  Union  T.  Co.  320 

Farwell  v.  Gt.  Western  Tel.  Co.  644 

Fauntleroy  v.  Hannibal  103 

Fearing  v.  Clark  98 

Felton  V.  Potomac  Ins.  Co.  366 

Fernschild  v.  D.  G.  Yuengling  Brew- 
ing Co.  843,  853 
Fidelity  Ins.  Co.  v.  Huntington  443 

V.  United  N.  J.  R.  &  Canal  Co.    314, 

490 

V.  West  Pa.,  &,c.  R.  Co.    10, 18. 26,  27, 

30,  33,  112 
Fidelity  Ins.  &  T.  Co.  v.  Norfolk  & 
West.  R.  Co.  624 

V.  Roanoke  Iron  Co.  670 

Fidelity  T.  Co.  v.  Mobile  St.  11.  Co.     459, 

819 

Fidelity  Tr.  Co  v.  Shenandoah  Val. 

R.  Co.     61,  151,  187,  291,  2'.»7,  298,  307, 

350,  611,  020,  633,653 

Fifth    Nat.    Bank    of    Pittsburgh    v. 

Pitts.  &  Castle  Shannon  R.  Co.     510, 

640,571 
Fifty-four  first  Mortgage  Bondliold- 
ers,  //(  re  658,  647 


TABLE    OP    CASES    CITED. 


xlvii 


Filon  V.  Miller  Brewing  Co.  124 

Finance  Co.  of  Penn.  v.  Charleston, 
&c.  Ry.  Co.    280,  512,  607,  023,  G91,  716, 

700 
First  Division  of  St.  Paul,  &c.  R.  Co. 

V.  Parcher  178,  788,  790 

First  Nat.  Bank,  &c.  v.  Comnirs.  95 

First  Nat.  Bank  of  Cleveland  *'.  Shcdd  47, 
461,  487,  489,  734,  737,  834,  835 
Fir.st  Nat.  Bank  of  Jeffersonville,  Ind., 
V.  Ohio  Falls  Trolley  Car  &  Loco- 
motive Works  77 
First  Nat.  Bank  of  North  Bennington 

V.  Bennington  103 

First  Nat.  Bank  of  Montpelier  v. 
Sioux  City  Term.  R.  &  Warehouse 
Co.  18,  190,  19G 

First  Nat.  Bank  of  Salem  v.  Ander- 
son 244 

u.  Salem  Capital  Flouring  Mills 

Co.  421 

First  Nat.  Fire  Ins.  Co.  v.  Salisbury 

308,  311,  397,  399,  472,  487 
Fisher  v.  B.  &  O.  Ry.  Co.  843 

Fisk  V.  Potter  261,  270,  272 

Fitclietty.  North.  Penn.  R.  Co.     105, 109, 

385 
Fleming,  Ex  parte  812 

Fletcher  v.  Rutland,  &c.  K.  Co.     290,  292 
Flint  &  Marquette   River  R.  Co.  v. 

Dewey  147 

Florida  v.  Anderson      311,  330,  334,  374, 

380 

V.  Jacksonville,  P.  &  M.  R.  Co.     552 

Floyd  Acceptances  Case  157 

Fogg  V.  Blair  5,  263,  623,  753 

Follit  V.  Eddy  stone  Granite  Quarries     51, 

849 
Forbes  v.  Memphis,  El  Paso,  &  Pac. 
R.  Co.  470,  532 

V.  San  Rafael  Turnpike  Co.  197 

Ford  r.  Central  Tr.  Co.  594 

V.  Earl  of  Chesterfield  708 

('.  Kansas  City,  &c.  Ry.  Co.  509 

Fordyce  v.  Dubose  625 

Foreman  i'.  Cent.  T.  Co.  of  New  York   625 
Forrest   Exrs.  v.  Luddington      330,  331, 
426,  428,  465,  470 
Fort  Payne  Furnace  Co.  v.  Fort  Payne 

C.  &  I.  Co.  520 

Fort  Wayne,  M.  &  C.  R.  Co.  v.  Mel- 

lett  571 

Fosdick  V.  Car  Co.  346,  353,  798 

V.  Schall     38,  268,  271,  345,  346,  849, 

35.3, 354, 453, 496,  -525,  547,  584,  585, 

587,  588,  589,  590,  591,  593,  594,  596, 

599,  601, 604,  606,  608,  615,  616, 618, 

619,620,631,642,760 

V.  Sturges  20 

Foster  v.  Mansfield,  C.  &  L.  M.  R.  Co.  421, 

749,  812 
Fountaine  v.  Carmarthen  Ry.  Co.  30 

Fowler  v.  Jarvis  Conklin  Mortgage 
Co.  542,^543,  557 

V.  Strickland  93 

Fox  I'.  Hempfield  R.  Co.  417 


Fox  V.  Seal  150,  792 

Frank  v.  Denver  &  Rio  Grande  R.  Co. 

137,  270,  34.5,  346,  348,  353,  560, 
620,  660,  697 

i\  Hicks  204 

V.  N.  Y.,  Lake  Erie,  &  W.  R.  Co. 

495,  794 
Eraser  v.  Cooper,  Hall,  &  Co.  461 

Fraj'ser's  Admrs.  v.  Richmond  &  A. 

R.  Co.  501 

Frazier  v.  Railway  Co.  167 

V.  East  Tenn.,  V.  &  G.  R.  Co.     169, 

279,  613,  626,  793 
Freedman's  Savings  &  Tr.  Co.  v.  Siiep- 

iierd  496 

Freeman  v.  Howe    222, 413,  415,  421,  426, 

444 
Fries  v.  So.  Penna.  R.  &  Mining  Co.  799 
Fripp  V.  Chard,  &c.  Ry.  Co.  509 

Fuld  V.  Burr  Brewing  Co.  124 

FuUerton  v.  Fordyce  691 

Furness  v.  Caterham  Ry.  Co.        280,  732 


Gabert  !'.  Olcott  549 

Gage  V.  Pontiac,  O.  &  N.  R.  Co.  793 

Gaines  v.  Fuentes  438 

Galena  &  Chicago  Union  R.  Co.  v. 

Menzies  67,  246,  501 

Galena  &  S.  W.  R  Co.  v.  Barrett  74, 113 
Gait  V.  Erie  &  N.  R.  Co.  270 

Galveston,  H.  &  Henderson  Ry.  Co. 

V.  Covvdrey  68,  82,  96,  169,  194,  22,3, 
224,  271.  473,  496,  497,  500,  623 
Gamble   v.    Queen's    County    Water 

Co.  14,  20 

Gardner  v.  Butler  147 

V.  London,  C.  &  D.  Ry.  Co.     257,  370, 

509,  556,  641 
Garrett  v.  May  6,  70 

Gasquet  v.  Fidelity  Trust  Co.  322 

Gates  V.  Boston  &  N.  Y.  Air  Line  R. 

Co.  47,  49,  76,  303,  409,  847 

Geddes  r.  Toronto  St.  R.  Co.  12 

Gelpcke  v.  City  of  Dubuque  78,  105 

General  Assets  Purchase  Co.  v.  Ches- 
terton Coal  Co.  645 
Gen.  Prov.  Assn.  Co.,  In  re  87,  88,  262 
Gen.  So.  Am.  Co.,  In  re    87,  88,  258,  263, 

280,  603 
George  v.  St.  Louis  Cable  &  W.  R. 

Co.  609 

Georgier  v.  Mieville  81 

Gerniania  Safety  Vault  &  Trust  Co. 

V.  Boynton  29 

Gernsheim  v.  Central  T.  Co.  860,  862 

Gibbs  V.  Greenville  &  C.  R.  Co.       35,  37, 

59,  62,  296,  330,  334,  658 

Gibert  v.  Washington    Citv,  &c.  R. 

Co.        104,  112,^184,  296,"  496,  499,  641, 

649,  675,  770 

Gibson  v.  Bruce  437 

V.  Lenhart  83 

V.  Richmond,  &c.  R.  Co.         287,  375 

Gilbough  V.  Norfolk  &  P.  R.  Co.  83,  108 
Gilchrist  v.  Helena,  &c.  Ry.  Co.  200 


xlviii 


TABLE   OF   CASES   CITED. 


Giles  V.  Nuttall  645 

V.  Stanton  625 

GilfiUan  v.  Union  Canal  Co.  48,  846 

Oilman  r.  Dt-s  Moines  Valley  R.  Co      718 

V.  Illinois  &  Miss.  Tel.  Co.      08,  372, 

496,  499,  507,  543,  548 

V.  Perkins  426 

V.  Sheboygan  &  Fond  du  Lac  R. 

Co.  799,  844 

Oilman  &   Cowdrey   v.  Des   Moines 

Val.  R.  Co.  705 

Oirard  Life  Ins.  Co.  v.  Cooper       644,  695 
Gladwin  v.  Hitchman  392 

Gloninger  v.  Pittsburgh  &  Connells- 

ville  K.  Co.  4,  10,  166,  208 

Godfrey  v.  Ry.  Co.  685 

Gooderham  v.  Toronto,  &c.  Ry.  Co.     583 
Goodlett  V.  Louisville  &  Nashville  Ry. 

Co.  434 

Goodman  v.  Harvey  96 

V.  Simonds  96 

Goodwin  r.  Roberts  78,  81 

Gordon  v.  Gilfoil  428 

V.  Longest  445 

V.  Newman  680,  811 

V.  Preston  162 

Gorringe  v.  Irwell  India  Rubber,  &c. 

Co.  280 

Goshorn  v.  Supervisors  434 

Gould  V.  Town  of  Sterling  157 

Government  Stock  Invest.  Co.  v.  Ma- 
nila R.  Co.  258,  280,  372,  493 
Gower  V.  Winchester  806 
Graham  v.  Chamberlain  744 

V.  Chapman  692 

V.  Railroad  Co.  26,  207 

Grahams  v.  Boston,  H.  &  E.  R.  Co.       25, 
169,  195,  202,  417,  420,  442,  467, 
812,  814 
Grand  Rapids  &  Ind.  R.  Co.  v.  San- 
ders 93,  97,  105 
Grand  Tower,  &c.  Co.  v.  UUman  321 
Grand  Trunk  Ry.  Co.  v.  Cen.  Ver- 
mont R.  Co.                                   69,  614 

V.  Corp.  30 

Grant  v.  Hartford  &  N.  H.  R.  Co.  142 

V.  Phocni.x  Ins.  Co.  739 

Grant  et  ul.  v.  p:ast  &  West  R.  Co.  of 

Alabama  et  nl.  5,  IS 

Grape  Creek  Coal  Co.  v.  Farmers'  L. 

&  T.  Co.  221,  231,  407,  731 

Gravenstine,  Appeal  of  514 

Gray  v.  Manitoba  &  N.  W.  Ry.  Co.     403. 

761,  700 
Great  Luxembourgh  R.  Co.  v.  Mag- 

cnay  147 

Great  Northern  Ry.  Co.  v.  Tabourden  357. 

370 
Great  Western  Tel.  Co.  v.  Gray  467 

Greeley  v.  Provident  Sav.  Bank  654 

Green  v.  Coast  Line  K.  Co.  1.30,  026 

»;.  iMHk  739 

Green   I'.ay  &  Minn.  R.  Co.  v.  Union 

Steamboat  Co.  12:5 

Oreeiiiioinl  Co.  r.  Whitin  193 

Greensburgii,  &c.  Co.  v.  McCormick     160 


Greenwood  v.  Algeciras  Ry.  280,  667 

Gregg  V.  Sanford  248 

Griffin  v.  Macon  Co.  108 

Griffith  V.  Burden  78 

V.  Pound  461 

Griggs  c.  Banks  132 

Grinnell  v.  Trustees,  &c.  162,  770 

Grissell,  Ex  parte  630 

Griswold  v  Central  Vermont  R.  Co.  568 
Guarantee  Trust  &  Safe  Deposit  Co. 

V.  Duluth  &  Winnipeg  R.  Co.  467 

Guaranty   T.  Co.  v.  Green  Cove  R. 

Co.  399,  425,  738 

Gue  V.  Tidewater  Canal  Co.         165,  170, 

366,  367 
Guignon  v.  Union  T.  Co.  705,  713 

Guilford  v.  ]\Iinneapolis,  Ste.  Marie, 

&  A.  R.  Co.  44,  80,  406 

Guion   V.  Liverpool,   Lon.   &   Globe 

Ins.  Co.  828 

Gulf,  Col.  &  S.  F.  R.  Co.  V,  Morris      170, 

780 
Gumbel  v.  Pitkin  549 

Gurney  v.    Atl.  &  Gt.  Western  Ry. 

Co.  016,  674,  716 


Hack  v.  Chi.  &  G.  S.  R.  Co.  440,  441 

Hackensack  Water  Co.  v.  De  Kay    78,  84, 

85,  88,  474 
Hackettstown    Nat.   Bank   v.   D.  0. 

Yueugling  B.  Co.  51 

Hagan  v.  Lucas  413,  415 

Haiglit  r.  Pittsburg,  &c.  Ry.  Co.  78 

Haima  etui.  v.  State  Tr.  Co.  594 

Hale  r.  Frost  012 

V.  Nashua,  &c.  R.  Co.       288,  478,  677 

Hale,  Ayer,  &  Co.  v.  Burlington,  &c. 

R.  Co.  277 

Halev  V.  Halifax  St.  R.  Co.  162,  507 

Hall  V.  Mill  Co.  276 

V.  Mobile  &  Montgomery  R.  Co.     795 

V.  Sullivan  R.  Co.  109,  170, 175 

Hamilton  r.  Chouteau  506 

V.  New  Castle  &  Danville  R.  Co.       3 

Handin  v.  European,  &c.  Ry.  Co.  232, 

236 

V.  Jorrard  201,  245,  268 

Hammock  v.  Farmers'  L.  &  T.  Co.       200, 

339,  510,  567,  568 

Hammond  );.  Atlce 

('.  Port  Koyal  &  A.  Ry.  Co. 

Hammons  i\  Barclay 
Hamor  v.  Enstern  Ry.  Co. 
llamjishire  Land  Co.,  In  re 
Hancock  v.    Toledo,   Peoria,  &  Wa- 
bash R.  Co.  64,  866 
Hand  v.  Savannah  &   Charleston  R. 
Co.             105,   113,  329,  334,  470,  018, 
658,   662,  715,  721,  722,  723,  735, 
736,  753,  756,  758,  761,  762,  776,  790 
llandley  v.  Stutz  5 
Handy  v.  Cleveland  &  M.  R.  Co.           542 
llannap/  al.  v.  State  Tr.  Co.  el  al.        463, 

670,  673 
Hannibal  u.  Fauntleroy  103 


16 

8<12 

137 

35 

30 


TABLE    OF    CASES    CITED. 


xlix 


Hanlesty  v.  Pyle 

Harpending  v.  Munson  4G6,  816, 

Harrisburgh  &  E.  K.  Co.,  Appeal  of 

Harrison  v.  Annapolis  &  E.  Ky.  Co. 

V.  Cornwall  Minerals  R.  Co. 

V.  Union  Fac.  Ry.  Co. 

V.  Union  T.  Co.  290 

Harrison  et  ux.  v.  Lexington  &  F.  R. 

Co. 
Harrison  Wire  Co.  v.  Wheeler 
Hart  V.  Barney  &  Smith  Co. 

V.  pjastern  Union  R.  Co. 

Harwood  i-.  Railroad  Co. 

Hassall  v.  Wilcox 

Hatcher  v.  Toledo,  &c.  Ry.  Co 


345 

^57 
480, 
'279 
135, 
177. 
186, 


Haven  v.  Adams 

V.  Emery 

V.  Grand  Junction  R.  &  Depot 

Co.  78,  105,  110, 

Hawkins  v.  Mitchell 

Hawkins  et  al.,  Trustees,  v.  Mercan- 
tile T.  &  D.  Co. 

Haxton  v.  Bishop 

Hay  V.  Alexandria  &  W.  Ry.  Co.   305, 
429,  430,  437, 

V.  Swedish  &  Norwegian  Ry.  Co. 

Hayden  v.  Androscoggin  Mills 

Havden,  Trustee,  v.  Lincoln  City  El. 
R.  Co.  96, 

Hay6s  V.  Columbus  L.  &  M.  Ry.  Co. 

Haywood  w.  Lincoln  Lumber  Co. 

Hazard  v.  Vermont  &  Can.  R.  Co. 

Hebberd  v.  Soutliwestern  Land  &  Cat- 
tle Co. 

Heidritter  v.  Oil  Cloth  Co. 

Heinslieimer  v.  Dayton,  &c.  Rv.  Co. 
88,  517,  526, 

Hendee  v.  Pinkerton       163,  165,  106, 

Henderson  v.  Walker  685, 

Henen's  Admr.  v.  Balto.  &  Ohio  R. 

Co. 

■  Henry  Pound,  In  re.     See  Pound. 
Hercules  Ins.  Co.,  In  re 
Heme  Bay  Waterworks  Co.,  hi  re 
Herring  v.  New  York,  Lake  Erie,  & 

West.  Rv.  Co.  467,  557, 

Hervey  v.\\\.  Midi.  Ry.  Co.    187,  195, 

207,  285,  440,  445,  447,  510,   518, 
533,  608, 
^—  V.  Rhode     Island     Locomotive 

Works  349, 

Heryford  v.  Davis  349, 

Hibble white  v.  McMorine 
Higgins,  In  re 

Higgins  V.  Lansing  85 

Highland    Ave.   &    Belt  R.    Co.    v. 

Thornton 
Hiles  V.  Case  597, 

Hinchman  v.  Point  Defiance  Ry.  Co. 


340 

822, 
843 

297, 
490 
30, 
773 
280 
124 

O  1  .J 

235 
418 
547 
,  383 
814 
,826 
169, 
790 
493 
272 

757 
385 

229 
162 
416, 
818 
52 
436 

213 
579 
532 
252 

27 
425 

25, 
530 
170, 
189 
692 

435 


Hinckley,  In  re 


379 

746 
204, 
523, 

671 

350 
350 
81 
650 
),  94 

657 
624 
229, 
242 
742 


Hinckley  v.  Oilman,  C.  &  S.  Ry.  Co.    830, 

836 

V.  Morton  742 

V.  Railroad  Co.        557,  563,  640,  703, 

711 
Hitchcock  U.Midland  Ry.  Co.  ofNew 

Jersey  859 

Hodder  v.  Kentucky,  &c.  Ry.  Co.    8.3, 179, 

183,  189,  191,  194,  407 

Hodges  V.  Shuler  78 

Holland  v.  Lee  22 

V.  State  of  Florida  287 

Holland  Tr.  Co.  v.  Cons.  Gas  Co.  539 

Hollins  V.  Brierfield  Iron  &  Coal  Co.  470 
HoUister  v.  Stewart  298,  301,  313,  485 

Holman  v.  Gal  v.,  li.  &  S.  A.  Ry.  Co.  688 
Holmes,  Booth,  &  Haydens  v.   Wil- 

lard  122,  123 

Holroyd  v.  Marshall  222 

Home  Ins.  Co.  v.  Morse  437 

Hood  V.  First  Nat.  Bank  of  Tremont  533 
Hook  V.  Boswortli  548 

Hooper  v.  Central  T.  Co.  63,  593,  670 

V.  Savannah,  &c.  Ry.  Co.      269 

V.  Western  Counties  Tel.  Co.        844 

Hoover   v.  Montclair    &   Greei.wood 

Lake  R.  Co.  667,  671 

Ho{)e  V.  Croydon  &  Norwood  Tram- 
ways Co.  379, 732 
Hornsby  v.  Eddy  6!>3 
Hotchkiss  V.  Nat.  Banks                    95,  154 

V.  Tradesman's  Nat.  Bk.  154 

Hotel  Co.  V.  Wade  205,  475 

House  Imp.  Supply  Assn.,  In  re  645 

Houston,  E.  &  W.  T.  Ry.   Co.  v.  Kel- 
ler 803,  860 
Houston  &  Tex.  Cent.  R.  Co.  v.  Craw- 
ford                                       795, 802,  803 

V.  Kelly  803 

('.  McFadden  803 

V.  Shirley  170,  843 

V.  Stycharski  575, 803 

Hovelman  v.  Kan.   City  Horse    Ry. 

Co.  252 

How  V.  .Jones  836 

Howard  v.  Iron  &  Land  Co.  of  Minn.    212, 

449,  450,451,452 

V.  La  Crosse  and  Milwaukee  R. 

Co.  543,  544,  545 

V  Patent,  &c.  Co.  181 

Howe  r.  Freeman  222,268,414 

V.  Harding  700 

Howe,  Brown,  &  Co.  v.  Sanford  Fork 

&  Tool  Co.  200 

Howell  V.  Western  R.  Co.  409,  730,  738 
Hoyle  V.  Plattsburgh,  &c.  Ry.  Co.  337 
Hubbard  v.  N.  Y.  &  Harlem  R.  Co.  78,  81 
Hubbell  u.  Syracuse  Iron  Works  564 

Hubbuck  r.  Helms  370,  509 

l\\n\son.  Ex  parte  2^0 

Huff  V.  Winona  &  St.  Peter  R.  Co.  804 
Hughes  V.  Chicago,  Mil.  &  St.  P.  Ry. 

Co.  288 

Huidekoper    v.    Hinckley    Locom. 

Works  354,  620 

Hull.  In  re  280 


TABLE   OF   CASES   CITED. 


Humboldt   Mining  Co.  t^.  Am.  Mfg. 

M.  &  M.  Co.  120 

V.  Variety  Iron  Works  Co.  121 

Humphreys  v.  Allen  637,  664,  682 

V.  McKissock  25o,  254 

V.  jNIorton  64,  104,  754 

V.  New  York,  L.  Erie,  &  Western 

R.  Co.  344,  352 

Hunt  V.  Bay  State  Iron  Co.  239 

V.  Bullock  228,  247,  248,  339 

V.  Memphis  Gaslight  Co.  693 

Hunter  v.  Burlington  C.  R.  &  N.  R. 

Co.  800 

Huntington   v.   Little  Rock    &  Fort 

Smith  Ry.  Co.  487,  812,  857 


Ide  v.  Passumpsic,  &c.  R.  Co.  105 

Illinois   Tr.  &  Sav.  Bank  v.  Pacific 

Ry.  Co.  831 

Imperial  Land  Co.  of  Marseilles,  In  re  80 
Imperial  Merc.  Credit  Assn.  v.  Newry 

&  Armagh  Ry.  Co.  280 

Indiana,  111.  &  Iowa  R.  Co.  v.  Swan- 

nell,  Exr.  309,  460,  795 

Indiana  So.  R.  Co.  v.  Liverpool,  L.  & 

G.  Ins.  Co.  454,  828,  833,  839 

Industrial    &    Gen.    Tr.    Co.    v.    So. 

American  &  M.  Co.  506,  645 

Inglehart  v.  Thousand  Island  Hotel 

Co.  94 

Inhabitants  of  An.son,  Petitioners,  &c.  288 
Insurance  Co.  v.  Brune's  Assignee        428 

V.  Dunn  437,  444,  445 

V.  Pechner  437 

International  &  Gt.  Northern  R.  Co. 

i\  Herndon  644 

'•.  Went  worth  644 

Int.  Pulp  Co.,  In  re  87,  88 

Inter-(Jceanic  Ry.  Co.  of  Mexico  850 

Investment  &  Gen.  Tr.  Co.  v.  Inter- 
national Co.  849 
Investment  Co.  of  Penn.  d.  Ohio  &  N. 

W.  R.  Co.  669,  713 


Jackson  v.  Brown  162 

V.  Ludeling  46, 133,  420,  865 

V.  Mut.  Life  Ins.  Co.  437 

V.  North.  Cen.  Rv.  Co.  78 

V.  Vickshurg  S.  &  T.  Ry.  Co.  95 

V.  York  &  Cumberland  R.  Co.        78, 

105,  107 
Jack.son  &  Sharp  Mfg.  Co-w.  Burling- 
ton &  L.  R.  Co.  103,  433,  475,  738 
Jamaica  Ry.  Co.  v.  Attorney-Ciencral     06 
James  v.  Cr)wing              299'  312,  489,  843 

r.  Pontine  &  0.  P.  R.  Co.  170 

r.  Railroad  Co.  821 

Jarvis  i-t  al.  v.  State    Bank   of  Fort 

Morgan  276 
Jcffnv  /•.  Moran  760 
J.-nningH  v.  I'hil.  &  Read.  R.  Co.  f).''..3,  5.'-)5 
Jerome  /■.  M(;('arter  97,  4(i:!,  4(54,  676 
Jcsfluf)  v.  Atlantic  &  Gulf  U.  Co.  277 
V.  Bridge                    64,  199,  246,  496 


Jesup  V.  City  Bank  of  Racine     24,  28,  98, 
190,  191,  203,  732,  831 

V.  Wilmington  &  M.  R.  Co.      60,  61, 

62,  864 
Johnson  v.  Norwich  &  Worcester  R. 

Co.  72 

V.  Phil.,  W.  &  B.  Ry.  Co.  433 

Johnson  County  v.  Thayer  294,  305 

Joliet  Iron  &  Steel  Co.  v.  Scioto  Fire 

&  B.  Co.  97 

Jones  y.  Cent.  T.  Co.  of  N.  Y.  637 

V.  Municipality,  &c.  30 

V.  Nat.  Building  Assn.  29 

V.  Seligman  320 

V.  Smith  453 

V.  Terre  Haute  &  Richmond  R. 

Co.  56 

Jordan,  Ex  parte  828 

Joshua  Stubbs,  In  re.     See  Stubbs. 
Joy  V.  Jackson,  &c.  Plank  lid.  Co.         177 
Junction  R.  Co.  v.  Bank  of  Ashland       20 

V.  Cleneay  78 

V.  Ruggles  234 


Kain  v.  Smith  658,  690 

Kansas,  &c.  Construction  Co.  v.  To- 

peka,  &c.  Ry.  Co.  436 

Kansas  Pac.  Ry.  Co.  v.  Bayles  693 

Kanouse  v.  Martin  437 

Kappner  v.  St.  Louis,  &c.  Ry.  Co.         198 
Karn  >:.  Rorer  Iron  Co.  672 

Keating,  In  re  200,  626 

Keep  V.  Micliigan,  &c.  Ry.  Co.      517,  531, 

566 
Kelly  I'.  Calhoun  185,  194 

V.  Green  Bay  &  Minn.  R.  Co.         635 

V.  Trustees  of  the  Ala.,  &c.  R.  Co.  2, 

3,  26,  31,  162,  168,  190,  246,  463, 
469,  508,  531 
Kemble  v.  Wil.  &  Northern  R.  Co.      6,  17 
Kenawha   Coal    Co.   v.    Kenawlia   & 

Ohio  Coal  Co.  806 

Kennebec  &  Portland  R.  Co.  v.  Port- 
land &  Kennebec  R.  Co.     172,  317,  318, 
376,  377,  807 
Kennedy  r.  I.  C.  &  L.  R.  Co.  416,  573,  574  . 

V.  St.  Paul  &  Pac.  R.  Co.      529,  676, 

678 
Kent  V.  Lake  Superior  Ship  Canal 
Ky.  &  Iron  Co.  303,  487 

r.  N.  Y.  Cent.  R.  Co.  278 

V.  Quicksilver  Mining  Co.  32 

Kentucky  Centr.  R.  Co.  i'.  Common- 
wealth 789 
Kern  v.  Iluidckoper  444,  445 
Kerr  v.  White  510 
Kerrison  v.  Stewart  400,  476,  487 
Ketchum  r.  City  of  Buffalo  144 

V.  Duncan        105,  110,  410,  754,  755, 

756,  757,  776,  777,  853 

V.  Mobile  &  Ohio  R.  Co.        288,  294 

V.  Pac.  R.  Co.  157,  327,  578 

V.  St.  Louis        67,  325,  327,  332,  498 

Kiiilare  Lumber  Co.  v.  Nat.  Bank  of 
Commerce  441 


TABLE    OF    CASES    CITED. 


B.  R.  Co. 

274 

518 

5UU 

181 

258 

550,  758 

8Uo 

R.  Co. 

210 

573, 

688 

125 

467 

585 

688 

690 

&  North- 

8 

275 

282,  292, 

477 

T.  Co. 

353, 

657,  665, 

672, 

Kilpatrick  v.  Kansas  City  & 
Kimball  v.  Goodl)urn 
King  V.  Housatotiic  K.  Co. 

V.  Marshall 

V.  Ohio  &  Miss.  R.  Co. 

V.  Tuscuiiihia,  C.  &  D. 

Kitiney  v.  Crocker 

Kirk  V.  Bell 

Kirkpatrick  v.  Corning 

Kitchen  v.  Pac.  R.  Co. 

Klein  v.  Jewett 

Knapp  V.  St.  Louis,  K.  City, 

ern  Ry.  Co. 

V.  Railroad  Co. 

Kneeland  v.  American  L.  & 
601,  615,  620,  621,  625, 

761 

i\  Bass  Foundry  Works  672 

V.  Braintree  St.  R.  Co.  2 

V.  Lawrence  78 

Knevals  r.  Florida  Cent.  R.  Co.  255 

Knox  Co.  V.  Aspinwall  78 

Knoxville  &  Oliio  R.  Co.  v.  Hicks        789 
Kountze  i'.  Omaha  Hotel  Co.  49(5 

Krihhs  V.  Alford  270 

Krippeiidorf  v.  Hyde  421 

KrophoUer  v.  St.  Paul,  Minn.   &  M. 

Ry.  Co.  474,  676,  776,  819,  822 

V.  St.  Paul  &  Pac.  R.  Co.  854 

Kuser  v.  Wright  '  196 


Lackawanka    Iron   &  Coal   Co.   v. 

Farmers'  L.  &  T.  Co.  620 

La  Crosse  R.  R.  Co.  Bridge,  In  the 

matter  of  676 

Lafayette  Co.  v.  Neely  563,  643,  785 

Lake  Erie  &   W.   Ry.  Co.  v.  Griffin 

799,  800,  803,  842 
Lambertville  Nat.  Bank  v.  McCready, 

&c.  Co.  463,  480 

Lamphear  v.  Buckingham  320 

Lanark  v.  Cameron  221,  252 

Land  Credit  Co.,  In  re  87 

Land  Mortgage  Bank  of  Florida,  Re    864 
Landis  v.  Western  Penna.  R.  Co.    57,  843, 

859 
Landowners'    West    of    England    & 

South  Wales  Drainage  &  Inclosure 

Co.  V.  Ashford 
Lane  v.  Baughraan  357, 
,  Rec.  V.  Macon  &  Atl.  Ry.  Co. 

Langdon  v.  Horton 

V.  Vermont  &  Canada  Ry.     556, 

647,  651, 
Langston  v.  South  Carolina  R.  Co. 

102,  104, 
Lanman  v.  Lebanon  Val.  Ry.  Co. 
Larson  v.  Nelson  &  Fort  Sheppard 

Ry.  Co. 
Latham  v.  Chaffee  427,  428, 

Latlirop  ('.  Union  Pac.  Ry.  Co. 
Laugidin  v,  U.  S.  Rolling  Stock  Co. 

Law  V.  Glenn 


2 
358 
621, 

622 
222 
659, 
682 
78, 
385 
170 

274 
429 
434 
593, 
670 
378 


Lawrence  v.  Morgan's  L.  &  Tex.  R. 

St.  Ship  Co.  134 

Le  Blanc,  In  the  matter  of  498 

Ledwicli  v.  McKini  y.j 

Leedom  v.  Plymoutli,  &c.  Ry.  Co.  164 

Legg  V.  Matliieson  258,  280,  356 

Lehigh  Coal  &  Nav.  Co.  f.  Central  Ky. 
Co.  of  iS'ew  Jersey         69,  277,  51'.»,  551, 
572,  612,  046,  801,  863 
Lehman  v.  Tallaliassee  Mfg.  Co.  78 

L'Engle  v.  Florida  Centr.  liy.  Co.   537,  545 
Lewis  V.  Brady  30 

V.  Jeffries  10 

;;.  Meier  152,  2t(5 

V.  The  Ship  Orphans  413 

Libby  V.  Rosekrans  557 

Lincoln  v.  Iron  Co.  1H7 

Linder  v.  Hartwell  R.  Co.  461,  466 

Linn  u.  Jos.  Dixon  Crucible  Co.  865 

Little  V.  Dusenberry        576,  688,  690,  691 
Little  Rock  &  Fort'Smith  Ry.  Co.  v. 
Huntington  314 

V.  McGehee  7^6 

Little  Rock,  &c.  Ry.  Co.  v.  Page    22.3,267 
Lloyd  V.  Chesapeake,  O.  &  S.  W.  K. 
Co.  653 

y.  E.&M.  A.  R.  Co.  221 

Loder  v.  N.  Y.,  Utica,  &  Ogd.  R.  Co.     517 
liOgan  V.  Greenlaw  418 

V.  Vernon,  Greensburg,  &  R.  R. 

Co.  786 

Lombard  Invest.  Co.  v.  Seaboard  Mfg. 

Co.  470 

London  Chartered  Bank  of  Australia, 

In  re  844,  867 

London  Financial  Assn.  v.  Wrexham 

Ry.  Co.  844 

Long  Branch,  &c.  R.  Co.  v.  Sneden        644 
Long   Branch  &  Sea  Shore  R.  Co., 

In  re  544 

Long  Dock  Co.  v.  Mallory  529,  533 

Long  Island  L.  &  T.  Co.  o.  Columbus, 

C.  &  I.  C.  Ry.  Co.  93,  96,  96 

Longdendale    Cotton    Spinning  Co., 

/«  re  '  370,  772 

Loomis  V.  Davenport,  &c.  Ry.  Co.     270, 

798 
Lord  V.  Yonkers  Fuel  Gas  Co.      167,  192, 

193 
Lord  Crewe  v.  Edleston  280 

Lorman  v.  Clarke  375 

Loudenslager  v.  Benton  211,  267,  361 

Louisiana  State  Bank  v.  New  Orleans 

Nav.  Co.  120 

Louisville,  Cin.  &  Charleston  R.  Co. 

)'.  Letson  432 

Louisville,  E.  &  St.  L.  R.  Co.  v.  Wil- 
son 601,616,618 
Louisville  &  Nashville  R.  Co.  v.  Ken- 
tucky 7 

V.  Orr  802 

V.  Palmes  786,  788,  789 

Louisville,  N.  A.  &  Chi.  R.  Co.  v.  Ohio 

Valley  Imp.  Co.  116,  117 

Louisville,  &c.  R.  Co.  v.  Oliio  V.  Im- 
provement Co.  85 


lii 


TABLE   OF   CASES   CITED. 


Louisville   T.  Co.  v.  Cincinnati  In- 
cUued  Plane  Ry.  Co.  645 

V.  Louisville,  N.  A.  &  Chi.  R.  Co. 

116,  117,  4.33 
Louisville  Water  Co.  v.  Hamilton  105 
Low  V.  Cent.  Pac.  R.  Co.  119 

Lucas  V.  White  Line  Transfer  Co.         121 
Ludlow  V.  Clinton  R.  Co.     261,  263,  494, 

770 

V.  Hurd  180,  242,  357 

LusBj;.  Isthmus  Transit  Co.  191 

Lvman  c.  Central  Vermont  R.  Co.        673 


Maas  v.  Mo.,  K.  &  T.  R.  Co.  24,  92, 95 
Rlacalaster's  Admrs.  v.  Maryland  364,498 
McAllister  j;.  Plant  2, 6,  14, 162, 163,  170, 
206,  296,  303, 372,  397 
McCalmont  v.  Phila.  &  Reading  li.  Co.  10 
McCamnion    v.   Detroit,  L.  &  N.  R. 

Co.  773 

McClelland  i-.  Norfolk  So.  R.  Co.    44,106, 

107,  382 
McCullough  r.  A.  &  E.  R.  Co.  12 

V.  Merchants'  L.  &  T.  Co.  512 

McCurdy,  Appeal  of  186, 189,  461 

McDonald  v.  Charleston,  &c.  R.  Co.     426, 

757 

V.  Smalle^  443,  444 

McElrath,  In  re  564 

McElrath  v.  Pittsburgh,  &c.  R.  Co.  373, 
414,  487,  753 
McEadden  v.  May's  Landing,  &c.  R. 

Co.  388,  397,  407,  472,  768 

McGeorge  v.  Big  Stone  Gap  Improve- 
ment Co.  406 
McGourkey  v.  Toledo,  &c.  Ry.  Co.  344, 
345,  346,  347,  348,  835 
McGran  v.  Memphis,  &c.  Rv.  Co.  225, 
245.  246,  247,  271,  323 
McGregor  v.  Cov.  &  Lex.  R.  Co.  2 
McIIcnry,  Petition  of  464,  465,  478 
McHenry  v.  New  York,  P.  &  O.  R.  Co.  46, 
440,  446,  544,  843,  866 
Mcllhenny  v.  Binz  150,  206,  519 
Mcllratii  V.  Snure  548 
McKce   >\   Grand    Rapids    &   Reed's 

Lake  St.  R.  Co.  24,33,743 

Mackintosh  v.  Flint  &  P.  M.  R.  Co.  141, 
842,  849.  852,  853,  867 
McKittrick    v.    Arkansas    Cent.   Ry. 

Co.  326 

McLanc  v.  Placerville,  &c.  R.  Co.     13,  95, 

18«,  211,  389,  398,  535,  716,  721,737 

McLean  '•.  St.  I'aul,  &c.  Ry.  Co.  437 

McLou^ililin   v.   Nat.    Mut.    Bond    & 

Inv   Co.  528 

McMalion  v.  North  Kent  Iron  Works 

f:o.  370 

Mc Masters  v.  Reed's  Exrs.  3 

McMurray  v.  Moran  89,  154,  156,  158 

McNulta  I'.  Lockridtre  689,  691 

McTl^he  ('.  Mac-on  Constr.  Co.  163,  229 
Macon   &  Antrnsta  K.  Co.  r.  Ga.  M. 

Co.  122,  126,  204,  291,  302,  303,  372, 
387,  773,  809 


Macon  &  Western  R.  Co.  v.  Parker  771 
Madeley  v.  Ross  372 

Madison  &,I.  Ry.  Co.  v.  Norwich  Sav. 

Soc.  86,  126,  128,  155 

Madison,  &c.  Plank  Road  Co.  v.  Water- 
town  Plank  Koad  Co.  121 
Madras  Irrigation  &  Canal  Co.,  In  re  850 
Magdalena  Steam  Nav.  Co.,  In  re  88 
Mahoney  v.  E.  Holy  ford  Mining  Co.  86 
Making  v.  Percy  Ibotson  &  Son  556 
Mallory  v.  West  Siiore  &  H.  Ry.  Co.  382 
Manchester    Locomotive    Works    v. 

Truesdell  27.3,611 

Mancliester,  &c.  Ry.  Co.,  In  re      533,  556 
Maniiattan  Trust  Co.  i-.  Seattle  Coal 
&  Iron  Co.  200,  280,  614 

V.  Sioux  City  Cable  Ry.  Co.    2.52,  270 

Manning  v.  Norfolk  So.  R.  Co.  382,  383 
Mansfield,  C.    &    L.    M.  Ry.    Co.    v. 

Swan  437 

Manuf.  L.  Co.  v.  Conover  30 

Marbury  v.   Kentucky  Union    Land 

Co.  120,  124,  125,  126,  127 
March  v.  Eastern  R.  Co.  472 
Marine  Mansion  Co.,  In  re  181 
Market  Street  Ry.  fo.  i\  Hellman  144 
Marlor  v.  Texas  &  P.  Ry.  Co.  43,  71 ,  105, 
153,  154,403 
Marshall  v.  Baltimore  &  Ohio  Ry.  Co.  432 
i".  So.  Staffordshire  Tramways 

Co.  370 

V.  Tramways  Co.  769 

V.  Western  N.  Car.  R.  Co.  804 

Martin  v.  Niagara  Falls  Paper  Co.       126, 

187,  196 
Martin  &  Merriweather  v.  Mobile  & 

Oiiio  R.  Co.  367,  384 

Marwick  v.  Thurlow  731 

Maryland   v.  Baltimore   &  Ches.  R. 

Co.  72 

r.  Brown  310 

Mase  V.  Nicliols  201 

Mason  v.  York  &  C.  R.  Co.        27,  28,  284, 

459,  472 
Mass.  Mut.  Life  Ins.  Co.  r.  Chicago  & 

A.  R.  Co.  430,  468,  481,  571 

Massie  v.  Watts  414 

Mather  r.  Union  T.  Co.  120 

Mather  Humane   Stock  Trans.  Co.  v. 

Anderson  353 

Matthews  v.  Murcliison  526,  533,  843,  864 
Maury  v.  Chesapeake  &  Ohio  R.  Co.  708 
Maxwell  V.  Wilmington  Dental  Mfg. 

Co.  216 

May  V.  Printup  426,  510 

Mayer  v.  Denver,   T.  &  Fort  W.  R. 

Co.  34 

Mavor   of  the    City  of  Knoxville  v. 

knoxville  &  Oliio  Uy.  Co.  843 

Mead  v.  New  York,  Ilousatonic,  &  N. 

H.  Co.  22,  40,  168,  261,  422 

Means  V.  Cincinnati  &  Ciiieatro  \{.  Co.    45 

Meara's  Admrs.  v.  Ilolbrook  573,  57'),  685, 

688,  (iOO.  691 

Moi'hanics'   Batik,  In  the   matter    of 

the  Petition  of  290 


TABLE    OF   CASES    CITED. 


liii 


Mechanics'  Bank  v.  N.  Y.  &  N.  H.  R.  Co.  81 
Mecklenberg  v.  Phil.  &  Read.  Ry.  Co.  57 
Meier  v.  Kansas  Tac.  R.  Co.    470,  612,  514, 

5;iy,5i;-j 

Melendy  v.  Barboiar  571,  GUU,  «;jO 

Mellon  V.   Morristown  &  C.  Gap  U. 

Co.  Gil 

Memphis  &  Charleston  R.  Co.  v.  Ala- 
bama 435 
Memphis  &  C.  R.  Co.  v.  Hoeclinet        685 
Memphis  &  Little  Rock  R.  Co.  v.  Dow     4, 
5,  17,  21,  102,  842,  84'J 

V.  Commrs.      134,  176,  178,  780,  782, 

786,  787,  842,  845 

i>.  State  159,  465 

Mendenhall  v.  Westchester  &  Phila. 

R.  Co.  373 

Mercantile  Inv.  &  Gen.  T.  Co.  v.  In- 
ternational Co.  of  Mex.  51,  132 
Mercantile  Tr.  Co.  v.  Atl.  &  Pac.  li. 
Co.  427 

V.  Balto.  &  Ohio  R.  Co.  614 

— —  V.  Chicago,  P.  &  St.  L.  R.  Co.        398 

V.  Kanawha  &  O.  R.  Co.        449,  450, 

456,  522,  666,  679,  680,  681,  683,  796, 

831 

V.  Riser  122 

V.  Lamoille  Val.  R.  Co.      419,  428, 

429,  459,  482,  484,  569 

V.  Missouri,  K.  &  T.  Ry.  Co.      3't7, 

399,  405,  496,  526,  543,  712,  716,  724 

V.  Pittsburg,  &c.  R.  Co.  2B9,  467 

V.  Portland,  &c.  R.  Co.    296, 478,  480, 

4M1 

V.  River  Plate  51,  525 

V.  St.  Louis    &,    San    Fran.    R. 

Co.  261,  572 

V.  Southern  Iron  Car  Line  Co.       620 

V.  Texas  &  Pac.  Ry.  Co.  370 

Mercer  Co.  v.  Hacket  78,80,  106 

Merchants'    Bank  v.  Petersburg    R. 

Co.  499 

Merchants'    Bank    of    Atlanta    v. 

Moore  593 

Merchants'  Nat.  Bank  v.  Eastern  R. 

Co.  35 

Merrill  v.  Farmers'  L.  &  T.  Co.  282,  312 
Mersey  Ry.  Co.,  In  re  280,  657 

Messchaert  v.  Kennedy  474 

Metropolitan   Trust  Co.  v.  N.  Y.  Tr. 
&  W.  R.  Co.  252 

V.  Penn  ,  &c.  Ry.  Co.  338 

V.  Tonawanda,  &c.  R.  Co.        464, 673 

Metz   r.  Buffalo,  Corry,  &   Pitts.   R. 

Co.  685,  781,  803,  804,  84.S 

Meyer  v.  Car  Co.  346,  353 

V.  City  of  Muscatine  105 

II.  Construction  Co.  277 

V.  Hornby  275,  279 

V  .lohnston         61, 133,  176, 177,  184, 

189,  224, 233,  234,  23-5,  252,  268,270,  339, 

345, 430, 507,  509, 527,  623,  656,  663,  665, 

667,672,677,683,  717 

('.  Utah  &  Pr.  Ry.  Co.  812,  815 

Michigan  T.  Co,  v.  Lansing  Lumber 
Co.  388 


Middleton  v.  New  Jersey  West  Line 

R.  Co.  734,  736 

Miilland  R.  Co.  v.  Stevenson  367 

Midland    R.   Co.   of    New    Jersey  v. 

Hitclicock  374.  859 

Midland  Waggon  Co.  v.  The  Potteries 

8.  &  N.  W.  Co.  370 
Miles  /■.  Roberts  319 
Millard  r.  Burley  252 
Miller  v.  N.  Y.  &  E.  R.  Co.  2,  3, 12,  39 
I).  Rutland  &  VVaslungton  Ry.  Co.     2, 

3,  14,  98. 109, 162, 170,  174,  175,  186,  204. 

212,  234,  241,  295, 297,  29«,  305, 308, 855 

Miltenberger  v.  Logansport  Rv.  Co.     463, 

591,593,  602,  603,  604,  607,  608,61.5,  631, 
663,672,  673,  674,675 
Milwaukee  &  Minn.  R.  Co.  v.  Mil.  & 

Western  R.  Co.  567 

I'.  Soutter  507, 527, 536, 537, 562,  730, 

778, «34,  839 
Milwaukee,    &c.  R.    Co.   v.   Brooks 

Locomotive  Works  318 

Milwaukee  &  St.  Paul  R.  Co.  v.  Milw. 

&  Minn.  R.  Co.  784 

Minnesota  Co.  i-.  St.  Paul  Co.  241,  340, 
417,421,451,571 
Mississippi  Val.   Co.   v.  Cliicago,  St. 

Louis,  &  N.  O.  Ry.  Co.  216,  227,  230, 
255,  261,  548 
Miss.   Val.    &   W.    R.   Co.  v.   LTnited 

States  Express  Co.  68,217,497,499,501 
Missouri,  K.  &  T.  R.  Co.  v.  Lacy  et  ul.    802 

V.  Wylie  701 

Missouri  Pac.  Ry.  Co.  r.  Texas  Pac. 

Ry.  Co.  560,  563,  574,  658,  718 

Mitchell,  Ex  parte  670 

Mitchell,  Assignee,  v.  Winslow  221 

Mobile  &  Cedar  Point  R.  Co.  r.  Tal- 

man       167,  186,  202,  204,  212,  291,  298, 

431 
Mobile    &     Montgomery   R.    Co.    i\ 

Sreiner  703, 842 

Mobile  &  Olno  R.  Co.  v.  Davis        570,  658 

i>rNicliolas  62,  866 

Montgomery  v.  Elliott  401 

('.  Petersburg  Sav.  &  Ins.  Co.         711 

Montgomery    County    x\gri.    Soc.    (•. 

Francis  "        ^  380 

Montgomery  &  AVest  Point  R.  Co.  r. 

Branch  65,  793 

Moory.  Anglo-Italian  Bank  2-58 

Moore  r.  Baird  93 

Moran  v.  Pittsburgh,  &«.  Ry.  Co.  .  237 
Morgan  v.  Kansas  Pac.  Rv.  Co.     472,  478 

V.  Louisiana     135,  786,  787,  788,  789, 

790 

V.  Union  Pac.  Ry.  Co.  66 

V.  United  States  75,95 

Morgan,  &c.  v.  Donovan  1.34,  18-3,  208, 
228,  242,  252 
Morgan  County  v.  Thomas  243,  782,  805 
Morgan's   La.  &  Tex.  R.  &  St.  Ship 

Co.  v.  Farmers'  L.  &  T.  Co.  620 

Morgan  's  Louisiana   &  Texas  R.  Co. 

V.  Texas  Cent.  R.  Co.  397,  404.  413, 

421,427,453,629,839 


liv 


TABLE    OF    CASES   CITED. 


Morrill  v.  Noyes  224,  234,  267 

Morris  v.  Clieney  lti4,  243 

Morris  Canal  &  Bkg.  Co.  v.  Fisher        <3o, 

78,  79,  83,  97 

V.  Lewis  78,  79,  83,  93,  97 

Morrison  v.  Buckner  534 

i:  Eaton  &  Hamilton  R.  Co.  20 

V.  G.  T.  Ey.  Co.  356 

Morse  v.  Brainerd  688 

Morton  V.  New  Orleans  &  Selma  Ry. 

Co.  91,  95,  260,  453,  461,  481,  712,  714, 
715,  719,  722,  754,  762 
Morton,  Rose,   &   Co.   v.   Barbadoes 

Water  Supply  Co.  556 

Mo^grove  v.  Kountze  152 

Mower  v.  Kemp  208 

Mo  wry  v.  i\  L.  &  T.  Co.       17,  60,  62, 853, 

856 
Muhlenberg  v.  Phila.   &  Reading  R. 

Co.  57 

Muller  V.  Dows       414,  423,  433,"  454,  480. 

555 
Munns  v.  Isle  of  Wight  Ry.  Co.  844 

Munson  et  al    v.  Syracuse,  Geneva, 

&  Corning  R.  Co.  et  al.  15 

Murdock  v.  Woodson  329,  469,  475,  478 
Murphy  v.  Holbrook  685 

Murray  v  Deyo  500 


V.  Lardner 


95,  96,  lOB 


Murrietta  v.  Nevada,  L.  &  C.  Co. 

Myatt  V.  St.  Helens,  &c.  Ry.  Co. 

Myer  ?;.  Car  Co. 

Myers  v.  Dorr 

V.  York  &  Cumberland  R.  Co. 


663, 
673 
256 
650 
433 
79, 


Nelson  v.  Iowa  Eastern  Ry.  Co.     84,  202, 
262, 264,  274,  275,  340 

V.  Hubbard  4,  298,  387,  396 

Neves  v.  Scott  375 

New  Albany,  &c.  Plank  Road  Co.  v. 

Smitli  78 

New    Brunswick  &    Canada    R.    Co., 

In   re  49 

New  Castle  Northern  R.  Co.  v.  Simp- 
son 146,  150,  151,  716 
New  Clydach,  &c.  Co.,  In  re  225 
New  Kngland  R.  Co.  v.  Carnegie  Steel 

Co.  583 

New  Jersey  Midi.  Ry.  Co.,  Receivers 

of,  V.  Wortendyke  634 

New  Orleans  &  Pac.  R.  Co.  v.  Parker 

23.3,  252,  253,  255,  405 
New  Orleans,  &c.  R.  Co.  v.  Harris        170, 

842 

V.  Union  T.  Co.  233 

New    Orleans,  Spanish  Fort,  &  L.  R. 

Co.  p.  Delamore  135 

New  York  &  Greenwood  Lake  R.  Co. 

V.  State  793 

New    York,   L.   E.   &   W.  R.  Co.  v. 

Nickals  863 

New  York,   P.   &  0.  R.  Co.  v.  New 

York,  L.  E.  &  W.  R.  Co.     538,  622,  695, 

698 
New   York    Security  &   Trust  Co.  i\ 

Capital  Ry.  Co.  270,  614 
I'.  Equitable  Mtge.  Co.  756 

—  V.  Lincoln  St.  Ry.  Co.  300,  451 

—  V.   Louisville,   E.   &    St.   L.   R. 


105,  107 


Naglee  v.  Alex.  &  Fred.  R.  Co.  171 

Nashua  &  Lowell  R.  Corp.  v.  Boston 

&  Lowell  R.  Corp.  433 

Nashville,  C.  &  St.  L.  Ry.  Co.  t).  Mat- 

tingly  826 

Nat.  B.ink  of  Augusta  v.  Carolina,  K. 

&  \V.  K.  Co.  605,  606,  617 

National    Bank    of    Gloversville    v. 

Wells  120 

Nat.  Rnnk  of  Mich.  v.  Green  93 

Nat.  Hunk,  &c.  v.  Kirby  95 

Nat.  Bolivian  Nav.  Co.  r.  Wilson  44,  55 
Nat.  Ex.   Hank  v.  Hartford,  &v,    Rv. 

Co.  78,  105,  106,  381 

National  Foimdrv   &  Pipe  Works  r. 

Oconto  Water  Co.  197,  273 

National   Piirk  Rank  r.  German  Am. 

Warehousing  Co.  120 

NatidiiMl  Kiibbcr  ("o.  r.  Rhode  Lsland 

J'o-l).  Tr.  f%).  .303 

National  Wsiterworks  Co.   v.  Kansas 

City  305 

Native  Iron  Ore  Co.,  In  re  88,  2(i2 

NcJifle,  Ai)i)eHl  of  670,  0«0 

Neal  r.  Kr.sfcr  454 

Nc-itii  &  I',rccr)n  I{v.  Co.,  //)  re  849 

Ncff  V.  The  Wolf  River  Boom  Co.      802. 

844 


Co. 


Light 


626 


541 


V.  Saratoga    Gas    &    El 

Co. 
Newbold  v.  Peoria  &  Springfield  R. 

Co.  680 

Newby  r.  Oregon  Cent.  R.  Co.        44,  356 
Newell  V.  Smith  688 

Newgass  v.  Atlantic,  &c.  R.  Co.    264,  3^5 
Newport  r.  Bury  513 

Newport  &  Cincinnati  Bridge  Co.  r. 

Douglass      75,  92,  97,  98,  102,  103,  158, 

216,  296,  328,  496, 499,  501,  526,  566,  629 
684,  708,  724,  794 

V.  Woolley  433 

Newport     &     Covington     R.   Co.   t'. 

Douglass  21 

Nichols  r.  Mase  25,  88, 185 

Nichols,  Treas.,  &c.    v.   New    Haven 

&N.  Co. 
Nickals  V.  N.  Y.,  L.  E.  &  W.  R.  Co. 
Nickerson    v.  Atcli.,  To[).  &  Si-nia  Fc 

R.  Co. 
Nixon's  Navig.-ition  Co.,  In  re 
Noble  V.  Alabama 
Noonan  r.  Lee 

Norfolk  &  W.  R.  Co.  r.  Pendleton 
North    Hudson,  &c.  Asso.   r.  Hudson 


863 

721 
861 
366 
375 

785 


Fir.Ht  Nat.  Bk. 
North  Penn.,  &c.  R.  Co.  v.  Adams 

North  Side  Rv.  Co.  v. 


29 
104, 
105 
Worthington       11, 
15,  17 


TABLE    OF    CASES    CITED. 


Iv 


Northampton  Nat.  Bank  v.  Kidder  75 

Nortliern  Central  Ry.  Co.  v.  Bastian     187 

V.  Kc'ifrliler  873,  7U.3,  7u4 

Northern  Indiana  Ry.  Co.  v.  Michigan 

Central  Ry.  Co.  423,  555 

Northern  Pac.  K.  Co.  v.  Lamont     605, 613, 

619 

V.  Shinimell  134,  367 

Nortliern  Penn.  R.  Co.  v.  Adams  385 

Northern  T.  Co.   v.  Columbia  Straw 

Paper  Co.  738 

Norvvicii  &  Worcester  R.  Co.  v.  John- 
son 832 
Noyea  v.  Rich                                    68,  501 


O'Beirne  v.  Allegheny  &  K.  Ry.  Co.  460 
Ogilvie  u.  Knox  Ins.  Co.  416 

O'Hara  v.  Mobile  &  O.  R.  Co.  351 

Ohio   Central   Ry.  Co.  v.  Central  T. 
Co.  727,  731,  732 


29 
580 
551 
433 
126 

541 


126 
826 


Ohio  &  M.  R.  Co.  V.  McCarthy 

Ohio  &  Miss.  R.  Co.  v.  Fitch 

r.  Russell 

V.  Wheeler 

Olcott  V.  Tioga  R.  Co. 

Olmstead  v.  Distilling  &  Cattle  Feed- 
ing Co. 

Olyphant   v.  St.  Louis  Ore   &  Steel 
Co.  396,  624 

Omaha  Hotel  Co.  v.  Kountze  528 

Omalia,  &c.  R.  Co.  v.  Wabash,  &c.  R. 
Co.  235.  255 

Opdyke  v.  Pacific  R.  Co. 

Opelika  City  v.  Daniel 

Opera,  Lim.,  In  re  280,  603 

Ormerod,  Grierson,  &  Co.,  In  re        630, 

670,  708 

Orphan  Asylum  Soc.  v.  McCartee        525 

Osborn  v.  Michigan  Air  Line  R.  Co.     421 

Osgood  V.  Chicago,  D.  &   V.  R.  Co. 

443,  444,  445,  447 

Osterber  v.  Union  T.  Co.  783,  784 

Overton  v.  Memphis  &  Little  Rock 
R.  Co.  516,525,526,540,811 

Owen  I'.  Cronk  689 

V.  Homan  517 

Owens  0.  Ohio  Central  R.  Co.         42.3, 426, 
445,  472,  553,  568 

Oxley    Stave    Co.    v.   Coopers'   Int. 
Union  of  N.  A.  550 


P.  &  C.  R.  Co.  V.  Allegheny  County        171 
Pacifier  R.  Removal  Cases  438 

Pacific  R   Co.  V.  Cass  Co.  341 

V.  Ketchum  441,  487,  510,  747, 

778,  825,  832 

V.  Missouri  Pac.  R.  Co.         416,  749, 

750,  812,  814,  815 

V.  Wade  576 

Pacific  Rolling  Mill  v.  Dayton,  Sheri- 
dan, &  G.  R.  Ry.  Co.  190,  713 

r.  James  St.  Const.  Co.  276 

Paige  r.  Smith  688 

Paine  v.  Little  Rock  R.  Co.  678 


Palmer  v.  Farbes  201,  240,  245,  248, 

316,  339,  366 
Palys  V.  Jewett  573,  576 

Panama,  N.  Z.  &  A.  Royal  Mail  Co., 

In  re  216,2.58 

Parish  v.  Wheeler  228,  242,  256 

Park  V.  N.  Y.,  Lake  Erie,  &  Western 

R.  Co.  413,414,653,654, 

696,  698,  69J 

Parker  i\  Aldridge  413 

v.  Bluffton  Car  Wheel  Co.  765 

f.  Browning  574,  576 

V.  New  Orleans,  &c.  R.  Co.         178, 

224,  226,  233,  250 
Parkhurst  v.  Northern  Central  R.  C^o. 

246,  490,  499 
Parkinson  i\  Wainwriglit  730 

Parsons  c.  Greenville,  &c.  R.  Co.  419 

V.  Jackson  82,  89,  96 

c.  Lyman  376 

V.  Robinson  835,  836 

Patent  Automatic  Knitting  Co.,  In  re    844 
Patent  Bread  Machine  Co.,  In  re  88 

Patterson  v.  Central  II.  &  Bkg.  Co.       685 
Paulding  r.  Chrome  Steel  Co.  193 

Payne  v.  Hook  875,  462 

V.  Wilson  211,212 

Peale  v.  Piiipps  57] 

Peatman  v.  Centerville,  L.  H.  &  P. 

Co.  91 
Peck  V.  Jenness  137,  413 
V.   New   York   &   N.   Jersey    R. 

Co.  728,  819,  823,  824,  8.32 

V.  Trinsmaran  Iron  Co.  556 

Peckham  v.  Dutchess  Co.  R.  Co.  700 

Pegge  V.  Neath  Dist.  Tramways  Co. 

370,  509 
Peirce  v.  Van  Dusen  692 

Pekiu  V.  Reynolds  105 

Pendleton  v.  Russell  564 

Peninsular  Iron  Co.  v.  Eells  45,  793 

Penn  v.  Calhoun  6.33 

Pennock  v.  Coe  13,  131,  180,  221,  222, 

223,  224,  234,   250,  252,  268,  359,  360, 
363,  .364,  367,  368 
Pennoyer  v.  Neff  552 

Penna.  R.  Co.  v.  Allegheny  Valley  R. 

Co.  734,  737,  756 

V.  Jones  686 

V.  St.  Louis,  &c.  R.  Co.        150,  170, 

435,  436 
Penna.  &  Del.  R.  Co.  v.  Lenffer  137 

Penna.  Co.  for  Insurance  on  Lives  ;.'. 

Jacksonville,  J.  &  K.  W.  R.  Co.         429, 

521,  83/ 

V.  Phila.  &  Reading  R.  Co.         392, 

399.  401,  405 
Penn.  Transportation  Co.,  Appeal  of 

777.  778,  852 
Pcnsacola  Provisional  Mun.  v.  North- 
rop 273 

49. 


People  V.  Albany  &  Vermont  R.  Co. 

r.  Brooklyn,  F.  &  C.  L  R.  Co. 

V.  McLane 


170 
843. 
846 
667 


Ivi 


TABLE    OF   CASES   CITED. 


People  V.  O'Brien  843 

People  ex  rel.  v.  Long  Island  R.  Co.  49 
People  ex  rel.  Gore  v.  Illinois,  B.  &  L. 

Assn.  51 

People  ex  rel.  Scliwarz  i-.  Cook  84o 

People's  Bank  v.  Calhoun  438,  439 

Peoria   &   Pekin    Union    Ry.    Co.    v. 

Chicago,  Pekin,  &  S.  VV.  R.  Co.  699 
Peoria  &  Springfield  Ry.  Co.  v.  Bryan    453 

V.  Thompson  4,  7,  24,  91,  99, 

204,  767 
Perry  v.  Oriental  Hotels  Co.         520,  645, 

772 
Peter  v.  Kendel  175 

Peters  v.  St.  Louis  &  Iron  Mt.  R.  Co.     278 


Petersburg  Sav.  &  Ins.  Co.  v.  Della- 

torre                                                703, 

740 

Pettibone  v.  ToL,  Cin.  &   St.  Louis 

R.  Co.                                             45, 

280 

Pettris  V.  Georgia  Ry.  Co. 

443 

Pfeifer  v.  Sheboygan  &  Fond  du  Lac 

R.  Co.  ■  799 

Pfister  V.  Milwaukee  Electric  R.  Co. 

et  al.  17 

Phelps  V.  Lewiston  103 

V.  St.  Catharine's  &  N.  C.  R.  Co.     280 

Phila.,  &c.  R.  Co.  v.  Pidelity  T.  Co.      104 

V.  Knight  104 

Phila.  &  Baltimore  Central  Ry.  Co. 

V.  Johnson  380,  385 

Pliila.  &  Reading  R.  Co.,  Appeal  of        2, 

4,  32 
Phila.  &  Treading  R.  Co.  v.  Hickman         3 

V.  Smith  104 

Phila.  &  Sunbury  R.  Co.  r.  Lewis       3,  24, 

32,  92,  96 
Phila..  Wilmington,   &  Balto.  R.  Co. 

r.  Woelpper  179,  223,  241,  367 

Philips  V.  Winslow  180,  238,  249,  360 

Phillip's  Trustee  v.  Eastern  Ry.  Co. 

139,  141 
Phinizy  v.  Augusta  &  K.  R.  Co.         86, 

274,  397,  399,  483,  612,  538,  632,  655, 
656,  660,  6()6 
Pha-nix,  &c.  Steel  Co.,  In  re  181 

Physick  et  at.  v.  Baker  19,  29 

Picard  v.  East  Tenn.,  &c.  R.  Co.  786 

Pierce  v.  Emery  131,  13.5,  1G2,  221, 

*223,  248,  249,  250,  269,  307 

V.  Madison  &  Indiiuiapolis  R.  Co.     1 4 

V.  Milwaukee,  &c.  My.  Co.      161,  272 

Pillsbury   r.  Cons.  Eur.  &  N.  A.  Ry. 

( 'o.  292 

Piiikard  >•.  Allen's  Admr.  740 

Pittsburg,  &c.  Ry.  Co.  v.  Allegliany 

Co.  170 

Pitts.,   Cin.  &  St.  Louis  Ry.  Co.   r. 

Fierst  7«2,  843 

r.  Marshall  2H(),  747 

I'itihhiirgh  1{.  Co.  V.  Keokuk  &  Ham. 

Bri-lge  150 

Piftsl>urgh,   C.  C.  &  St.  L.   }iy.  Co. 

V.  Lvndc  >i  „t.  1(1,  45,  98,  99 

Piatt  V.  ^■.•w  V(,rk  &  L.  B.  Ky.  Co.       252 
-^^  V.    Phiiadulpliitt  &    leading    R. 

Co.  622,  550,  660,  052 


Pocahontas   Coal  Co.   v.    Henderson 

El.  Light  &  Power  Co.  138 

Poland  V.  Lamoille  Val.  R.  Co.       213, 265, 
451,  547,  590,  596,  599,  617 
Polhemus  v.  Fitchburg  li.  Co.  2(J6 

Pollard  V.  Maddox  234 

Pollitz  V.  Farmers'  L.  &  T.  Co.       487,  488 
Pollock  V.  Eastern  R.  Co.  35 

Pomeroy  v.  New  York  &  N.  H.  Ry. 

Co.  436 

Pond  V.  Framingham,  &c.  Ry.  Co.         519 

V.  Sibley  440 

V.  Vermont  Valley  R.  Co.  441 

Pontet  V.  Basmgstoke  Canal  Co.  383 

Port    Royal    &    Augusta    R.    Co.   v. 

King  522 

Portstewart  Tramway  Co.,  In  re  506 

Porter  v.  Pittsburgh  Bessemer  Steel 

Co.  96,  148,  149,  160,  151,  188.  198, 

207,  272,  623,  838 
Portsea  Island  Building  Soc,  Ex  parte  SO 
Portsmouth  Tramways  Co.,  Petition 

of  382 

Post  V.  Industrial  Land  Development 

Co.  408 

Potomac  Mfg.  Co.  v.  Evans  408 

Potter  V.  Cromwell  338 

Potts  V.  Warwick  &,  Birm.  Canal  Nav. 

Co.  280 

Pound,  Heurj',  Son,  &  Hutchins,  In  re 

520,  645 
Powell  V.  Blair  10 

Pratt  V.  Munson  843,  848 

V.  Northam  375 

Price  V.  Great  Western  Ry.  Co.  379 

Prince  of  Wales  Assn.  Co.  v.  Harding     87 
Printup  V.  Cherokee  R.  Co.  469 

Pulian  V.  Cin.  &   Cliicago  Air  Line 

Ry.  Co.         166,  170,  177,  202,  210,  218, 
240.  246,  503,  507,  527,  528,  631,  659 

V.  City  of  New  Albany  4U) 

Pullman  v.  Osborne  413 

Pusey  V.  N.  J.  West  Line  R.  Co.  16 

Putnam  v.  Jacksonville,  &c.  Hv.  Co.     529 
P\  le  Works,  In  re  164,  181,  280,  603 


QoKENSL.iND  Land  &  Coal  Co.,  In  re 

280,  753 
Quincy  v.  Chicago,  B.  &  Q.  Ry.  Co.  221 
Quincy,  M.  &  P.  R.  Co.  v.  llumpbrevs 

572,  698 


Racky  v.  Erie  Ry.  Co.  117 
Kacine  &  M.  R.  Co.  i:  F.  L.  &  T.  Co.     31, 
109,  203,  317.  732 
Radcbaugh  r.  Tacoma,  &c.  Ry.  Co.       201, 
340,  558,  837 
Pagan  v.  Aiken  170 
Ralit  V.  Attrill                           692,  608,  670 
R.  Commissioners  v.  Portland  &  Ox- 
ford li.  Co.  40 
Railroad  Co.,  Ex  parte                      ^Ti .  833 
Kailroa.l  Co.  v.  Bradleys                 833,  834 
V.  Brown                                          686 


TABLE   OF   CASES   CITED. 


Ivii 


Railroad  Co.  v.  County  of  Hamblen      786 

V.  Doiiougli  iJ6i) 

V.  Harris  434,  4o(J 

V.  Haward         1,   118,  123,  460,  (JoO, 

079,  759,  703,  782,  801,  805 


V.  Humphries 

558 

('.  Johnson 

71,  001 

V.  Koontz 

434 

1'.  Mississippi 

444 

v.  Orr 

210,  474 

V.  Kamsey 

439 

V.  Soutter 

543,  544,  818 

V.  Sprague 

401 

V.  Stringfellow 

685 

V.  Supervisors 

434 

V.  Swasey 

739,  834 

rj 


Eailroad  Companies  v.  Chamberlain    421 

V.  Gaines  787 

V.  Schatte  26,  SI,  324.  325,  332, 

333 
Railway  Co.  v.  Jewett  515 

V.  Sprague  75,  95,  98,  105 

V.  Whitton  432,  433 

Ralpli  V.  Shiawassee  Circuit  Judge       530 
Ralston  v.  Crittenden  (see  Tenn.  Bond 

Cases)  39,  328,  810 

V.  Wash.  &  C.  C.  R.  Co.  513 

Ramsdell  v.  Citizens'  Electric  Light 

&  P.  Co.  131,  201 

Ramsey  v.  Erie  R.  Co.  39,  515 

Randall  v.  Elwell  341 

Randolph  v.  Earned  170,  301,  736 

V.  Middleton  73,  407 

V.  New  Jersey  West  Line   Ry. 

Co.  155,  184 

V.  Wilmington,  &c.  Ry.  Co.  184 

Rankine  v.  Elliott  565 

Raymond  v.  Clark  219 

Raynor  v.  Selmes  40^ 

Read  v.  Dupper  618 

Reagan  v.  Farmers'  Loan  &  Trust  Co.    370 
Ream  r.  Stone  2ci0 

Receiver  v.  Stanton  759 

Redmond  v.  Galena  &  So.  Wise.  R. 

Co.  278 

Reed,  Appeal  of    18,  26,  30,  150,  262,  264 
Regent's  Canal  Iron  Works  Co.,  In  re 

030,  632,  070,  754 
Reid  V.  Bank  of  Mobile  78,  83,  96 

Reinach  v.  Meyer  101 

Removal  Cases         440,  441,  444,  446,  447 
Rennselaer    &    Saratoga    R.    Co.   v. 

Miller  712,  720,  721,  724 

Republic  Life  Ins.  Co.  v.  Swigert         564 
Resor  v.  Ohio,  &c.  Ky.  Co.  272 

Reyburn  v.  Consumers'  Gas  Co.  595 

Ribon  V.  Railroad  Co.  480 

Rice,  Appeal  of  753,  754,  762 

Rice  V.  Railroad  Co.  225 

V.  St.  Paul  &  Pac.  R.  Co.    302,  389, 

534 
Richards  v.  Chesapeake  &  Ohio  R. 

Co.  464,  466,  483,  487,  512,  513 
V.  Merrimack  &  Conn.  River  R. 

Co.  2,  3,  8,  162,  164,  16-5,  169,  185. 

202,  284,  287 


Richards  v.  People 
Kichardson,  Re 
Richardson  v.  Green 

V.  Sibley 

llichter  v.  Jerome 
Ricker  v.  Am.  L.  &  T.  Co 
('.  London,  &c.  Bkg.  Co. 


566 

708 

45 

170, 172,  177 

460,  487,  490,  812 

343,  344 

82 


Riddle  V.  New  York,  &c.  Ky.  Co.  436 

Ridley  v.  Plymouth,  &c.  Banking  Co.     124 
Itiggs  V.  Johnson  County  416 

Pennsylvania,  &c.  R.  Co.     156,  298 


Rio  Grande  &  K.  P.  R.  Co.  v.  Ortiz 
Roberts  v.  Denver,  L.  &  G.  R.  Co. 
Robinson  v.  Ala.  &  Ga.  Mfg.  Co. 
V.  Atlantic  &  Gt.  Western  R.  Co. 


800 
106 
477 
220, 
565 

V.  Campbell  375 

r.  Dolores  C.  Co.  197 

r.  Iron  Ry.  Co.  489,  823 

('.  Phila.  &  Reading  Ry.  Co.  854 

Robison  V.  Coal  Cliff  Co.  162 

Rochester  Bank  r.  Averell  193 

Rochester  Distilling  Co.  v.  Rasey  182 

Rockwell  V.  Elkhorn  Bank  2 

Rogers  v.  Dexter  &  P.  R.  Co.  l;-!7 

V.  Mobile  &  Ohio  R.  Co.        573,  065 

V.  Wheeler  319,  320,  686 

Rogers  Locomotive  Co.  v.  Lewis         3i9 
Rogers   Locomotive  &  M.  Works  v. 

Southern  Ry.  Assn.  126,  128 

Rogersville,  &c.  Ry.  Co.  v.  Kyle  780 

Rome  &  D.  R.  Co.  v.  Sibert  036 

Romford  Canal  Co.,  In  re  31 

Roper  V.  McWhorter  170 

Rosa  V.  Butterfield  20 

Rosenkraus  c.  La  Fayette,  B-  &  M.  R. 

Co.  57 

Rothgerber  v.  Dupuy  278 

Rothschild  v.  Rochester  &  Pittsburgh 

Ry.  Co.  10,  23,  25,  192,  202,  423 

Rouede  v.  Mayor  of  Jersey  City  87 

Rouse  V.  Harry  698 

V.  Letcher  413 

V.  Redinger  689 

Royal  British  Bank  r.  Turquand  86 

Kuggles  V.  Simonton  368,  415 

Runkle  v.  Lamar  Ins.  Co.  436 

Russell  V.  East  Anglian  Ry.  Co.     280,  361, 

370,  509 

V.  Texas  &  Pac.  R.  Co.  547,  567 

Rutter  V.  LTnion  Pac.  Rv.  Co.  67,  75 

Ryan  v.  Anglesea  Rv.  Co.  208.  558 


Hays 


658,  700,  701,  762,  802 


Sacramento  &  Placerville  R.  Co.  r. 

Superior  Ct.  389 

Sadler  r.  Worley  280,  392 

Sage  r.  Central"  Rv.  Co.  49,  145,  3-53, 

411.  727,  729,  773,  777,  851,  852 

r.  Centr.Tl  Ry.  of  Iowa     482, 827,  829 

V.   Memphis    &  Little  Rock   R. 

Co.  502,  507,  523,  532,  533,  540 

V.  Railroad  Co.  835 

Sahlgaard  r.  Kennedy  48,  420,  441, 474, 
488,  709,  812,  818,  819,  820,  857 


Iviii 


TABLE   OF   CASES    CITED. 


St.  John  V.  Erie  Ey.  Co.       139,  141,  862, 

863 
St.   Joseph    «&-   St.   Louis   R.   Co.   v. 

Humphreys  572,  698 

St.  .Josepli  Union  Depot  Co.  v.  Chi- 
cago, K.  I.  &  Pac.  R.  Co.  800 
St.  Louis.  A.  &  T.  H.  R.  Co.  v.  Cleve- 
land, C.  C.  &  I.  R.  Co.        606,  607,  694 
St.  Louis  Car  Co.  v.  Stillwater  St. 

Rv.  Co.  521 

St.  Louis,  Fort  S.  &  W.  R.  Co.  v.  Che- 

nault  et  al.  94 

St.  Louis,  Iron  Mt.  &  So.  R.  Co.  v. 

Southern  Exp.  Co.  833 

St.  Louis,  &c.  Ky.  Co.  v.  Whitaker      231, 

268 
St.  Louis  &  San  Fran.  R.  Co.  v.  James  433 
St.  Louis  S.  W.  Ry.  Co.  v.  Holbrook 

575,  651,  803 

V.  Stark  797 

St.  Louis  T.  Co.  r.  Kelly  625 

St.  Paul  &  Duluth  Ry.  Co.  v.  United 

States  243 

St.  Paul,  &c.  R.  Co.  V.  St.  Paul,  &c. 

R.  Co.  256 

St.  Paul  Title  Ins.  Co.  v.  Diagonal 

Coal  Co.  611,  673,  712 

Sanborn  v.  Clough  100 

Sandford  v.  McLean  637 

San  Francisco  v.  Cent.  Pac.  R.  Co.        143 
San   Francisco,   &c.  R.  Co.  v.  State 

Board  143 

Sangamon  R.  Co   r.  Morgan  Co.  341 

Sankey  Brook  Coal  Co.,  In  re  392 

Santa  Clara  County  v.  So.  Pac.  Ry.       143 
Sanxey  v.  Iowa  City  Glass  Co.  64 

Savannah,  F.  &  W.  R.  Co.  v.  Jackson- 
ville, T.  &  K.  W.  Ry.  Co.  614 
Savannah  &  Memphis  R.  Co.  v.  Lan- 
caster        1,  162,  189,  190,  450,  476,  478 
Schallard  v.  Eel  River  Nav.  Co.  713 
Schmidt  V.  Louisville  &  N.  R.  Co.    139,  246 

r.  Mitchell  419 

ScliDllenberger,  Ex  parte  436 

Scliurr  r.  Omaha  &  St.  Louis  Ry.  Co.     685 
Schutte  i:  Florida  Cent.  Rv.  Co.      83,  92, 
330,  651,  795 
Scotland  County  v.  Hill  103 

Scott  i\  Clinton  &  Springfield  Rv.  Co. 

223,  .3.39,  444,  446,  447,  610 

r.  Farmer's  Loan  &  Tr.  Co.     549,  670 

V.  Mansfield,  C.  &  L.  M.  R.  Co.     470 

V.  Ry.  (^o.  687 

w.  Mainier  Power  &  Ry.  Co.  643 

Searies  w.  Jacksonville,  P.  &  M.  R.  Co. 

459,  515,  810 
Seattle.  L.  S.  &  E.  R.  Co.,  In  re  560 

V.  Union  T.  Co.  729,  732 

Secor  V.  'j  olr-do,  P.  &  W.  Ry.  Co.  550 

Securities  Iiiv.  Corp.  v.  Brighton  Al- 

hairibra  5.')(),  670,  672 

Seibert  <•.   Minneapolis,  &c.  Railroad 

Cn.  168,  386,  40f.,  463,  472,  502 

.Scligman  '■.  Prince  15 

Seney  i'.  Wabash  Western  Ry.  Co.      09:], 

698 


Seventh   Nat.   Bank   v.   Shenandoah 

Iron  Co.  594 

Sewall  V.  Brainerd  107,  754 

Sewell  i:  Cape  May,  &c.  Ry.  Co.     527,  51 3 
Sewing  Machine  Cos.,  Case  of  440 

Seybel  v.  Nat.  Currency  Bank  95 

Seybert  v.  City  of  Pittsburg  106 

Seymour  v.  Canandaigua,  &c.  Ry.  Co. 

221,  223,  224,  234,  23-5,  250,  267 
Shamokin  Val.  Ry.  Co.  v.  Livermore 

134,  228,  231,  255 
Shaver  v.  Bear  River,  &c.  Co.  384 

V.  Hardin  197 

Shaw  V.  Bill  218,  245,  451,  823 

r.  Little  Rock  Rv.  Co.  48 

V.  Norfolk  Co.  R'.  R.  Co.        169,  291, 

310,  389,  451,  475,  478,  479 

V.  Railroad  Co.       460,  487,  489,  490, 

678,  842 

V.  Saranac  Horse  Nail  Co.  763 

Sheboygan  County  r.  Parker  106 

Sheffield  &  B.  Coal,  Iron,  &  Ry.  Co. 

V.  Newman  795 

Shelby  r.  Beacon  429 

Shepard  i-.  Richardson  394,  805 

Shepley  v.  Atlantic,  &c.  Ry.  Co.  169, 

172,  302,  389 
Sherwood  v.  Alvis  285 

■ V.  Atlantic  &  D.  R.  Co.  844 

Shields  v.  Thomas  416 

Shopp  V.  Norristown  Pass.  Ry.  Co.         10 
Shrewsbury  Ry.  Co.  l:  London  Ry. 

Co.  29 

Sickles  V.  Richardson  23,  45 

Silliman  v.  Fredericksburg,  O.  &  C. 

Ry.  Co.  88,  157 

Simmons  v.  Burlington,  Cedar  Rapids, 

&  N.  Rv.  Co.  750,  751   805,  806 

V.  Taylor     65,  98,  465,  720,  743,  750, 

783,  798 
Simpson  v.  Palace  Theatre,  Lim.  844 

Skiddy  v.  Atlantic  &  Miss.  R.  Co.  35, 

37,  63,  112,  154,  155,  307,  483,  597, 
602,  612,  618 
Slater  v.  Darlaston  Steel  Co.  850 

Sloan  ?•.  Cent.  Iowa  liy.  Co.  687 

Smead  v.  Indianapolis,   P.  &  C.   R. 

Co.  122,  123,  124,  128 

Smith  V.  Atlantic  Mutual  Fire  Ins. 

Co. 

/'.  Chicago  &  N.  W.  Ry.  Co. 

Chicago  &  Prairie  du  Cliien  R 

Co. 

V.  Clark  County 

r.  Clay 

r.  Eastern  R.  Co 

r.  fiower 

V.  Kernochon 

V.  McCullough 

r.  j'ort  Dover,  &C.  R.  Co 

n.  Potter,  Receiver 


428 
844 

801 
106 
813 
35,  68,  140,  499 
783 
444 
142,  218,  243 
625 
690 
Smitli's    ICxrs.   r.   Wasiiington    Citv, 

&c.  Rv.  Co.  372,  724 

Smythe"r.  Chicago  &  S.  R.  Co.  44 

Sneitth  r.  Valley  Cold  Co.        51,  851,  855 
Snively  v.  Loomis  Coal  Co.  694 


TABLE    OF   CASES   CITED. 


lix 


Snow  V.  Texas  Trunk  K.  Co.         442, 

Society  for  Savings  v.  New  London 

Somerset  Ky.  v.  Pierce 

South  Carolina  li.  Co.,  In  the  mat- 
ter of  530, 

South  Carolina  li.  Co.  v.  People's 
Sav.  Inst.  366,  427,  428,  434, 

i;.  Wilmington,  C.  &  A.  li.  Co. 

Soutii  Covington  liy.  Co.  y.  Uest  110 

South  Essex  Gas  Light  Co.,  In  re 

South  St.  Louis  R.  Co.  v.  Plate 

Southern  Development  Co.  v.  Farm- 
ers' Loan  &  T.  Co. 

Southern  Pac.  li.  Co.  v.  Doyle     211, 

390, 

Southern  Ry.  Co.  v.  Adams 

V.  Am.  Brake  Co. 

V.  Eon  Knight 

V.  Carnegie  Steel  Co. 

V.  Dunlop  Mills 

V.  FoUett 

Soutliwestern  Ark.  &  I.  T.  Ry.  Co. 
V.  Hays  2,  769, 

Sovereign  Life  Assn.  Co.  v.  Dodd 

Spence  v.  Mobile  &  M.  R.  Co.         96, 

Spencer  i'.  Brooks 

Spies  V.  Chicago  &  E.  L  R.  Co.      65, 


Spoon  V.  C.  &  W.  M.  R.  Co. 
Sprague  v.  Smith  319, 

Squire  v.  Wilton 
Stainbuck  v.  Junk  Bros.'  Lumber  & 

Mfg.  Co. 
Stantlard  Ins.  Co.  v.  Langston 
Standard  Mfg.  Co.,  In  re  280, 

Stanford  Banking  Co.  v.  Allchin 
Stanley,  Case  of 
Stanley,  Ex  parte 

Stanton  v.  Ala.  &  Chat.  R.  Co.       90, 
156,  677,  678,  679,  681,  683,  689, 

V.  Embrey  427,  428, 

Stark  Bank  i'.  U.  S.  Pottery  Co. 
State  r.  Board  of  Freeholders 

V.  Brown  206,  741,  742,  746,  809, 

V.  Central  Iowa  Ry.  Co. 

— —  V.  Clinton 

V.  Con.  Eur.  &  N.  American  Ry. 

Co.  ^ 

V.  Florida  Centr.  R.  Co.  331,  828, 

V.  Glenn  228, 

V.  Hartford  &  N.  H.  R.  Co. 

V.  McDaniel 

i>.  Morgan 

V.  Nashville,  Chat.  &  St.  Louis 

liy.  Co. 

V.  Nichols 

V.  Northern  Centr.  Ry.  Co.  240, 

526, 

V.  Port  Royal  &  A.  Ry.  Co.    669, 

V.  Sherman 

V.  Spartanburg  &  N.  R.  Co.  107, 

V.  Wabash  Rv.  Co. 

State  ex  rel.  r.  Cheraw  &  C.  Ry.  Co. 

V.  Funding  Board 

V.  Mays 


446 

118 
377 

532 

553 

794 

,111 

88 
400 

620 
387, 
492 
619 
619 
627 
619 
619 
614 

774 
850 
266 
643 
231, 
478 
252 
690 
81 

28 
143 
603 
645 
181 
258 
153, 
725 
484 
120 

84 
,  833 
794 
129 

321 
831 
252 
49 
843 
170 

789 
13 
508, 
529 
837 
845 
108, 
332 
685 
141 
129 
72 


State  ex  rel.  v.  Merchant  551 

V.  Recorder  of  Mtges.  2i'4 

State  ex  re/.,  &c.  v.  Atchison  &  Ne- 
braska li.  Co.  9 
State  ex  rel.  Plock  v.  Cobb         25,  59,  90, 
95,  154,  157 
State  ex  rel.  Rolston  et  al.  Trustees 

V.  Chappell  329 

State  of  California  i\  Wells,  Fargo,  & 

Co.  95 

State  of  Florida  v.  Anderson  73,  311 

V.  Florida  Centr.  K.  Co.  287,  330 

V.  Jacksonville,  P.  &  M.  R.  Co.    507, 

515,  520 
State  of  Maryland  v.  Northern  Cen- 
tral Ry.  Co. 
State  of  Missouri  v.  McKay 
State  of  New  Jersey  v.  Montclair  R. 

Co. 
State  of  New  Jersey,  N.  J.  So.  R.  Co., 

Prosecutor,  v.  Railroad  Connnrs. 
State   of   Tennessee  v.  Edgefield    & 
Kent  R.  Co.  544,643 

V.  McMinnville  &  M.  R.  Co.  832 

State  of  Virginia  v.  State  of  Mary- 
land 78 
State  Journal  Co.  v.  Connnonwealth 

Co  526,  530 

State  Line  R.  Co.,  Appeal  of  10,  23 

State  Treasurer  v.  Somerville  &  East- 
ern R.  ("o.  131 
State  Tr.  Co.  of  N.  Y.  v.  Nat.  Land 


826 
817 


843 


654 


Impv.  &,  Mfg.  Co. 
Steelman  et  al.  v.  Baker 
Stein  V.  Howard 
Steiner,  Appeal  of 
Stephen  i:  Banque  d'Hochelaga 
Stephens  v.  Benton 
Stern  i:  Wisconsin  Cent.  R.  Co. 


612 

19,  29 

5 

165 

766 

91 

393,  454, 

482,  484 

200 

507 

290,  472 

844 


Stevens  r.  Buffalo,  &c.  Ry.  Co. 

V.  Davison 

V.  Eldridge 

V.  Mid.  Hants  Ry.  Co. 

V.  New   York  &  Oswego  Midi. 

R.  Co.  107,  577,  654,  755 

V.  Railroad  Cos.  455,  853 

p.  Union  T.  Co.  293 

V.  Watson  20,  234,  267,  2(18 

Stevens  et  al.  r,  Louisville  &  Nash- 
ville R.  Co.  .39 

Stevenson  r.  Davison  5ul 

Stewart,  Appeal  of  801,  80.j 

Stewart  v.  Chesapeake  &  Ohio  Canal 

Co.  47,  390,  431,  470,  481,  525,  531. 

632,  715,  71'.* 

V.  Jones  170 

V.  Wheeling  &  L.  E.  R.  Co.  747,  791 

Stockton  I'.  Central  Ry.  Co.  170 

Stoney  v.  Am.  L.  Ins.  Co.  86,  155 

Stradley  r.  Pailthorpe  91 

Strang  v.  Montgomery  &  Eufaula  R. 

Co.  136,  246,  784 

Stratton  v.  Allen  3 

r.  European  &  N.  A.  Ry.  Co.        319. 

320,  bU2 


Ix 


TABLE   OF    CASES   CITED. 


Strauss  v.  United  Tel.  Co.  71,  82,  118 

8treatliam  &  Gen.  Estates  Co.,  In  re  258 
Street  v.  Maryland  Cent.  K.  Co.  669,  67o, 

G74 
Strong  V.  Carlyle  Press  Co.  506,  520,  645 
Stuart  I'.  James  River  &  R.  Co.  3ol 

Stubbs,  Josliua,  In  re  520,  645 

Sturges  V.  Knapp     288,  293,  308,  309,  311 

o.  Stetson  20,  39 

Suddath  v.  Gallagher  632 

Sullivan  v.  Portland  &  K.  Ry.  Co.  137, 
376,  745,  813,  867 
Sunflower  Oil  Co.  v.  Wilson  564,  693 

Supervisors  v.  Durrant  416 

Sussex  R.  Co.  v.  M.  &  E.  R.  Co.  29 

Sus.  Bridge  &  Bank  Co.  v.  General 

Ins.  Co.  162,  187 

Susquelianna  Canal  Co.  v.  Bonhan  165 
Sutlierland   &   Lake    Superior    Ship 

Canal  Co.  393,  464,  565 

SutlifC  V.  Cleveland  &  W.  Ry.  Co.  56 

Svvann  v.  Clark  678,  683 

V.  Gaston  252 

V.  Wright's  Exrs.  735,  736,  746, 

796,  797 
Swasey  v.  North  Carolina  Ry.  Co.       392, 

442,  469 
Sykes  v.  Hastings  513 

Syracuse  Savings  Bank  v.  Syracuse, 

&c.  Ry.  Co.  833 


Taber  v.  Cinn.,  &c.  Ry.  Co.  183 

Taggart  v.  N.  C.  Ry.  Co.  58 

Tailby  v.  Receiver  258 

Talcott  V.  Township  of  Pine  Grove  591 
Taunton  v.  Warwicksliire  Sheriff  280,  370 
Taylor  v.  Burlington,  &c.  Ry.  Co.        271, 

274,  275 

V.  Carryl  413,  415 

v.  Phil.  &  Reading  R.  Co.         32,  33, 

354,  508,  520,  543,  551,  672,  674 

V.  Trustees  of  Atl.  &  Gt.  Western 

R.  Co.  15,25,101,164.155,168 


Teal  V.  Walker 

496 

Temple  v.  lilasgow 

826 

Tenn.  Bond  Cases 

Ralston  v. 

Crit- 

tenden) 

334 

Terluine  r.  Midland  R.  Co. 

467 

V.  Potts 

71 

Texas,  &c.  R.  Co.  v. 

Collins 

693 

Texas  l{y.  Co.  r.  \V 

itts 

578 

Texas  &  .Mex.  Ry.  C 

}o.  r.  Wrigh 

t          357 

Texas  &  I'ac.  R.  Co 

V.  Bledsoe 

69.3 

('.  I'.looni 

661 

,  687,  701 

V.  Cox 

579, 693 

>-.  Gaal 

()88 

/'.  Gay 

653,  686 

r.  (Jciger 

692 

r.  lliidinan 

672,  6H7 

1'.  JiilinsoM 

687, 701 

V.  M(;Alli»ter 

447 

V.  .Marlor 

43,  71 

i:  Wat  Hon 

6H5 

Tcxfift  Trunk  It.  T'o 

V.  Lewis 

665 

Texan  West.  Ry.  Co 

.  r.  Gentry 

204,  212 

Third  Nat.  Bank  of  Boston  v.  Eastern 

R.  Co.  35 

Third  Nat.  Bank  of  City  of  N.  Y.,  In 

the  matter  of  the  claim  of  631 

Third  St.  Suburban  Ry.  Co.  r.  Lewis  614 
Thomas  v.  Brownville,  Fort  K.  iJc  Pac. 

R.  Co.  25,  94,  147,  150,  152,  198 
V.  Cincinnati,  N.  U.  &  T.  P.  Ry. 

Co.  560, 643 

V.  Citizens'  Horse  Ry.  Co.     192,  204 

V.  Dakin  134 

V.  E.  Tenn.,  V.  &  Ga.  R.  Co.         658 

i\  Jones  708 

V.  N.  Y.  &  G.  L.  R.  Co.  69,  260 

V.  Peoria  &  R.  I.  R.  Co.         352,  584, 

606,611,621,661,697 

V.  Railroad  Co.  121,  174 

V.  Western  Car  Co.         619,  621,  657 

V.  Williams  583 

Thompson  v.  Erie  Ry.  Co.  14,  162 

V.  Huron  Lumber  Co.  384 

V.  Lambert  91 

V.  Memphis,  S.  &  B.  R.  Co.  39 

V.  Perriiie  95 

V.  Scott  573,  574 

V.  Van  Vechten  200 

V.  White  Water  Valley  R.  Co.     623 

Thomson  v.  Lee  Co.  105 

1-.  Wooster  449 

Thomson-Houston    Electric     Co.    v. 

Capitol  Electric  Co.  96 

Thorn  v.  Nine  Heefs  370,  506 

Thornton  v.  Highland  Ave.  R.  Co.      652, 

657 

V.  Wabash  Ry.  Co.  843,  858 

Tluirman  c.  Cherokee  R.  Co.  692 

V.  Railroad  Co.  685 

Tilley  v.  Savannah,  Florida,  &  West. 

R.  Co.  370 

Tillinghast  v.  Troy  &  Boston  R.  Co.  406 
Titus  V.  Ginheimer  368 

V.  Mabee  248,  339,  368,  834 

Tobias  v.  Tobias  577 

Tod  V.  Kentucky  L'^nion  Land  Co.        120, 

124,  127 

Toledo,  &c.  Ry.  Co.  c.  Hamilton    235,  236, 

264,  273,  623 

Toledo,  Wab.  &  West.  R.  Co.  v.  Beggs  688 

Toler  V.  East  Tennessee,  &c.  R.  Co      312, 

395,  399,419,  482.  738 

Tome  ?'.  King         464,  535,  707,  710,  728, 

734,  829,  bi;;i,  838 

Tommey  v.  Spartanburg  &  A.  R.  Co.     274 

Tompkins  v.  I.ittle  Rock  &  Ft   Smiii\ 

Ry.  Co.  39, 136,  137,  145,  324,  332,  374 
Tonawaiida  Valley  &  Cuba  R.  Co.  r. 

N.  Y.,  L.  E.  &  W.  R.  Co.  121 

Toppan  V.  Cleveland,  C.  &  C.  R.  Co.     118, 

127,  128 
Tottenham  v.  Swansea  Zinc  Ore  Co.  645 
Town  of  l''agle  i\  Kolui  78 

Town  of  (ieiioa  r.  Woodruff  104 

Township,  &c.  r.  Toronto  &  N.  R.  Co.  30 
Traders'  Nat.  Bk.  i'.  Lawrence  Mfg. 

Co.  20,61.63 

Trask  v.  Maguire  787,  788,  789 


li 


TABLE   OP   CASES   CITED. 


Ixi 


Treadwell  v.  Salisbury  Mfg.  Co.  1G2, 1G4 
Tripp  V.  Bridgewater  &  T.  Canal  Co.  51b 
Troy  &  Boston  K.  Co.  v.  Boston,  H.  T., 

&c.  \i.  Co.  170 

Troy  &  Rutland  Ky.  Co.  v.  Kerr  170 

Truman  &  Co.  v.  Redgrave  556 

Trust  Co.  V.  Morrison  Go7 

V.  Riley  6'J4 

Trustees  v.  Greenough        703,  704,  705, 

706,  708,  712,  714,  719,  837 

Tunis  Ry.  Co.,  In  re  8G7 

Turner  v.  Conant  40 

V.  Cross  61)3 

V.  Farmers'  L.  &  T.  Co.  440,  83y 

V.  Indianapolis,  B.  &  W.  Ry.  Co.    133, 

353,  426,  446,  558,  584,  587,  591,  GIO, 

661,  689,  690,  735,  736,  740,  707,  775, 

778,  806,818,819 

V.  Peoria  &  Springfield  R.  Co.      6G7, 

679 
Twin  Lick  Oil  Co.  v.  Marburg  147 

Tvler,  hi  re  413,  421,  577,  654 

Tyrell  v.  Cairo  &  St.  Louis  R.  Co.    26, 31, 

107 
Tyrone  &  Clearfield  R.  Co.  v.  Jones  747 
Tysen  v.  Wabasli,  &c.  Ry.  Co.  47, 523, 525 
Tyson's  Reef  Co.,  In  re  30 


Underbank  Mills  Co  ,  In  re  280,  604 

Underliill  v.   Santa    Barbara   Land, 

Building,  &  Improvement  Co.  5 

Union  Bank  o.  Jacobs  2 

Union  Bank  of  Cliicago  v.  Bank  of 

Kansas  City  547 

Union    Cattle   Co.   v.   International 

Trust  Co.  82 

Union  Mut.  Life  Ins.  Co.  v.  Union 

Mills  Plaster  Co.  402,  516,  528 

V.  University  of  Chicago        423,  566 

Union  Pac.  R.  Co.  v.  Stewart  40 

V.  United  States  133,  139 

Union  Trust  Co.  u.  Atchison,  &c.  R. 

Co.  550,  602 

t'.  Chicago  &  Lake  Huron  R.  Co.   662, 

678,  681 

V.  Cuppy  319 

V.  Illinois  Midi.  Ry.  Co.       285,  303, 

478,  487,  529,  593,  601,  607,  (!15,  644, 
657,  660,661,  662,  664,  667,  670,  671, 
672,  673.  678,  680,  681,  683,  853 
V.  Missouri,  Kansas,  &  Tex.  Ry. 

Co.  75,  137,  318,  887 
V.  Monticello  &  Port  Jervis  Ry. 

Co.  109,  110,  757 

t\  Morrison      357,  358,  635,  636,  037 

V.  Nevada  &  O.  R.  Co.  24,  89 

I'.  New  York  C.  &  S.  L.  R.  Co.       25 

('.  Olmsted  4'23 

v.  Roch.  &  Pittsburg  R.  Co.  433 

('.  Rochford,  R.  I.  &  St.  Louis 

R.  Co.  424,  426 
r.  St.  Louis,  Iron  Mt.  &  Southern 

K.  Co.  400,  401,  527,  535,  731 

V.  Southern  Cal.  Motor  Road  Co.      5, 

28,  81,  83,  340,  652,  696 


Union  Trust  Co.  v.  Soutter     66,  593,  698, 

606 

V.  Walker  687,  6U4 

i;.  Weber  547,  548 

Union  Water  Co.  v.  Murphy's  i'lat 

Plume  Co.  29,  229,  247 

United  Lines  Tel.  Co.  v.  Boston  Safe 


Deposit  &  T.  Co. 

224 

Jnited  States  v.  Cassidy 

550 

V.  Elliott 

650 

V.  Erie  Co. 

78 

V.  Flint 

470 

(;.  How  land 

375 

V.  Kane 

550 

V.  Kansas  Pac.  Ry.  Co. 

139 

V.  New  Orleans  R.  Co. 

268,  270, 

276,  345 

V.  Union  Pac.  Ry.  Co. 

138 

V.  Wilson 

38 

U.  S.  Rolling  Stock  Co.,  Matter  of       647 
United  Slates  Tr.  Co.  v.  New  York, 
W.  S.  &  B.  R.  Co.       509,  555,  605,  613, 

709 

V.  Omaha  &  St.  Louis  R.  Co.     561, 

562,  577 

r.  Wabash,  St.  Louis,  &  Pac. 

Ry.  Co.  235,  254 

V.  Wabash  &  Western  Rv.  Co.     241, 

245,  496,  519,  565,  640,  657,  693,  698 
Uruguay  Central,  &c.  R.  Co.,  In  re     379, 

459,  732 
Usher  v.  Raymond  Skate  Co.  120 


Vail  u.  Hamilton  192 

Valpy  V.  Chaplin,  Ex  parte  262 

Van  Cott  V.  Van  Brunt  28 

Vanderbilt  i'.  Central  R.  Co.  696 

V.  Little  646,  647,  648 

Van  Hostrup  v.  Madison  City  106 

Van  Weel  v.  Winston  43,  53,  54,  589 

Varner  v.  St.  Louis  &  C.  R.  Co.  800 

Vatable  v.  N.  Y.,  L.  E.  &  W.  R.  Co.     741, 

777,  780,  843,  848 

Venables  v.  Baring  82,  95 

Vermont  &  Can.  Ry.  Co.  v.  Vermont 

Central  Ry.  Co.     139,  207,  507,  525, 548, 

545,  640,  649,  667,  675,  749,  762 

Verplanck  v.  Mercantile  Ins.  Co.     515,  642 

Vertue  v.  East  Anglian  R.  Co.  379 

Vicksburg  &  Meridian  R.  Co.  i'.  Me- 

Cutclien  494,  731 

Vicksburg,  S.  &  P.  Ry.  Co.  v.  Elmore     842 

'•.  Sledge  208 

Victoria  Steamboats,  Lini.,  lit  rp    370,  506 
Vilas    ?'.    Milwaukee    &    Prairie    du 
Chien  Ry.  Co.  804 

V.  Page     556,  570,  650.  662,  666,  667, 

668,  672,  723,  801 
Virginia  Tidewater  Coal  Co.  v.  Mer- 
cantile T.  Co.  810 
Vlatch  V.  Am.  L.  &  T.  Co.  626 
Voorhees  v.  McGinnis  338 
Voorhis  ('.  Freeman  342 
Vose  V.  Bronson  486 
V.  Reed                    523,  624,  525,  528 


Ixii 


TABLE    OF   CASES   CITED. 


Wabash  Tly.  Co.,  In  re 
Wabash  liy.  Co.  v.  Dykeman 


550 

515,  516, 

537 

V.  Stewart  797 

Wabash,  St.  Louis,  &  Pac.  R.  Co.  v. 
Central  T.  Co.     4b2,  464,  518,  521,  605, 
641,  672,  697,  »52,  So4 

V.  Hain  142 

Waco  &  Tap.  Ry.  Co.  v.  Shirley  212 

Wade  V.  Chicago,  S.  &  St.  L.  K.  Co.     93, 

235,  267 

V.  Donan  Brew.  Co.  46,  186 

WahUg  V.  Standard  Pump  Mfg.  Co.  120 
Wakefield  v.  Fargo  137 

Waldoborough  v.  Knox  &  L.  R.  Co.        47 
Walker    v.   Montclair,  &  Greenwood 
Lake  Ry.  Co.  824 

V.  Quincy,  M.  &  P.  Ry.  Co.     707,  718, 

724 

Wallace  v.  Loomis  72,  303,  487,  593. 

663,  667,  668,  671,  672 

V.  McConnell  401 

Wallbridge  v.  iarwell  341,  583,  696 

Walsii  V.  Barton  230 

Ward  r.  Montclair  Ry.  Co.  813 

Wardell  v.  Union  Pac.  Railroad  Co.       94, 

147,  697 
Warner  v.  Rising  Fawn  Iron  Co.  402,  535 
Warren  r.  King  863 

Warwick  Iron  Co.  v.  Morton  402 

Washington,  A.  &  G.  R.  Co.  v.  Alex- 
andria &  Wash.  R.  Co.       289,  291,  4.35, 

734 
Washington  City  &  Point  Lookout  R. 

Co.  V.  So.  Maryland  Ry.  Co. 
Washington,  Ohio,  &  W.  R.  Co.  v. 

Cazenove 
— —  V.  Lewis 
Water  Co.  v.  DeKay 
Waterhouse  v.  Comer 
Watson  I'.  Jones 
Watt  V.  H.  M.  &  F.  R.  Co. 

V.  Senecal 

Waymine  v.  San  Franc.  &  S.  M.  R. 

Co.  417 

Webb  V.  Commrs.  of  Heme  Bay       30,  87 

V.  Vermont  Centr.  R.  Co.     294,  388, 

459,  472 
Wedgwood  Coal  &  Iron  Co.,  In  re       850, 

865 
Weetjen  v.  St.  Paul,  &c.  R.  Co.  239 

V.  Vibbard  313,  472 

Welch  V.  Nat.  Cycle  Co.  774 

V.  Sage  78 

Wells  V.  So   Minn.  Rv.  Co.  143 

WellHborough,  &c.   Plank   Road  Co. 

V.  (;riffin  7H2,  804,  843 

WeJHh  v.  St.  Paul,  &c.  R.  Co.  104,  293,  .'JHO 
West  V.  Ma<lis()n  Co.  Agri.  Board  l'>3 
West  Br;incli  liaiik  r.ChostcT  .'')'.)2 

Went  of  Knglaiirl  Hank,  /»  rp  125,  120 
Western  Div.of  Western  North  Caro- 
lina II.  Co.  i;.  Drew  302 
Western  of  Canada  Oil  Co.,  In  re  HJ4 
Western  Penn.  Ry.  Co.  >•.  .Johnston  i:!l, 
164,  269,  798,  800 


837 


746 

801 

26 

560,  561 

419, 429 

252,  356 

356 


Western  R.  Co.  v.  Nolan  472,  478 

Western  U.  Tel.  Co.  v.  Burlington, 

&c.  Ry.  Co.  272 

1-.  Thorn  695 

Wetmore  v.  St.  Paul  &  Pac.  R.  Co.  491, 
739,  748,  774,  812,  819,  822,  835,  842, 

854 
Wheeling,  P.  &  B.  R.  Co.  v.  Warrell  798 
Wheelwright  v.  St.  Louis,  &c.  Transp. 

Co.  98,  473 

Whitaker  v.  Hartford,  &c.  Ry.  Co.  105 
White,  Ex  parte  61,  62,  8ti4 

White  V.  Nashville  &  N.  W.  R.  Co.       798 

V.  Vt.  &  Mass.  R.  Co.  78,  79,  81 

V.  Wood  861 

White  Mountains  R.  Co.  v.  Bay  State 

Iron  Co.  77 

V.  White  Mts.   (N.  H.)  Co.        816, 

817,  821 
White,  Potter,  &  Page  Mfg.  Co.  v. 

Pettee's  Importing  Co.  136 

White  Water  Val.  Canal  Co.  v.  Val- 

lette  3,13,20,211,212,528 

Whitehead  v.  Vineyaid  143,  144,  2-zO 

V.  Wooten  534 

Whitely  V.  Cent.  T.  Co.  of  N.  Y.  636 

Whiting  V.  Bank  of  the  U.  S.  834 

Whitley  V.  CoUis  220,  556 

Whitney  Arms  Co.  r.  Barlow  29 

Wickham  v.  N.  B.  &  C.  A.  Ry.  Co.      252, 

258 
Widener  v.  Ry.  Co.  381 

Wiggins  Ferry  Co.  v.  Illinois  &  St.  L. 

R.  Co.  839 

V.  Ohio  &  Miss.  R.  Co.  794 

Wild  i:  Mid.  Hants  R.  Co.  356 

Wilkinson  v.  North  River  Construc- 
tion Co.  571 
Wilkinson  et  al.  Trustees  v.  Fleming  321 
Willamette,  &c.  Ry.  Co.  v.  Bank  of 

British  Columbia  178 

Williams,  A'xy^ar^e  78,685 

Williams  v.   Little  Rock  &  Fort   S. 

Ry.  Co.  39 

V.  Missouri,  &c.  Ry.  Co.  434 

V.  Morgan  461, 483,  707,  739,  827,  837 

V.  Stevens  Point  Lumber  Co.  30 

Williamson   v.  New  Albanv,  &c.   R. 

Co.        363,  397,  399,  506,' 523,  526,  531, 

535,  557 
V.  New  Jersey  Southern  R.  Co.  179, 

184,  200,  201,  223,  224,  236,  242, 
244,  260,  270,  271,  276,  341,  451 

V.  Washington  City,  Va.  Midi. 

&  G.  S.  R.  Co.      587,  698,  599,  606,  612, 

618 
Willink  )".  Andrews  2-J8 
V.  Morris  Canal,  &c.  Co.        158,  ICS, 

185,  234,  250.  267,  374.  467,  468, 

475,  477,  478,  481,  547 
Willmott  )'.  London  (\'lluloid  Co.  645 
Willoughby     )'.    (Chicago,    J.     R.    & 

Union   Stock   Yards  Co.  3,  13,  34 

Wilmer  r.  Atlanta  &  Riclmiond  Air 
Line  R.  Co.  310,  .393,  423.  424.  472. 

474,  543,  555,  768 


TABLE   OP   CASES   CITED. 


Ixiii 


Wilmington  R.  Co.  v.  Downward        781, 

783,  b-i2 


Wilson  V.  Barney 
——  V.  Beckvvith 

y.  Boyce 

V.  Gaines 

Winboum,  Case  of 


5i0 

144,  159,  220,  252 
143,  220 

787 
690 


Winchester,  &c.  Turnpike  Co.  v.  Ver- 
mont 165 
Winnipeg  &  H.  B.  R.  Co.  v.  Mann  12,  162 
Winslow  c.  Minnesota,  &c.  R.  Co.  483,  485 
Wiswall  V.  Sampson  547 
Witlierspoon  v.  Texas  Pacific  R.  Co.  843 
Witter  V.  Grand  Rapids  Flouring  Mill 

Co.  204 

Woerishoffer   v.   North    River   Con- 
struction Co.  570 
Wood  V.  Corry  Waterworks  Co.       26,  30 

V.  Dubuque  &  S.  C.  R.  Co.  797 

V.  Goodwin  317,  806 

V.  Guarantee  T.  Co.        63,  592,  594, 

606,  607,  623,  670 

V.  Holly  Mfg.  Co.  272 

v.  N.  Y.  &  New  England  R.  Co.   612 

V.  Oregon  Development  Co.  539 

V.  Truckee  Tpke.  Co.  170 

V.  Wlielen  24,  500,  767 

Woodbury  et  al.  v.  Alleghany  &  K. 

R.  Co.  et  al.  10,  205,  414,  423 

Woodhams  v.  Anglo-Aus.  Co.  88 

Woodruff  V.  Erie  Ry.  Co.       558,  640,  699 

V.  New  York,  L.  E.  &  W.  R.  Co.   705, 

725 

V.  State  of  Miss.  71 

Woods  &  McBrown  v.  Pitts.,  Cin.  & 
St.  L.  R.  Co.  742,  743,  747 


Woodson  V.  Murdock  329 

Woodwurtii  r.  Blair  463 

Wookey  i'.  Pole  81 

Worcester  Exchange,  In  re  30 

Wright  V.  Buiidy  104,  210 

V.  Ellison  148 

V.  Hughes  29 

V.  Kentucky  &   Great   Eastern 

Ry.  Co.  149,  194 

V.  Kirby  708 

V.  Ohio,  &c.  R.  Co.  107 

Wyatt  V.  L.  &  K.  Ry.  Co.  252 

Wylie  V.  Missouri  Pac.  R.  Co.  25 

Wynn  Hall  Coal  Co.,  In  re  262 

Wynne  v.  Lord  Newborough  514 


Yoakum  v.  Selph  693 

York  &  Cumberland  R.  Co.  v.  Myers  809 
York  &  North  Mid.   Ry.  Co.  v.  The 

Queen  49 

Yorkshire  Ry.  Co.  v.  Maclure  4,  354,  370 
Young  V.  Montgomery  &  Eufiiula  Ry. 

Co.  21,  88,  101,  156,  157,  332,  460,  464, 
469,  487,  568 

V.  Rollins  431,  612,  516,  552 

Youngblood  V.  Comer  685 

Youngman  v.  Elmira,  &c.  Ry.  Co.        164, 

231,  302,  373 

Yulee  V.  Vose  44-5,  446 


Zabrtskie  v.  Cleveland,  Columbus,  & 

C.  R.  Co.  78,  127,  157,  435 

Zebley  v.  Farmers'  L.  &  T.  Co.  317 


THE   LAW 


OF 


RAILWAY  BONDS  AND  MORTGAGES, 


'    CHAPTER  I. 


NATURE   AND   ISSUE   OF   BONDS. 


Objectious  to  the  Validity  of  the 
Bonds  on  the  Ground  of  the  Re- 
lations of  the  Purchasers  to  the 
Corporation. 

Informality  of  Issue,  when  this  is  an 
Objection  of  which  only  Corpora- 
tions can  take  Advantage. 

When  the  Company  is  estopped  to 
dispute  the  Validity  of  Bonds. 

Bonds  not  void  because  Mortgage  se- 
curing them  is  unauthorized. 

Deferred  Income  Bonds,  Power  to 
issue. 

Validity  of  Pledges  of  Bonds. 

When  the  Issue  of  Bonds  will  be 
enjoined. 

Suits  to  annul  Bonds. 

Certificates  of  Indebtedness  and  for 
Bonds. 

State-aid  Bonds. 

Convertible  Land-grant  Certificates. 

Bonds  convertible  into  Stock. 

Exchanges  of  Bonds. 

Lloyd's  Bonds. 

§  1.  Po-wer  of  Rail'way  Companies  generally  to  issue  Bonds. — 
The  general  rule  is  that  private  corporations,  in  the  absence  of  an 
express  prohibition,  may  borrow  money  and  issue  negotiable  in- 
struments in  the  transaction  of  their  legitimate  business  ;  and 
until  the  contrary  is  shown,  the  legal  presumption  is  that  their 
acts  in  this  connection  are  done  in  the  regular  course  of  their 
authorized  business.^ 

1  Railroad  Co.  v.  Howard  (1869),  7  len,  448  ;  Savannah  &  C.  R.  Co.  v.  Lan- 
"Wall.  392  ;   Com.  v.  Smith  (1865),  10  Al-     caster  (1878),  62  Ala.  555;  Branch  &  Sons 

1 


§1- 

Power  of  Railway  Companies  gen- 
erally to  issue  Bonds, 

§  8. 

2. 

Constitutional  Provisions  as  to  the 
Issue  of  Bonds. 

3. 

Special  Charter  Provisions  as  to  Is- 
sue of  Bonds. 

9. 

4. 

General  Statutory  Provisions  as  to 

the  Issue  of  Bonds. 

10. 

(a)  Construction  of  Statutory  Pro- 

visions   specifying    the    Pur- 

11, 

poses   for  which  Bonds  may 

be  issued. 

12. 

(b)  Construction   of  Statutory  Pro- 

visions as  to  the  Considera- 

13. 

tion  of  Bonds. 

14. 

(c)   Construction   of  Statutory  Pro- 

visions limiting  the  Amount 

15. 

to  which   Bonds   may  be   is- 

16. 

sued. 

5. 

Rate  of  Interest  at  which  Bonds  may 

17, 

be  issued. 

18. 

6. 

Power  to  issue  Bonds  after  Consoli- 

19. 

dation, 

20. 

7. 

Validity  of  Bonds. 

21. 

RAILWAY   BONDS   AND   MORTGAGES. 


[chap.  I. 


A  company  is  not  impliedly  prohibited  from  giving  other  evi- 
dences of  debt  besides  bonds  and  debentures,  by  reason  of  the  fact 
that  those  forms  of  obligations  are  alone  mentioned  in  the  act 
authorizing  a  loan  to  be  secured  by  a  })ledge  of  its  property .^ 

The  power  to  issue  bonds  is,  however,  frequently  limited  by 
constitutional  or  statutory  provisions,  and  some  of  these  are 
noted  in  the  succeeding  sections.^ 

Railway  companies  have  such  powers  as  are  specifically  granted 
by  statute,  or  as  are  necessary  for  the  purpose  of  carrying  into 
effect  such  powers,  and  no  others.  These  powers  are  implied 
from  the  duties  imposed  by  their  charters.     In  the  latter  case 


V.  Atl.  &  Gulf  K.  Co.  (1879),  3  Woods, 
481.  See  also  American  Nat.  Bank  v. 
American  Wood  Paper  Co.  (R.  I.,  1895), 
32  Atl.  305,  as  to  the  general  principle 
that  a  private  corporation  has  the  power 
to  issue  negotiable  bonds.  See  also  Da 
Ponte  V.  Northern  Pac.  R.  Co.  (1883),  21 
Blatch.  534;  Miller  v.  R.  &  W.  R.  Co. 
(1863),  36  Vt.  452  ;  McAllister?;.  Plant,  54 
Miss.  106;  McGregor  v.  Gov.  &  Lex.  R. 
Co.,  1  Dis.  (Ohio)  509. 

"It  is  a  well-acknowledged  rule  that 
the  right  to  contract  debts  carries  with  it 
the  power  to  give  negotiable  notes  or  bills 
in  payment  or  security  for  such  debts, 
unless  the  corporation  is  restrained  by  its 
charter  or  statute  from  doing  so."  Rock- 
well V.  Elkhorn  Bank  (1861),  13  Wis.  653, 
per  Dixon,  C.  J.  See  also  Commrs.  of 
Craven  County  v.  Atlantic,  etc.  R.  Co. 
(1877),  77  N.  C.  289. 

On  the  power  to  borrow,  see  the  follow- 
ing cases  :  Richards  v.  Merrimack  &  Conn. 
R.  Co.  (1802),  44  N.  H.  127;  Bardstown 
&  Louisville  R.  Co.  v.  Metcalfe  (1862),  4 
Mete.  (Ky.)  199;  Kelly  v.  Trustees,  etc. 
(1877),  58  Ala.  489  ;  s.  c.  21  Am.  Ry. 
Rep.  138  ;  Miller  v.  New  York  &  E.  R. 
Co,  (1859),  18  How.  Pr.  374  ;  Brown  v. 
Maryland  (1880),  62  Md.  439  ;  Duncomb 
V.  N.  Y.,  H.  &  N.  R.  Co.  (1881),  84 
N.  Y.  190 ;  s.  c.  4  A.  &  E.  R.  R.  Cas.  293  ; 
Phila.  &  Reading  R,  R.  Co.'s  Appeal  (1882), 
4  A.  &  E.  R.  R.  Cas.  118  ;  Union  Bank  v. 
Ja.-ol.s  (184.5),  6  Humph.  (Tenn.)  515. 

See  also  on  tliis  subject  generally, 
Pierce  on  Ifail roads,  .503;  1  Rorer  on  Rail- 
roads, 22!»,  237,  241,  244  ;  2  Redfield's 
liaw  of  Railways,  536  ;  1  Woods'  Railway 
Law,  523  ;  note  to  7  A.  &  E.  R.  R.  Cas. 
117;  2  Am.  L.  Reg.  713,  728.  Sen  also 
Ktifclanil  V.  I'raiiitrce  St.  Ry,  Co.  (Mass.), 


;  South  Western  Ark.  & 
Hays  (Ark.),  38   S,  W. 


45  N.  E.  Rep. 
L  T.  Ry.  Co. 
Rep.  665. 

In  connection  with  subjects  of  this 
treatise  see  "Principles  and  Practice  of 
Finance,"  by  Edward  Carroll,  Jr. 

1  Commercial  Bank  v.  Great  Western 
Ry.  Co.,  3  Moore  P.  C.  295. 

2  For  a  construction  of  a  power  given 
in  an  English  statute,  see  Landowners' 
West  of  England  &  South  Wales  Drainage 
and  Inclosure  Company  i;.  Ashford  (1880), 
L.  R,  16  Ch.  Div.  411,  437. 

A  special  power  of  borrowing  money 
by  the  issue  of  debentures  secured  by 
mortgage  is  given  companies  in  the  English 
Companies  Clauses  Act,  8  &  9  Vict.,  c.  16. 
It  was  claimed  in  this  case  that  outside  of 
the  act  the  company  were  authorized  to 
raise  certain  moneys.  Fry,  J.,  approved  as 
an  exposition  of  the  law  remarks  of  Mr.  Jus- 
tice Crompton,  in  his  judgment  in  the  case 
of  Chambers  v.  Manchester  &  Milford  Rail- 
way Company  (1864),  5  B.  &  S.  588,  607. 

Referring  to  section  8  of  the  special  act, 
Mr.  Justice  Crompton  said:  "It  is  said 
that  this  leaves  untouched  the  power  of 
borrowing  on  bond  or  by  simple  contract, 
so  that  though  the  company  can  only  bor- 
row that  sum  on  mortgage,  the  legislature 
have  left  to  the  company  a  larger  power  of 
borrowing  money  on  other  security.  But 
it  is  a  strange  construction  that  by  an 
enactment  giving  them  a  limited  express 
power  of  borrowing,  they  are  to  have  a 
general  implied  jiower  of  borrowing.  I 
agree  with  Mr.  Lush  that  the  more  natural 
construction  is,  that  tliis  is  an  enabling 
section  giving  ]K)wer  to  the  company  which 
it  would  not  otherwise  have  possessed,  and 
that  the  directors  cannot  borrow  money  in 
any  otlier  way,  so  as  to  bind  the  company." 


§!•] 


NATURE   AND   ISSUE   OF   BONDS. 


3 


they  are  but  incidents  to  the  principal  matter.  An  incidental 
power  is  one  that  is  directly  and  immediately  appropriate  to  the 
execution  of  the  specific  power  granted,  and  not  one  that  has  a 
slight  or  remote  relation  to  it.^  These  powers,  whether  express  or 
implied,  as  incident  to  their  creation,  to  make  contracts,  whether 
by  bond,  bill  of  exchange,  or  negotiable  note,  which  are  entered 
into  in  the  usual  and  necessary  course  of  their  legitimate  busi- 
ness, are  upheld  by  the  courts.^ 

The  power  of  a  corporation  to  issue  bonds  being  independent 
of  statute,  it  results  that,  if  it  is  vested  with  authority  to  borrow 
money  for  specific  purposes,  it  has  the  right  to  issue  any  instru- 
ment in  acknowledgment  of  the  debt  which  may  be  thought  proper. 
Without  any  express  provision  empowering  it  to  issue  bonds,  it 
may  do  so  for  the  purpose  mentioned  in  the  enabling  act.^ 

the  plan  of  selling  portions  of  their  rolling- 
stock  to  a  wagon  company  for  the  money 
they  wished,  and  leasing  the  same  from 
the  wagon  company  upon  a  contract  which 
in  its  terms  bound  the  railway  company 
to  repay  the  amount  advanced,  with  inter- 
est, in  payments  annually,  covering  a 
period  of  five  years.  In  an  action  for  a 
part  of  the  money  due  on  the  lease,  the 
Court  of  Appeals  held  that  the  transac- 
tion was  a  legitimate  one,  and  the  wagon 
company  entitled  to  a  judgment  against 
the  railway  company  and  the  guarantors 
of  the  contract,  certain  of  the  company's 
directors.  In  the  argument  before  the 
court,  the  rights  of  debenture-holders,  as 
against  rolling-stock,  were  referred  to.  In 
his  opinion,  Jessel,  M.  R.,  had  this  to  say  : 
"  First  of  all,  I  am  not  going  to  say  that 
debenture-holders  have  not  some  sort  of 
security  over  rolling-stock,  though  what 
its  precise  nature  may  be  is  another  mat- 
ter. It  may  be  that  they  have  this  kind 
of  security,  that  is,  a  security  on  the  roll- 
ing-stock for  the  time  being,  because  it  is 
always  changing ;  it  is  not  like  a  mort- 
gage, subject  to  the  right  of  the  railway 
company  not  only  to  use  it  in  the  ordinary 
course  of  business,  but  to  replace  it  in  the 
ordinary  course  of  business  ;  that  is  to  say, 
they  may  sell,  or  part  with,  or  use  these 
wagons,  engines,  locomotives,  and  so  on, 
and  replace  them  by  others,  either  of  a 
better  description  or  otherwise,  so  thiit 
they  may  part  with  them  for  any  reason- 
able purpose  in  the  ordinary  course  of 
business.  If  there  is  a  new  invention, 
and  they  find  they  can  buy  some  better 


.1  McMasters  v.  Reed's  Exrs.  (1854),  1 
Grant's  Cases  (Pa.),  36.  Power  to  borrow 
money  on  mortgage  does  not  imply  that 
the  company  cannot  issue  bonds  alone. 
Phila.  &  Sunbury  R.  Co.  v.  Lewis  (1859), 
33  Pa.  St.  33.  Bonds  not  avoided  because 
mortgage  securing  them  is  invalid.  Com- 
pare liardstown  &  Louisville  R.  Co.  v. 
Metcalfe  (1862),  4  Mete.  (Ky.)  199  ;  Mil- 
ler V.  Rutland  &  W.  R.  Co.  (1863),  36 
Vt.  452 ;  Richards  v.  Merrimack  &  Conn . 
R.  Co.  (1862),  44  N.  H.  127. 

2  Phila.  &  Read.  R.  Co.  v.  Hickman 
(1857),  28  Pa.  St.  318 ;  White  Valley  Canal 
Co.  i;.  Vallette  (1858),  21  How.  414  ; 
Miller  v.  New  York  &  E.  R.  Co.  (1859), 
18  How.  Pr.  374  ;  Commrs.  of  Craven. 
County  r.  Atlantic  &  R.  Co.  (1877),  77 
N.  C.  289  ;  Stratton  v.  Allen  (1803),  16 
N.  J.  Eq.  229  ;  Bardstown  &  Louisville 
R.  Co.  V.  Metcalfe  (1862),  4  Metc.(Ky.)  199; 
Richards  v.  Merrimack  &  Conn.  R.  Co. 
(1862),  44  N.  H.  127  ;  Kelly  v.  Trustees, 
etc.  (1877),  58  Ala.  489  ;  s.  c.  21  Am. 
Rep.  138  ;  Brown  v.  State  of  Maryland 
(1884),  62  Md.  439  ;  Hamilton  v.  New- 
castle &  Danville  R.  Co.  (1857),  9  Ind. 
359  ;  Willoughby  v.  Chicago  J.  R.  &  Union 
Stock  Yards  Co.,  50  N.  J.  Eq.  656  ;  s.  c. 
25  Atl.  Rep.  277. 

3  Miller  v.  New  York  &  E.  R.  Co. 
(1859),  18  How.  Pr.  374;  Kelly  v.  Trus- 
tees, etc.  (1877),  58  Ala.  489  ;  s.  c.  21 
Am.  Rep.  138.  As  to  Massachusetts,  see 
§  4,  below.  An  English  railway  company, 
needing  money  to  pay  certain  debts,  and 
having  exhausted  its  power  of  borrowing 
money,  by  advice  of  counsel  resorted  to 


RAILWAY   BONDS   AND   MORTGAGES. 


[chap.  I. 


§  2.    Constitutional  Provisions  as  to  the  Issue  of  Bonds.  —  The 

constitutions  of  some  of  the  States  of  the  United  States  contain 
various  provisions  in  reference  to  the  issue  of  bonds  by  railway 
companies.     The  text  of  these  is  given  in  the  subjoined  note.^ 


locomotives,  they  may  part  with  the  old 
stock  ;  or  if  they  become  useless,  and  they 
can  hire  a  better  class  of  locomotives,  I 
should  say  that  they  might  part  with  them 
in  the  ordinary  course  of  business.  But 
as  at  present  advised,  1  do  not  think  they 
could  sell  the  whole  of  the  rolling-stock 
to  pay  the  debts  which  were  subsequent  in 
priority  to  the  debentures."  Yorkshire 
Railway  Co.  v.  Maclure  (1882),  L.  R.  21  Ch. 
Div.  309,  314,  315  ;  Phil.  &  Read.  R.  Co.'s 
Appeal,  11  W.  N.  C.  325  ;  s.  c.  4  Am.  & 
Eng.  R.  R.  Cas.  118  ;  Gloninger  v.  Pitts- 
burgh &  Connellsville  R.  Co.,  139  Pa.  St. 
13;  s.  c.  21  Fed.  Rep.  211.  See  also 
Anglo- Australian  Co.,  16  N.  S.  Wales,  38  ; 
North  Central  Wagon  Co.  v.  Manchester, 
etc.  Ry.  Co.,  35  Ch.  Div.  191  ;  White  v. 
Carmarthen  Ry.  Co.,  1  H.  &  M.  786; 
Mowatt  V.  Castle  Steel  &  Iron  Works  Co., 
34  Ch.  Div.  58. 

-  All  the  constitutional  provisions  re- 
lating to  any  of  the  subjects  treated  in 
this  book  are  collected  here,  although 
some  of  them  relate  to  subjects  treated  in 
other  chapters. 

Alabama.  —  Const.,  Art.  XIV.,  §  6. 
"  No  corjjoration  shall  issue  stock  or  bonds 
except  for  money,  labor  done,  or  money  or 
property  actually  received  ;  and  all  ficti- 
tious increase  of  stock  or  indebtedness 
shall  be  void.  The  stock  and  bonded  in- 
debtedness of  corporations  shall  not  be 
increased,  except  in  pursuance  of  general 
laws,  nor  without  the  consent  of  the  per- 
sons holding  the  larger  amount  in  value 
of  stock,  first  obtained  at  a  meeting  to  be 
held  after  thirty  days'  notice  is  given  in 
pursuance  of  law." 

Tlie  Alabama  Supreme  Court  said  in 
Nelson  V.  }Iii])l«nl,  Adams'  Cotton  Mills 
V.  Dininiirk  (18!t2),  96  Ala.  238,  250  ;  s.  c. 
11  So.  Hep.  428  ;  12  Ry.  &  Corp.  L.  J. 
182:  "The  con.stitutional  jirovision  [Art. 
XIV.,  §  6],  standing  by  itself,  does  not 
require  that  the  amount  of  money,  or  the 
value  of  tlie  labor  or  projxTty  for  which 
stock  or  boiKls  arc  issued,  shall  correspond 
with  the  face  value  of  the  stock  or  bonds 
for  which  it  is  issued.  ...  In  the  case  of 
bonds  there  is  not,  as  there  is  in  the  case 


of  stock  subscribed,  any  statutory  pro- 
vision requiring  the  value  or  consideration 
received  by  the  corporation  to  correspond 
with  the  amount,  or  nominal  or  face  value, 
of  the  bonds  issued  therefor.  Such  bonds 
are  not  issued  in  contravention  of  the  jiro- 
vision contained  in  the  first  sentence  of 
the  above-mentioned  section  of  the  consti- 
tution if  the  issue  does  not  effect  a  '  ficti- 
tious increase  of  indebtedness,'  and  if  they 
can  properl)'  be  regarded  as  issued  for 
'  money,  labor  done,  or  money  or  property 
actually  received.'  The  constitutional  pro- 
vision in  question  operates  to  invalidate 
evidence  of  indebtedness  when  there  is  in 
fact  no  debt ;  to  require  every  issue  of 
stocks  or  bonds  of  private  corporations  to 
represent  substantial  values  received  by  the 
corporations  ;  to  impose  upon  those  charged 
with  the  disposition  of  corporate  securities 
the  duty  to  procure  therefor  a  fair  and 
reasonable  equivalent  in  money,  labor,  or 
property  actually  contributed  to  the  corpo- 
ration. Courts  of  the  highest  authority 
which  have  considered  the  effects  of  such 
provisions  have  not  construed  them,  when 
not  fortified  by  more  stringent  statutory 
requirements,  as  invalidatory  issues  of 
stocks  and  bonds  in  exchange  for  money, 
property,  or  labor,  upon  such  terms  as  the 
coiporate  authorities,  in  the  fair  exercise 
of  their  judgment  and  discretion,  may 
deem  proper,  though  the  amount  received 
therefor  was  less  than  the  face  value  of 
the  securities.  The  negotiation  of  bonds 
must  be  a  real  transaction,  carried  through 
to  ]iromote  legitimate  corporate  purposes, 
and  not  a  mere  trick  or  device  to  evade 
the  law  and  impose  greater  obligations 
upon  the  corporation  than  there  is  any 
occasion  for  it  to  assume  in  order  to  obtain 
the  consideration  received  thereof.  Issues 
of  stocks  and  bonds  have  been  sustained 
under  constitutional  or  statutory  provisions 
of  the  same  import  as  the  one  under  con- 
sideration, when  they  were  disposed  of  for 
the  best  price  tiiat  could  be  obtained, 
though  for  considerably  less  tlian  their  face 
value."  Memphis  &  Little  Rock  Rail- 
road V.  Dow  (1887),  120  U.  S.  287;  s.  c. 
7  Sup.  Ct.  Rep.  482 ;  Peoria  &  Springtield 


•] 


NATURE   AND   ISSUE   OF   BONDS. 


§  3.    Special   Charter  Provisions   as  to   Issue   of   Bonds.  —  When 
companies  are  organized  under  special  legislative  cliarters,  and 


R.  Co.  V.  Thompson  (1882),  103  III.  187  ; 
Stein  V.  Howard  (1884),  65  Cal.  616; 
Haadley  v.  Stutz  (1891),  139  U.  S.  41/  ; 
s.  c.  11  Sup.  Ct.  Rep.  511  ;  Clark  o. 
Bever  (1891),  139  U.  S,  96  ;  s.  c.  11  Sup. 
Ct.  Rep.  468  ;  Fogg  v.  Blair  (1891),  139 
U.  S.  118;  s,  c.'ll  Sup.  Ct.  Rep.  476. 
The  power  "to  borrow  money,  and  to 
mortgage,  or  otherwise  convey  or  pledge 
its  property,  real  or  personal,  and  its  fran- 
chises, to  secure  the  payment  of  the  money 
so  borrowed,  or  any  other  debt  contracted 
by  it,"  includes  the  power  to  pledge  the 
bonds  of  the  corporation,  secured  by  its 
mortgage  on  property  as  collateral  security 
for  debts  of  the  corporation  presently 
created  or  already  owing.  .  .  .  "And  we 
do  not  think  that  such  pledge,  if  made 
without  fraud,  and  solely  for  the  bona  fide 
purpose  of  satisfactorily  securing  the  pay- 
ment of  corporate  debts,  can  properly  be 
regarded  as  effecting  a  fictitious  increase 
of  indebtedness,  or  as  not  issued  for  money, 
labor  done,  or  money  or  property  actually 
received,  though  the  amount  of  the  bonds 
pledged  exceeds  the  amount  of  the  in- 
debtedness to  be  secured." 

See  Coe  v.  East  &  West  R.  Co.  of 
Alabama  et  al.  (1892),  52  Fed.  Rep.  531, 
and  Grant  et  al.  v.  East  &  West  R.  Co. 
of  Alabama  ct  al.  (1893),  54  Fed.  Rep. 
569,  for  a  construction  of  this  provision  in 
the  Constitution  of  Alabama. 

Const.,  Art.  XIV.,  §  9.  "No  corpora- 
tion shall  issue  preferred  stock  without  the 
consent  of  the  owners  of  two-thirds  of  the 
stock  of  said  corporation." 

Const.,  Art.  XIV.,  §  11.  "...  No 
telegraph  company  shall  consolidate  with, 
or  hold  a  controlling  interest  in,  the  stock 
or  bonds  of  any  other  telegraph  company 
owning  a  competing  line,  or  acquire,  by 
purchase  or  otherwise,  any  other  competing 
line  of  telegraph." 

Arkansas. — Const.,  Art.  XII.,  §  8. 
"No  private  corporation  shall  issue  stocks 
or  bonds,  except  for  money  or  property  actu- 
ally received  or  labor  done,  and  all  fictitious 
increase  of  stock  or  indebtedness  shall  be 
void  ;  nor  shall  the  stock  or  bonded  in- 
debtedness of  any  private  corporation  be 
increased,  except  in  pursuance  of  general 


laws  ;  nor  until  the  consent  of  the  persons 
holding  the  larger  amount  in  value  of 
stock  shall  be  obtained  at  a  meeting  held 
after  notice  given  for  a  period  not  less 
than  sixty  days,  in  pursuance  of  law." 

See  Memphis  &  Little  Rock  Railroad  v. 
Dow  (1887),  120  U.  S.  287,  where  this 
provision  of  the  Constitution  of  Arkan.sas 
is  construed  by  the  U.  S.  Supreme  Court. 

Const.,  Art.  XVII.,  §  11.  "The 
rolling-stock  and  all  other  movable  prop- 
erty belonging  to  any  railroad  company 
or  corporation  in  this  State  shall  be  con- 
sidered personal  property,  and  shall  be 
lial>le  to  execution  and  sale  in  the  same 
manner  as  the  personal  property  of  indi- 
viduals, and  the  general  assembly  shall 
pass  no  law  exempting  any  such  property 
from  execution  and  sale." 

California.  —Count.,  Art.  XII.,  §  10. 
"The  legislature  shall  not  pass  any  laws 
permitting  the  leasing  or  alienation  of  any 
franchise,  so  as  to  relieve  the  franchise  or 
property  held  thereunder  from  the  liabili- 
ties of  the  lessor  or  grantor,  lessee  or 
grantee,  contracted  or  incurred  in  the 
operation,  use,  or  enjoyment  of  such  fran- 
chise, or  any  of  its  privileges." 

Const.,  Art.  XII.,  §  11.  "No  corpora- 
tion shall  issue  stocks  or  bonds,  except  for 
money  paid,  labor  done,  or  property  actu- 
ally received,  and  all  fictitious  increase  of 
stock  or  indebtedness  shall  be  void.  The 
stock  and  bonded  indebtedness  of  corpora- 
tions shall  not  be  increased  except  in  pur- 
suance of  general  law,  nor  without  the 
consent  of  the  persons  holding  the  larger 
amount  in  value  of  the  stock,  at  a  meeting 
called  for  that  purpose,  giving  sixty  days' 
public  notice,  as  may  be  provided  by  law\ " 

As  to  first  clause,  see  Farmers'  Loan  & 
Trust  Co.  V.  San  Diego  St.  Car  Co.  (1891 ), 
45  Fed.  Rep.  518  ;  Ewing  v.  Oroville 
I\Iining  Co.  (1880),  56  Cal.  649  ;  Underbill 
V.  Santa  Barbara  Land,  Building,  &  Im- 
provements Co.  (1892),  93  Cal.  300  ;  s.  c. 
28  Pac.  Rep.  1049. 

It  was  held  in  Union  L.  &  T.  Co.  v. 
Southern  Cal.  Motor  Road  Co.  (1892),  51 
Fed.  Rep.  840,  that  the  provision  in  the 
Constitution  of  California  prohibiting  that 
the  bonded  indebtedness  of  corporations 


6 


RAILWAY   BONDS   AND   MORTGAGES. 


[chap.  I. 


not  under  general  laws,  such  charters  frequently  contain   pro- 
visions expressly  authorizing  the  issue  of  bonds.^ 


shall  not  be  increased  without  the  con- 
sent of  the  persons  holding  the  lai'ger 
amount  of  stock,  does  not  apply  to  the 
first  issue  of  bonds.  That  provision  is 
strictly  limited  to  the  "increase"  of  such 
indebtedness,  and  has  no  application  to  its 
"  creation." 

Colorado.  —  Const.,  Art.  XV., § 9.  "No 
corporation  shall  issue  stocks  or  bonds, 
except  for  labor  done,  service  performed,  or 
money  or  property  actually  received,  and 
all  fictitious  increase  of  stock  or  indebt- 
edness shall  be  void." 

The  meaning  of  this  provision  is,  that 
an  issue  of  bonds  excei)t  as  above  stated  is 
in  direct  violation  of  the  constitution,  and 
ipso  facto  invalid.  Arkansas  Eiver,  Land, 
Town,  &  Canal  Co.  et  al.  v.  Farmers' 
Loan  &  Trust  Co.  et  al.  (1889),  13  Col. 
587,  601 ;  s.  c.  22  Pac.  Rep.  959. 

Const.,  Art.  XV.,  §  5.  "No  railroad 
corporation,  or  the  lessees  or  managers 
thereof,  shall  consolidate  its  stock,  prop- 
erty, or  franchises  with  any  other  railroad 
corporation  owning  or  having  under  its 
control  a  parallel  or  competing  line." 

Georgia.  —  Const.,  Art.  IV.,  §  2,  par. 
4.  Buying  stock,  etc.,  in  other  corpora- 
tions; competition.  "The  General  As- 
sembly of  this  State  shall  have  no  power 
to  authorize  any  corporation  to  buy  shares 
or  stock  in  any  other  corporation  in  this 
State  or  elsewhere,  or  to  make  any  con- 
tract or  agreement  whatever  with  any 
such  corporation  which  may  have  the 
effect,  or  be  intended  to  have  the  effect,  to 
defeat  or  lessen  competition  in  their  respec- 
tive businesses,  or  to  encourage  monopoly  ; 
and  all  .such  contracts  and  agreements 
shall  be  illegal  and  void." 

Idaho.  —  Const.,  Art.  XL,  §  9.  "  No 
corporation  shall  issue  .stocks  or  bonds 
except  for  labor  done,  services  performed. 


or  money  or  property  actually  received ; 
and  all  fictitious  increase  of  stock  or  in- 
debtedness shall  be  void.  .  .  ." 

Const.,  Art.  XL,  §  14.  "If  any  rail- 
road, telegraph,  express,  or  other  corpora- 
tion, organized  under  any  of  the  laws  of 
this  State,  shall  consolidate,  by  sale  or 
otherwise,  with  any  railroad,  telegraph, 
express,  or  other  corporation  organized 
under  any  of  the  laws  of  any  other  State 
or  Territory,  or  of  the  United  States,  the 
same  shall  not  thereby  become  a  foreign 
corporation ;  but  the  courts  of  this  State 
shall  retain  jurisdiction  over  that  part  of 
the  corporate  property  within  the  limits  of 
the  State  in  all  matters  that  may  arise,  as 
if  said  consolidation  had  not  taken  place." 

Const.,  Art.  XL,  §  1.5.  "The  legis- 
lature shall  not  pass  any  law  permitting 
the  leasing  or  alienation  of  any  franchise 
so  as  to  release  or  relieve  the  franchise  or 
property  held  thereunder  from  any  of  the 
liabilities  of  the  lessor  or  grantor,  or  lessee 
or  grantee,  constructed  or  incurred  in  the 
operation,  use,  or  enjoyment  of  such  fran- 
chise, or  any  of  its  privileges." 

Illinois. —  Conai.,  Art.  XL,  §  10. 
"  The  rolling-stock,  and  all  other  movable 
property  V)elouging  to  any  railroad  com- 
pany or  corporation  in  this  State,  shall  be 
considered  personal  property,  and  shall  be 
liable  to  execution  and  sale  in  the  same 
manner  as  the  personal  property  of  indi- 
viduals, and  the  general  assembly  shall 
pass  no  law  exempting  any  such  jiroperty 
from  execution  and  sale." 

Const.,  Art.  XL,  §  11.  "No  railroad 
corporation  shall  consolidate  its  stock, 
property,  or  franchises  with  any  other  rail- 
road corporation  owning  a  parallel  or  com- 
peting line  ;  and  in  no  case  shall  any  con- 
solidation take  place,  except  ujton  public 
notice  given  of  at  least  sixty  days,  to  all 


1  Coe  V.  Columbus,  P.  &  I.  R.  Co. 
(1859),  10  Ohio  St.  372  (company  em- 
jiowered  to  borrow  a  sum  not  exceeding 
its  capital  stock,  at  a  specified  rate  of  in- 
terest, and  to  executf!  bonds  therefor)  ; 
Garrett  v.  May,  19  Md.  187  (1862)  (com- 
pany empowered  to  borrow  money  on  its 


credit,    and    execute    bonds,    secured    by 
pledge  of  property). 

See  also  McAllister  v.  Plant  (1876),  54 
Miss.  106;  .s.  c.  17  Am.  Ry.  Rep.  389; 
Kemble  «;.  Wilmington  &  Northern  I\.  Co. 
(1878),  13  Phila.  469  ;  Da  I'onte  v.  North- 
crn  Par.  U.  Co.  (1883),  21  Blatchf.  564. 


§3.] 


NATURE   AND   ISSUE   OP   BONDS. 


Tlie  inherent  power  of  a  railroad  company  to  borrow  money 
and  mortgage  its  property  is  not  limited  by  a  clause  in  its  charter 


stockholders,  in  such  manner  as  may  be 
provided  by  law.  A  majority  of  the  direc- 
tors of  any  railroad  corporation,  now  in- 
corporated or  hereafter  to  be  incorporated 
by  the  laws  of  this  State,  shall  be  citizens 
and  residents  of  this  State." 

Rev.  Stat.  111.  Const,  Art.  XL,  §  13. 
"  No  railroad  corporation  shall  issue  any 
stock  or  bonds,  except  for  money,  labor, 
or  property  actually  received,  and  applied 
to  the  purposes  for  which  such  corporation 
was  created  ;  and  all  stocks,  dividends, 
and  other  fictitious  increase  of  the  capital 
stock  or  indebtedness  of  any  such  corpo- 
ration shall  be  void.   ..." 

In  Peoria  &  S.  R.  Co.  v.  Thompson 
(1882),  103  m.  187  ;  s.  c.  7  A.  &  E.  R. 
R.  Cas.  101,  this  provision  of  the  constitu- 
tion has  been  held  not  to  have  been  in- 
tended to  interfere  with  the  usual  and 
customary  methods  of  raising  funds  by 
railroad  companies  by  the  issue  of  its 
stocks  and  bonds  for  the  purpose  of  build- 
ing their  roads,  or  of  accomplishing  other 
legitimate  corporate  purposes. 

In  City  of  Chicago  v.  Cameron  (1887), 
120  111.  447  ;  e.  c.  11  N.  E.  Rep.  899, 
bonds  issued,  not  for  the  construction  of 
the  road,  but  to  pay  the  debt  of  another 
corporation,  were  held  to  be  void  as  against 
holders  with  notice  of  the  purposes  of  their 
issue. 

Kentucky.  —  Const.,  §  193.  "  No  corpo- 
ration shall  issue  stock  or  bonds  except  for 
an  equivalent  in  money  paid  or  labor  done, 
or  property  actually  received  and  ajiplied 
to  the  purposes  for  which  such  corporation 
was  created,  and  neither  labor  nor  property 
shall  be  received  in  payment  of  stock  or 
bonds  at  a  greater  value  than  the  market 
price  at  the  time  said  labor  was  done  or 
property  delivered,  and  all  fictitious  in- 
crease of  stock  or  indebtedness  shall  be 
void." 

Const.,  §  200.  "  If  any  railroad, 
telegraph,  express,  or  other  corporation, 
organized  under  the  laws  of  this  Common- 
wealth, shall  consolidate,  by  sale  or  other- 
wise, with  any  railroad,  telegraph,  express, 
or  other  corporation  organized  under  the 
laws  of  any  other  State,  the  same  shall  not 
thereby  become  a  foreign  corporation,  but 


the  courts  of  this  Commonwealth  shall 
retain  jurisdiction  over  that  part  of  the 
corporate  property  within  the  limits  of 
this  State  in  all  matters  which  may  arise 
as  if  said  consolidation  had  not  taken 
place." 

Const.,  §  201.  "  No  railroad,  tele- 
graph, telephone,  bridge,  or  common  car- 
rier company  shall  consolidate  its  capital 
stock,  franchises,  or  property,  or  pool  its 
earnings,  in  whole  or  in  part,  with  any 
other  railroad,  telegraph,  telephone,  bridge, 
or  common  carrier  company  owning  a 
parallel  or  competing  line  or  structure,  or 
acquire  by  purchase,  lease,  or  otherwise 
any  parallel  or  competing  line  or  struc- 
ture, or  operate  the  same.  ..." 

In  Louisville  &  Nashville  R.  Co.  v. 
Kentucky  (1896),  161  U.  S.  677  ;  s.  c.  16 
Sup.  Ct.  Rep.  714,  the  railroad  company 
sought  to  consolidate  with  a  parallel  or 
competing  railroad.  The  U.  S.  Su[)reme 
Court  held  that,  conceding  that  the  requi- 
site power  existed  in  both  the  companies 
as  claimed,  sect.  201  of  the  Constitution 
of  Kentucky,  adopted  in  1891,  was  a 
legitimate  exercise  of  the  police  power  of 
the  State,  and  forbade  such  consolidation, 
at  least  so  far  as  such  power  remained 
unexecuted. 

Const.,  §  203.  '•  No  corporation  shall 
lease  or  alienate  any  franchise  so  as  to 
relieve  the  franchise  or  property  held 
thereunder  from  the  liabilities  of  the  les- 
sor or  grantor,  lessee  or  grantee,  contracted 
or  incurred  in  the  operation,  use,  or  en- 
joyment of  such  franchise,  or  any  of  its 
privileges." 

Const. ,  §  212.  "  The  rolling-stock  and 
other  movable  property  belonging  to  any 
railroad  corporation  or  company  in  this 
State  shall  be  considered  personal  projiertv, 
and  shall  be  liable  to  execution  and  sale 
in  the  same  manner  as  the  personal  prop- 
erty of  individuals.  The  earnings  of  any 
railroad  company  or  corporation,  and 
choses  in  action,  money,  and  personal 
property  of  all  kinds  belonging  to  it  in 
the  hands,  or  under  the  control,  of  any 
officer,  agent,  or  employee  of  such  corpora- 
tion or  company,  shall  be  subject  to  pro- 
cess of  attachment  to  the  same  extent  and 


8 


BAILWAY   BONDS    AND    MORTGAGES. 


[chap.  I. 


providing  that  shares  shall  not  be  assessed  over  one  hundred 
dollars,  and  that  if  more  money  is  necessary  it  shall  be  raised  by 
creating  new  shares.^ 


in  the  same  manner  as  like  property  of 
individuals  when  in  the  hands  or  under 
the  control  of  other  persons.  Any  such 
earnings,  choses  in  action,  money,  or  other 
personal  property  may  be  subjected  to  the 
payment  of  any  judgment  against  such 
corpoi-ation  or  company,  in  the  same 
manner  and  to  the  same  extent  as  such 
property  of  individuals  in  the  hands  of 
third  persons." 

Louisiana.  —  Const.,  Art.  238.  *'  No 
corporation  shall  issue  stock  nor  bonds, 
except  for  labor  done  or  money  or  property 
actually  received,  and  all  fictitious  issues 
of  stock  shall  be  void,  and  any  corporation 
issuing  such  fictitious  stock  shall  forfeit 
its  charter." 

Const.,  Art.  246.  "If  any  railroad 
company,  organized  under  the  laws  of 
this  State,  shall  consolidate,  by  sale  or 
otherwise,  with  any  railroad  company  or- 
ganized under  the  laws  of  any  other  State 
or  of  the  United  States,  the  same  shall 
not  thereby  become  a  foreign  corporation, 
but  the  courts  of  this  State  shall  retain 
jurisdiction  in  all  matters  which  may 
arise,  as  if  said  consolidation  had  not 
taken  place.  In  no  case  shall  any  con- 
solidation take  place  except  upon  public 
notice  of  at  least  sixty  days  to  all  stock- 
holders, in  such  manner  as  may  be  pro- 
vided by  law." 

Mississippi.  — Const.,  Art.  VII.,  §  185. 
"  The  rolling-stock  belonging  to  any  rail- 
road company  or  corporation  in  this  State 
shall  be  considered  personal  property,  and 
shall  be  liable  to  execution  and  sale  as 
such." 

Const.,  Art.  VII.,  §  19fi.  "  No  trans- 
portation corporation  shall  issue  stocks  or 
bonds  except  for  iiioney,  labor  done  (or  in 
good  faith  agreed  to  be  done),  or  money 
or  property  actually  received  ;  and  all 
fictitious  increase  of  stock  or  indebtedness 
shall  be  void." 

Afichif/an.  —Const.,  Art.  XIX.  A,  §  2. 
"No  railroail  corporation  shall  consolidate 
its  stock,  property,  or  franchises  with  any 


other  railroad  corporation  owning  a  par- 
allel or  competing  line ;  and  in  no  case 
shall  any  consolidation  take  place  except 
upon  public  notice  given  of  at  least  sixty 
days  to  all  stockholders,  in  such  manner 
as  shall  be  provided  by  law." 

Missouri. — Const.,  Art.  XII.,  §  8. 
"No  corporation  shall  issue  stock  or 
bonds,  except  for  money  paid,  labor  done, 
or  property  actually  received,  and  all  fic- 
titious increase  of  stock  or  indebtedness 
shall  be  void.  The  stock  and  bonded 
indebtedness  of  corporations  shall  not  be 
increased,  except  in  pursuance  of  general 
law,  nor  without  the  consent  of  the  persons 
holding  the  larger  amount  in  value  of  the 
stock  first  obtained  at  a  meeting  called  for 
the  purpose,  first  giving  sixty  days'  public 
notice,  as  may  be  provided  by  law." 

Const.,  Art.  XII.,  §  10.  "No  cor- 
poration shall  issue  preferred  stock  with- 
out the  consent  of  all  the  stockholders." 

Const.,  Art.  XII.,  §  16.  "  The  rolling- 
stock  and  all  other  movable  property  be- 
longing to  any  railroad  company  or  cor- 
poration in  this  State  shall  be  considered 
personal  property,  and  shall  be  liable  to 
execution  and  sale  in  the  same  manner  as 
the  personal  property  of  individuals  ;  and 
the  general  assembly  shall  pass  no  law 
exempting  any  such  property  from  execu- 
tion and  sale."  See  Knapp  v.  St.  Louis, 
Kansas  City,  &  Northern  Ey.  Co.  (1881), 
74  Mo.  374. 

Const.,  Art.  XII.,  §  17.  "  No  railroad 
or  other  corporation,  or  the  lessees,  pur- 
chasers, or  managers  of  any  railroad  cor- 
poration, shall  consolidate  the  stock, 
pro]iorty,  or  franchises  of  such  corporation 
with,  or  lease  or  purchase  the  works  or 
franchises  of,  or  in  any  way  control,  any 
railroad  corporation  owning  or  having 
under  its  control  a  jjarallel  or  competing 
line  ;  nor'shall  any  oflScer  of  such  railroad 
corporation  act  as  an  officer  of  any  other 
railroad  corporation  owning  or  having  the 
control  of  a  parallel  or  comjicting  line. 
The  question  whether  railroads  are  parallel 


1  Richards  v.  Merrimack  &  Conn.  River  R.  Co.  (1862),  44  N.  H.  127. 


§3.] 


NATURE   AND   ISSUE   OP   BONDS. 


Business  corporations  were  authorized  by  section  13  of  the  act  of 
1875,  as  amended  by  chapter  394  of  the  Laws  of  New  York,  1888,  to 


or  competing  lines  shall,  when  demanded, 
be  decided  by  a  jury,  as  in  other  civil 
issues." 

Const.,  Art.  XII.,  §  18.  "  If  any  rail- 
road company  organized  under  the  laws 
of  this  State  shall  consolidate,  by  sale  or 
otherwise,  with  any'  railroad  company 
organized  under  the  laws  of  any  other 
State  or  of  the  United  States,  the  same 
shall  not  thereby  become  a  foreign  cor- 
poration ;  but  the  courts  of  this  State 
shall  retain  jurisdiction  in  all  matters 
which  may  arise,  as  if  said  consolidation 
had  not  taken  place.  In  no  case  shall 
any  consolidation  take  place,  except  upon 
public  notice  of  at  least  sixty  days  to  all 
stockholders,  in  such  manner  as  may  be 
provided  by  law." 

Montana. — Const.,  Art.  XV.,  §  6. 
"  No  railroad  corporation,  express  or  other 
transportation  company,  or  the  lessees  or 
managers  thereof,  shall  consolidate  its 
stock,  property,  or  franchises  with  any 
other  railroad  corporation,  express  or  other 
transportation  company,  owning  or  having 
under  its  control  a  parallel  or  competing 
line  ;  neither  shall  it  in  any  manner  unite 
its  business  or  earnings  with  the  business 
or  earnings  of  any  other  railroad  corpora- 
tion ;  nor  shall  any  officer  of  such  railroad, 
express,  or  other  transportation  company 
act  as  an  officer  of  any  other  railroad, 
express,  or  other  transportation  company 
owning  or  having  control  of  a  parallel  or 
competing  line." 

Const.,  Art.  XV.,  §  10.  "No  corpora- 
tion shall  issue  stocks  or  bonds,  except 
for  labor  done,  services  performed,  or 
money  and  property  actually  received  ; 
and  all  fictitious  increase  of  stock  or  in- 
debtedness shall  be  void.  .   .  ." 

Const.,  Art.  XV.,  §  15.  "  If  any  rail- 
road, telegraph,  telephone,  express,  or 
other  corporation  or  company  organized 
under  any  of  the  laws  of  this  State  shall 
consolidate,  by  sale  or  otherwise,  with  any 
railroad,  telegraph,  telephone,  express,  or 
other  corporation  organized  under  any  of 
the  laws  of  any  other  State  or  Territory, 
or  of  the  United  States,  the  same  shall 
not  thereby  become  a  foreign  corporation  ; 
but  the  courts  of  this  State  shall  retain 


jurisdiction  over  that  part  of  the  corpo- 
rate property  within  the  limits  of  the 
State,  in  all  matters  that  may  arise,  as  if 
said  consolidation  had  not  taken  place." 

Const.,  Art.  XV.,  §  17.  "The  legisla- 
tive assembly  shall  not  pass  any  law  per- 
mitting the  leasing  or  alienation  of  any 
franchise  so  as  to  release  or  relieve  the 
franchise  or  property  held  thereunder 
from  any  of  the  liabilities  of  the  lessor  or 
gi'antor,  or  lessee  or  grantee,  contracted 
or  incurj-ed  in  the  operation,  use,  or  enjoy- 
ment of  such  franchise,  or  any  of  its 
privileges." 

Nebraska.—  Const.,  Art.  XL,  §  2.  "  The 
rolling-stock  and  all  other  movable  prop- 
erty belonging  to  any  railroad  company  or 
corporation  in  tliis  State  shall  be  liable  to 
execution  and  sale  in  the  same  manner  as 
the  personal  property  of  individuals,  and 
the  legislature  shall  pass  no  law  exempt- 
ing any  such  property  from  execution  and 
sale." 

Const.,  Art.  XI. ^  §  3.  "No  railroad 
corporation  or  telegraph  company  shall 
consolidate  its  stock,  property,  franchises, 
or  earnings,  in  whole  or  in  part,  with  any 
other  railroad  corporation  or  telegraph 
company  owning  a  parallel  or  competing 
line  ;  and  in  no  case  shall  any  consolida- 
tion take  place,  except  upon  public  notice 
of  at  least  sixty  days  to  all  stockholders, 
in  such  manner  as  may  he  provided  by 
law." 

The  sense  in  which  the  word  "  consoli- 
date "  is  used  is  that  of  "join"  or 
"unite."  State  ex  rel.,  etc.  v.  Atchison 
&  Nebraska  R.  Co.  (1888),  24  Neb,  143, 
164  ;  s.  c.  38  N.  W.  Rep.  43. 

Const.,  Art.  XI.,  §  5.  "No  railroad 
corporation  shall  issue  any  stock  or  bonds, 
except  for  money,  labor,  or  property  actu- 
ally received  and  applied  to  the  purposes 
for  which  such  corporation  was  created, 
and  all  stock,  dividends,  and  other  fic- 
titious increase  of  the  capital  stock  or  in- 
debtedness of  any  such  corporation  shall 
be  void.  .   .  ." 

See  State  ex  rel.,  etc.  v.  Atchison  h 
Nebraska  R.  Co,  (1888),  24  Neb.  143, 
164  ;  s.  c.  38  N.  W.  Rep.   43. 

North    Dakota,  —  Const.,    Art.   VII., 


10 


RAILWAY   BONDS   AND   MORTGAGES. 


[chap.  I. 


issue  bonds  and  to  mortgage  their  real  estate  to  an  amount  not  to 
exceed  one-half  of  the  entire  corporate  property.     The  section 


§  138.  "No  corporation  shall  issue  stock 
or  bonds  except  for  money,  labor  done,  or 
money  or  property  actually  received  ;  and 
all  fictitious  increase  of  stock  or  indebted- 
ness shall  be  void. 

"  The  stock  and  indebtedness  of  cor- 
porations shall  not  be  increased  except  in 
pursuance  of  general  law,  nor  without  the 
consent  of  the  persons  holding  the  larger 
amount  in  value  of  the  stock  first  ob- 
tained at  a  meeting  to  be  held  after  sixty 
days'  notice,  given  in  pursuance  of  law." 

§  141.  "No  railroad  corporation  shall 
consolidate  its  stock,  property,  or  fran- 
chises with  any  other  railroad  corporation 
owning  a  parallel  or  competing  line  ;  and 
in  no  case  shall  any  consolidation  take 
place  except  ujion  public  notice  given  at 
least  sixty  days  to  all  stockholders,  in 
such  manner  as  may  be  provided  by  law. 
Any  attempt  to  evade  the  provisions  of 
this  section  by  any  railroad  corporation, 
by  lease  or  otherwise,  shall  work  a  forfeit- 
ure of  its  charter." 

Pennsylvania.  —  Const.,  Art.  XVI.,  §  7. 
"  No  corporation  shall  issue  stocks  or 
bonds  except  for  money,  labor  done,  or 
money  or  property  actually  received  ;  and 
all  fictitious  increase  of  stock  or  indebted- 
ness shall  be  void.  The  stock  and  in- 
debtedness of  corporations  shall  not  be 
increased  except  in  pursuance  of  general 
law,  nor  without  the  consent  of  the  per- 
sons holding  the  larger  amount  in  value 
of  the  stock,  first  obtained  at  a  meeting 
to  be  held  after  sixty  days'  notice  given  in 
pursuance  of  law." 

See  IJothschild  v.  Rochester  &  Pitts- 
burgh R.  Co.  (1887),  1  Ry.  &  Corp.  L.  J. 
321,  reversing  Appeal  of  State  Line  R. 
Co.  (1880),  1  Ry.  &  Corp.  L.  J.  139  ;  Ahl 
r.  Rhoadfs  (1877),  84  Pa.  St.  319;  Olos- 
singfT  V.  Pittsburgh  &  Connellsville  R. 
Co.  (1890),  139  Pa.  St.  13;  s.  c.  21  Atl. 
Rep.  211  ;  27  W.  N.  C.  497  ;  Lewis  v. 
Jeffries  (1878),  86  Pa.  St.  340;  Powell 
V.  Hlair  (1890),  ].33  Pa.  St.  550;  s.  c.  19 
Atl.  Rep.  559.  The  provision  of  the  Con- 
fltitution  of  Pennsylvania  as  to  fi(;titious 
increase  of  indebtedness  has  been  held  not 
to  apjily  to  the  sale  of  mortgage  bonds  of 
&  railroad  company  for  which  it  received 


the  money  from  innocent  purchasers  at 
par  for  construction  and  equipment.  The 
debt  would  not  be  fictitious,  tliough  the 
securities  might  turn  out  to  be  largely  so. 
Fidelity,  etc.  Co.  v.  West  Penn.,  etc.  R. 
Co.  ct  al.  (1891),  138  Pa.  St.  494  ;  s.  c.  21 
Atl.  Rep.  21.  As  to  notice  of  a  meeting 
to  increase  stock  under  this  constitutional 
provision  see  Shopp  v.  Norristown  Pass. 
Ry.  Co.,  2  Pa.  Dist.  Rep.  679.  See  as  to 
issuing  deferred  income  bonds,  McCalmont 
V.  Phil.  &  Read.  E.  Co.,  14  Phil.  479. 

Where  plans  have  been  perfected  for  a 
consolidation  of  railroad  companies  and 
the  building  of  another,  a  mortgage  exe- 
cuted and  bonds  executed  and  sold,  and 
the  purchase-money  of  the  bonds  applied 
to  the  purposes  for  which  the  mortgage 
and  negotiations  stated  they  were  to  be 
used,  such  bonds  are  not  issued  in  con- 
travention of  the  constitutional  provision 
of  Pennsylvania,  that  "  No  corporation 
shall  issue  stocks  or  bonds  except  for 
money,  labor  done,  or  money  or  property 
actually  received ;  and  all  fictitious  in- 
crease of  stock  or  indebtedness  shall  be 
void."  Woodbury  et  al.  v.  Allegheny  & 
K.  R.  Co.  ct  al.  (1895),  72  Fed.  Rep.  371. 

Const.,  Art.  XVII.,  §  4.  "  No  railroad, 
canal,  or  other  corporation,  or  the  lessees, 
purchasers,  or  managers  of  any  railroad 
or  canal  corporation,  shall  consolidate  the 
stock,  property,  or  franchises  of  such  cor- 
poration with,  or  lease  or  purchase  the 
works  or  francliises  of,  or  in  any  way  con- 
trol any  other  railroad  or  canal  corpoi-a- 
tion  owning  or  having  under  its  control  a 
yiarallel  or  competing  line  ;  nor  shall  any 
officer  of  such  railroad  or  canal  corpoia- 
tion  act  as  an  officer  of  any  other  raili'oad 
or  canal  corjioration  owning  or  having  the 
control  of  a  j>arallel  or  competing  line  ; 
and  the  question  whether  railroads  or 
canals  are  parallel  or  competing  lines 
shall,  when  demanded  by  the  party  com- 
plainant, be  decided  by  a  jury  as  in  other 
civil  issues." 

South  Carolina.  —  Const.,  Art.  IX., 
§  7.  "  No  railroad  or  other  transportation 
company,  and  no  telegraph  or  otiier  trans- 
mitting corporation,  or  the  lessees,  pur- 
chasers, or  managers  of  such  corporation, 


§3.] 


NATURE   AND   ISSUE   OF   BONDS. 


11 


did  not  imply  that  bonds  in  excess  of  that  amount  would  be  void, 
but  only  that  the  directors  should  be  personally  liable  for  any 


shall  consolidate  the  stock,  property,  or 
franchises  of  such  corporation  with,  or 
lease  or  purchase  the  works  or  franchises 
of,  or  in  any  way  control  any  other  rail- 
road or  other  transportation,  telegraph, 
or  other  transmitting  company  owning 
or  having  under  its  control  a  parallel 
or  competing  line  ;  and  the  question 
whether  raih-oads  or  other  transportation, 
telegraph,  or  other  transmitting  companies 
are  parallel  or  competing  lines  shall, 
when  demanded  by  the  party  complain- 
ant, be  decided  by  a  jury  as  in  other  civil 
causes." 

South  Dakota. — Const.,  Art.  XVII., 
§  8.  "No  corporation  shall  issue  stocks 
or  bonds  except  for  money,  labor  done,  or 
money  or  property  actually  received  ;  and 
all  fictitious  increase  of  stock  or  indebted- 
ness shall  be  void.  .  .  .  The  stock  and 
indebtedness  of  corporations  shall  not  be 
increased  exce])t  in  pursuance  of  general 
law,  nor  without  the  consent  of  the  per- 
sons holding  the  larger  amount  in  value 
of  the  stock  first  obtained,  at  a  meeting 
to  be  held  after  sixty  days'  notice  given 
in  pursuance  of  law." 

Const.,  Art.  XVII.,  §  13.  "The  roll- 
ing-stock and  all  other  movable  property 
belonging  to  any  railroad  company  or  cor- 
poration in  this  State  shall  be  considered 
personal  property,  and  shall  be  liable  to 
execution  and  sale  in  the  same  nv".nner  as 
the  personal  property  of  individuals,  cud 
the  legislature  shall  pass  no  laws  exempt- 
ing such  property  from  execution  and  sale. " 

Const.,  Art.  XVII.,  §  14.  "No  rail- 
road corporation  shall  consolidate  its 
stock,  property,  or  franchises  with  any 
other  railroad  corporation  owning  a  par- 
allel or  competing  line  ;  and  in  no  case 
shall  any  consolidation  take  place  except 
upon  public  notice  given  out,  at  least 
sixty  days,  to  all  stockholders  in  such 
manner  as  may  be  provided  by  law.  Any 
attempt  to  evade  the  provisions  of  this 
section  by  any  railroad  corporation,  by 
lease  or  otherwise,  shall  work  a  forfeit- 
ure of  its  charter." 

Texas.  —  Const.,  Art.  III.,  §  54.  "The 
legislature  shall  have  no  power  to  release 
or  alienate   any  lien  held  by   the  State 


upon  any  railroad,  or  in  any  wise  change 
the  tenor  or  meaning  or  pass  any  act  ex- 
planatory thereof ;  but  the  same  shall  be 
enforced  in  accordance  with  the  original 
terms  upon  which  it  was  acquired." 

Const.,  Art.  X.,  §  4.  "The  rolling- 
stock  and  all  other  movable  property  be- 
longing to  any  railroad  com[)any  or  cor- 
poration in  this  State  shall  be  considered 
personal  property,  and  its  real  and  per- 
sonal property,  or  any  part  thereof,  shall 
be  liable  to  execution  and  sale  in  the  same 
manner  as  the  projierty  of  individuals  ; 
and  the  legislature  shall  pass  no  laws 
exempting  any  such  property  from  execu- 
tion and  .sale. 

Const.,  Art.  X.,  §  5.  "No  railroad 
or  other  corporation,  or  the  lessees,  pur- 
chasers, or  managers  of  any  railroad  cor- 
poration, shall  consolidate  the  stock, 
property,  or  franchises  of  such  corporation 
with,  or  lease  or  purchase  the  works  or 
franchises  of,  or  in  any  way  control  any 
railroad  corporation  owning  or  having 
under  its  control  a  parallel  or  competing 
line  ;  nor  shall  any  officer  of  such  railroad 
corporation  act  as  an  officer  of  any  other 
railroad  corporation  owning  or  having  the 
control  of  a  parallel  or  competing  line." 

Const.,  Art.  X.,  §  6.  "No  railroad 
company  organized  under  the  laws  of  this 
State  shall  consolidate,  by  private  or  judi- 
cial sale  or  otherwise,  with  any  railroad 
company  organized  under  the  laws  of  any 
other  State  or  of  the  United  States." 

Const.,  Art.  XII.,  §  6.  "No  corpora- 
tion shall  issue  stock  or  bonds  except  for 
money  paid,  labor  done,  or  property  actu- 
ally received,  and  all  fictitious  increase  of 
stock  or  indebtedness  shall  be  void." 

In  Northside  Ry.  Co.  v,  Worthington, 
88  Texas,  573  (1895),  the  court  says  :  "  The 
decisions  of  the  courts  upon  like  provisions 
in  the  Constitutions  of  other  States  have 
been  such  as  in  most  cases  to  practically 
destroy  its  effect.  It  may  be  that  it  was 
not  intended  to  prohibit  corporations  from 
selling  their  bonds  below  par,  —  provided 
the  transaction  was  in  good  faith." 

Utah.  —  Const.,  Art.  XII.,  §  5.  "  Cor- 
porations shall  not  issue  stock,  except  to 
bona  fide    subscribers    thereof    or    their 


12 


RAILWAY   BONDS   AND   MORTGAGES. 


[chap.  I. 


damages   to   bondholders   or   mortgage-holders   caused    by    such 
excess.^ 

An  objection  may  be  taken  to  the  validity  of  a  mortgage  secur- 


assignee,  nor  shall  any  corporation  issue 
any  bond  or  other  obligation  for  the  pay- 
ment of  money,  except  for  money  or 
property  received  or  labor  done.  .  .  .  All 
fictitious  increase  of  stock  or  indebtedness 
shall  be  void." 

Const.,  Art.  XII.,  §  7.  "No  corpora- 
tion shall  lease  or  alienate  any  franchise, 
so  as  to  relieve  the  franchise  or  property 
held  thereunder  from  the  liabilities  of  the 
lessor  or  grantor,  lessee  or  grantee,  con- 
tracted or  incurred  in  operation,  use,  or 
enjoyment  of  such  franchise  or  of  its 
privileges." 

Const.,  Art.  XII.,  §  13.  "  No  railroad 
corporation  shall  consolidate  its  stock, 
property  or  franchise  with  any  other  rail- 
road corporation  owning  a  competing  line." 

Const.,  Art.  XII.,  §  14.  "The  rolling- 
stock  and  other  movable  property  belong- 
ing to  any  railroad  company  or  corporation 
in  this  State  shall  be  considered  personal 
property,  and  shall  be  liable  to  taxation 
and  to  execution  and  sale  in  the  same 
manner  as  the  personal  property  of  indi- 
viduals, and  such  property  shall  not  be 
exempted  from  execution  and  sale." 

Washington.  — Const.,  Art.  XII.,  §  6. 
"  Corporations  shall  not  issue  stock,  ex- 
cept to  bona  fide  subscribers  therefor  or 
their  assignees  ;  nor  shall  any  coi'poration 
issue  any  bond,  or  other  obligation  for  tlie 
payment  of  money,  except  for  money  or 
property  received  or  labor  done.  .  .  .  All 
fictitious  increase  of  stock  or  indebtedness 
shall  be  void." 

Const.,  Art.  XII.,  §  8.  "  No  corpora- 
tion shall  lease  or  alienate  any  franchise, 
.so  as  to  relieve  the  franchise  or  property 
held  thereunder  from  the  liabilities  of  the 
lessor  or  grantor,  lessee  or  grantee,  con- 
tracted or  incurred  in  the  operation,  use, 
or  enjoyment  of  such  franchise  or  any  of 
its  privileges." 

Const.,  Art.  XII.,  §  16.  "No  railroad 
corporation  shall  consolidate  its  stork, 
property,  or  franchises  with  any  other  rail- 
road corporation  owning  a  competing  lino." 


Const.,  Art.  XII.,  §  17.  "The  rolling- 
stock  and  other  movable  property  belong- 
ing to  any  railroad  company  or  corporation 
in  this  State  shall  be  considered  personal 
property,  and  shall  be  liable  to  taxation 
and  to  execution  and  sale  in  the  same 
manner  as  the  personal  property  of  indi- 
viduals, and  such  property  shall  not  be 
exempted  from  execution  and  sale." 

West  Virginia.  — Const.,  Art.  XL,  §  8. 
"The  rolling-stock  and  all  other  movable 
property  belonging  to  any  railroad  com- 
pany or  corporation  in  this  State  shall  be 
considered  personal  property,  and  shall  be 
liable  to  execution  and  sale  in  the  same 
manner  as  the  personal  property  of  indi- 
viduals ;  and  the  legislature  shall  pass  no 
law  exempting  any  such  property  from 
execution  and  sale." 

Const.,  Art.  XL,  §  11.  "No  railroad 
corporation  shall  consolidate  its  stock, 
property,  or  franchise  with  any  other  rail- 
road owning  a  parallel  or  competing  line, 
or  obtain  the  possession  or  control  of  such 
parallel  or  competing  line,  by  lease  or 
other  contract,  without  the  permis.sion  of 
the  legislature." 

Wyoming. — Const.,  Art.  X.,  §  8. 
•'  There  shall  be  no  consolidation  or  com- 
bination of  corporations  of  any  kinds 
whatever  to  prevent  competition,  to  con- 
trol or  influence  productions  or  prices 
thereof,  or  in  any  manner  to  interfere  with 
the  public  good  and  general  welfare." 

As  to  the  efi'ect  of  charter  provisions 
and  statutes  on  issuing  bonds,  see  Geddes 
V.  Toronto  St.  R.  Co.,  14  Up.  Can.  C.  P. 
Eep.  513  ;  Winnipeg  &  H.  B.  R.  Co.  v. 
Mann,  7  Man.  81  ;  East  Boston  Freight  R. 
Co.  r.  Hubbard,  10  Allen,  459,  note;  Miller 
V.  New  York  &  Erie  R.  Co.,  8  Abb.  Pr. 
431  ;  s.  c.  18  How.  Pr.  374.  As  to  the 
effect  of  reorganization  agreement,  see 
Dutenhofer  v.  Adirondacks  R.  Co.,  60 
Hun,  578,  under  a  .statute  authorizing  an 
issue  of  bonds  to  creditors  as  payees. 
McCullough  V.  A.  &  E.  R.  Co.,  4  Gill 
(Md.),  58. 


1  Beebe  v.  Rifhmond  Light,  Heat,  &    Power  Co.,  13  Misc.    Rep.  737;    s.  c. 
N.  Y.  Suppl.  1  (18'.i5). 


35 


§  4.]  NATURE   AND   ISSUE   OF   BONDS.  13 

ing  bonds,  on  the  ground  that  there  is  a  want  of  power  under  its 
charter  to  construct  its  road  on  the  line  selected,  and  consequently 
to  borrow  money  and  pledge  the  road  for  this  purpose.-^ 

But  the  legality  of  bonds  issued  under  a  charter  power  is  no 
longer  open  to  question  after  a  special  act  has  been  passed,  for- 
mally declaring  them  to  be  valid.^ 

So  also  certificates  of  organization  under  general  laws  some- 
times contain  such  provisions.  Thus,  where  such  a  certificate 
empowered  a  company  in  general  terms  "  to  issue  bonds,  .  .  . 
and  to  sell  or  pledge  such  bonds  for  proper  corporate  purposes," 
and  the  validity  of  the  contract  in  pursuance  of  which  they  are 
issued  is  established,  the  question  whether  they  shall  be  ordinary 
bonds,  or  income  bonds,  or  simple  debentures,  is  a  matter  of  cor- 
porate regulation  with  which  the  courts  will  not  interfere.^ 

§  4.  General  Statutory  Provisions  as  to  the  Issue  of  Bonds.  —  The 
principal  statutory  provisions  of  the  different  States  relating  to 
the  issue  of  bonds  by  railway  companies  are  not  here  tabulated, 
but  the  cases  are  cited  which  have  construed  such  provisions. 

The  subjects  dealt  with  in  the  provisions  which  have  been  con- 
strued may  be  conveniently  reviewed  under  four  heads :  (a)  The 
purposes  for  which  bonds  may  be  issued  ;  (5)  The  consideration  for 
which  they  may  be  issued  ;  (c)  The  amount  to  which  they  may  be 
issued;  (t?)  The  rate  of  interest  for  which  they  may  be  issued.^ 

(a)  Construction  of  Statutory/  Provisions  specifying  the  Purposes 
for  which  Bonds  may  he  issued.  —  Statutory  conditions  as  to  the 
nature  of  the  bonds  to  be  issued  as  a  security  for  the  loan  of  the 
State  credit  must  be  strictly  complied  with  to  give  the  corporation 
a  right  to  claim  the  benefits  of  the  legislation.  Where  the  legisla- 
ture requires  as  a  security  for  the  loan  of  the  State's  credit  by  the 
issue  of  State  bonds  a  deposit  of  corporate  bonds  which  shall  have 
forty  years  to  run,  without  any  qualification,  the  issue  of  corporate 
bonds  containing  a  clause  providing  that  the  principal  debt  shall 
become  immediately  exigible  is  not  such  a  compliance  with  the 
statute  as  will  enable  the  corporation  to  compel  the  State  officials 
to  issue  the  State  bonds.^ 

1  Pennock  v.  Coe  (1860),  23  How.  117.  may  be  exercised  by  the  majority  of  the 

2  White  Water  Val.  Canal  Co.  V.  Val-  board  of  directors.  McLane  v.  Placcr- 
lette  (1858),  21  How.  414  (1858).  ville  T.  T.  Vo.  (1885),  66  Cal.  606  ;  s.  c. 

3  Willoughby  v.  Chicago  Junction  Rail-  26  A.  &  E.  R.  R.  Cas.  404  (1885),  constru- 
ways,  etc.  Co.  (1892),  50  N.  J.  Eq.  656  ;  ing  the  statutes  of  California  (1861),  §  15, 
8.  c.  25  Atl.  Rep.  277.  as  amended  by  the  statute  of  1862,  §  547. 

*  In   the   absence   of   some    restrictive  5  States.  Nichols  (1878),  30  La.  Ann. 

provision,  the  power  to  issue  bonds  for  the  Part  11,  1217.  The  court  held  that  the 
purposes  mentioned  in  an  enabling  statute    insertion  of  such  a  clause  was  a  departure 


14  RAILWAY   BONDS   AND    MORTGAGES.  [CHAP.  I. 

The  rule  that  railway  companies  may  issue  bonds  to  carry  into 
effect  the  purpose  of  their  organization  necessarily  involves  the 
proposition  that  such  issue  may  be  made  in  payment  for  work 
done  and  materials  furnished  in  the  construction  of  the  road. 

An  issue  of  bonds  which  is  not  for  the  construction,  equipment, 
or  operation  of  the  road,  but,  for  instance,  to  pay  the  debts  of 
another  corporation,  is  void  as  against  any  holders  with  notice 
of  the  purposes  of   the  issue.^ 

Bonds  may  be  pledged  as  collateral  upon  an  extension  or 
renewal  of  the  floating  debt  of  a  company,  or  to  secure  notes 
given  in  payment  of  unsecured  bonds  of  the  company.^ 

While  a  provision  of  the  law  of  New  York  (Laws  1850,  ch.  140, 
§  28,  subd.  10),  that  railroad  corporations  could  "  from  time  to 
time  borrow  such  sums  of  money  as  might  be  necessary  for  com- 
pleting and  finishing  or  operating  their  railroad,  and  issue  bonds 
for  the  money  borrowed,  and  secure  their  repayment  by  a  mort- 
gage upon  the  corporate  property  and  franchises,"'  may  have  been 
designed  to  carry  with  it  an  implication  that  mortgage  bonds  can- 
not be  issued  for  any  other  purpose,  it  is  competent  for  the  legis- 
lature to  remove  such  a  restraint,  and  place  it  within  the  power 
of  a  consolidated  road,  as  was  done  in  a  case  by  the  act  of  1869, 
ch.  917,  §  2,  prescribing  terms  and  conditions  for  the  consolida- 
tion.    In  such  a  case  the  consolidated  company  may  issue  bonds 

from  the  terms  presented  by  the  legisla-  procurement  of  rails  for  its  road,  see  Mil- 
ture,  which  increased  the  liability  of  the  ler  v.  Rutland  &  Washington  E.  Co. 
State  beyond  the  risk  which  it  was  in-  (1863),  36  Vt.  452.  As  to  the  use  of 
tended  to  incur,  the  possible  result  of  its  bonds  in  paying  indebtedness  growing  out 
enforcement  being  that  the  mortgaged  of  the  purchase  of  another  road,  or  in  con- 
property  might  be  thrown  upon  the  mar-  structing  an  unfinished  portion  of  it,  see 
ket  at  any  time,  however  unpropitious,  McAllister  v.  Plant  (1876),  54  Miss.  106. 
and  the  State  thus  deprived  of  the  protec-  A  company  organized  under  the  Manu- 
tion  afforded  by  its  own  laws,  which  were  facturing  Act  of  New  York  (Laws  of  1848, 
designed  to  prevent  any  such  sacrifices.  ch.  40,  §  5,  as  amended  by  Laws  of  1881, 
1  City  of  Chicago  v.  Cameron  (1887),  ch.  213,  §  5)  has  the  power  to  borrow 
120  111.  447  ;  s.  c.  11  N.  E.  Rep.  899.  As  money  for  the  purpose  of  constructing  its 
to  the  principle  governing  this  decision  see  works,  and  to  issue  bonds  for  its  payment. 
Pierce  v.  Madison  &  I ndianaj)olis  R.  Co.,  21  This  provision  empowers  such  a  company 
How.  441  (1858).  In  Thompson  v.  Erie  to  purchase  works  already  constructed,  and 
R.  Co.  (1871),  42  How.  Pr.  8,  it  was  held  fit  and  suitable  for  its  purposes.  Gamble 
that  tlie  issue  of  bonds  for  the  ])urposes  v.  Queen's  County  Water  Co.  (1890),  123 
expressed  in  a  mortgage,  —  which  were  N.  Y.  91  ;  s.  c.  25  N.  E.  Rep.  201  ;  31 
"to  consolidate  its  funded  debt,  obtain  Am.  &  Eng.  Corp.  Cas.  313. 
the  money  and  material  necessary  for  pro-  ^  Claflin  v.  South  Car.  R.  Co.  (1880),  8 
tecting  its  line  of  railway,  enlarging  its  Fed.  Rep.  118.  See  also  as  to  other  debts 
capacities,  and  extending  the  facilities  for  which  bonds  may  be  pledged,  Duncomb 
thereof,*'  —  was  within  the  power  of  the  v.  N.  Y.,  Ilousatonic,  &  Northern  R.  Co. 
company.     As  to   issuing   bonds   for  the  (1881),  84  N.  Y.  190. 


§  4.]  NATURE  AND  ISSUE  OF  BONDS.  15 

for  the  purpose  of  paying  the  liabilities  of  the  constituent 
companies.^ 

As  the  law  of  New  York  (Laws  1850,  ch.  140,  §§  14,  15)  au- 
thorized a  railroad  corporation  to  acquire  land  for  its  track  and 
other  necessary  purposes,  by  voluntary  purchase  or  by  condemna- 
tion, an  agreement  made  on  the  purchase  of  rights  of  way  to  pay 
therefor  in  bonds  of  the  purchasing  corporation,  secured  by  a 
mortgage  on  its  property,  was  deemed  by  the  New  York  Court 
of  Appeals  clearly  within  the  implied,  if  not  within  the  exjjrcss, 
powers  of  a  railroad  corporation,  as  stated  in  sect.  28,  subd.  10,  of 
the  Law  of  1850.2 

A  railroad  company,  when  not  restricted  by  its  charter,  may 
acquire  lands  at  its  pleasure,  and  where  it  executes  a  mortgage  to 
secure  bonds  to  be  used  to  raise  money  for  construction  purposes, 
may  devote  part  of  the  bonds  to  the  purchase  of  lands,  to  be  util- 
ized by  including  them  in  the  mortgage,  as  additional  security 
for  all  bonds.2 

In  the  absence  of  some  restriction  in  the  charter,  the  salaries  of 
the  officers  of  the  company,  being  a  necessary  part  of  the  expenses 
of  the  construction  of  the  road,  may  be  paid  with  bonds  used  to 
raise  funds  for  the  construction.^ 

Where  two  companies  were  organized  under  the  laws  of  Texas, 
and  neither  company  had  the  power  to  extend  its  credit  to  foster 
the  interests  of  the  other,  the  issuance  by  the  two  companies  of 
joint  bonds,  dividing  the  proceeds,  was  held  equivalent  to  bor- 
rowing the  money  to  be  divided  between  them,  each  to  be  surety 
of  the  other ;  and,  further,  the  bonds  of  the  two  companies  would 
be  binding  on  each  to  the  extent  of  value  received  by  it  for  wbich 
they  had  been  issued.^ 

A  company  empowered  to  issue  bonds  to  raise  money  for  the 

1  Taylor  et  al.  v.  Trustees  of  Atlantic  &  row  or  raise  money  by  issuing  debentures. 

Great   Western   R.  Co.  et  al.  (1878),  53  Seligmau  j;.  Prince  (C.  A.),  L.  R.  (1895),  2 

How.  Pr.  26.  Ch.   617.     It  was  pointed  out  by   Lopes, 

*  Munson  et  al.  v.  Syracuse,  Geneva,  &  L.  J.,  that  no  question  could  have  been 
Corning  R.  Co.  ct  al.  (1886),  103  K.  Y.  58  ;  made  as  to  the  validity  of  the  transaction, 
s.  c.  8  N.  E.  Rep.  355.  if  the  company,  as  they  might  have  done, 

8  Blackburn  v.  Selma  R.  Co.  (1879),  2  had  issued  the  debentures  to  the  owner  of 

Flip.  525.  the  business,  as  a  part  of  the  consideration 

*  Ibid.  for  the  purchase,  and  he  had  then  raised 
^  Northside  Ry.  Co.  v.   Worthington,  the  amount  of  the  debt  upon  them,  and 

88  Texas,  562  (1895).     "Where  a  company  handed    it   to  the    person   now   suing   as 

is  formed  to  take  over  the  business  of  a  the    holder    of    the    debentures.       What 

person,    and    agrees    to    indemnify    him  had   been   actually  done    was   practically 

against  his  debts,  an  issue  of  debentures  the  same  thing  done  in  a  less  circuitous 

to  pay  those  debts  is  valid,  if  the  company  manner, 
is  vested  with  a  general  authority  to  bor- 


16 


RAILWAY   BONDS   AND   MORTGAGES. 


[chap.  I. 


construction  of  its  road  has  the  implied  power  to  issue  to  the 
contractor,  in  payment  for  work  done,  negotiable  certificates  of 
indebtedness,  payable  in  money  or  bonds,^ 

The  Massachusetts  statute  of  1854,  cli.  286,  has  had  the  effect 
of  entirely  abrogating  the  common-law  power  to  issue  bonds,  so 
far  as  railroad  companies  are  concerned,  and  any  bonds  issued 
for  a  purpose  and  in  a  manner  not  expressly  authorized  by  the 
statute  are  absolutely  void.^ 

(b)  Construction  of  Statutory  Provisions  as  to  the  Consideration 
for  Bonds.  —  A  statute  of  Ohio  passed  in  1820  (1  Swan  &  C.  862) 
was  in  force  when  the  bonds  of  a  railway  company  were  issued. 
The  statute  provided  "  that  all  bonds,  promissory  notes,  bills  of 
exchange,  foreign  and  inland,  drawn  for  any  sum  or  sums  of 
money  certain,  and  made  payable  to  any  person  or  order,  or  to 
any  person  or  bearer,  or  to  any  person  or  assigns,  shall  be  nego- 
tiable by  indorsement  thereon,"  etc.  It  was  claimed  that  these 
railway  bonds,  though  stated  on  their  face  to  be  transmissible  by 
delivery,  were  not  negotiable  under  this  statute  unless  indorsed. 
The  bonds  were  payable  in  New  York  city.  The  Supreme  Court 
of  Ohio  held  the  bonds  to  be  negotiable  without  indorsement.^ 

An  hypothecation  of  bonds  has  been  held  to  be  an  "  issue  "  of 


1  Pusey  V.  New  Jersey  R.  Co.  (1873),  14 
Abb.  Pr.  (N.  S.)  434. 

2  Commonwealth  v.  Smith  (1865),  10 
Allen,  448  (1865). 

This  ruling  of  the  Massachusetts  court 
does  not  seem  to  have  been  overruled,  but 
the  Public  Statutes  upon  the  subject  of 
bonds  and  mortgages  have  been  altered 
very  nmch  since  the  act  of  1854,  and  the 
powers  of  railroad  companies  as  to  the 
issue  of  bonds  and  execution  of  mortgages 
have  been  much  enlarged.  See  Pub. 
Stats.  Mass.  (1882),  612,  ch.  112,  §§  62- 
73,  Acts  1874,  1875,  1876  ;  and  by  Pub. 
Stats.  Mass.  (1882-1888),  502,  ch.  191, 
Act  1887,  April  15,  the  time  for  which 
such  bonds  may  run  has  been  extended 
from  '*  twenty  "  to  "  fifty  "  years. 

3  Pittsburgh,  C.  C,  &  St.  L.  Ky.  Co.  v. 
Lynde  et  al.  (Ohio),  44  N.  E.  Kep.  596 
(1890).  The  court,  after  referring  to  the 
fact  that  it  had  hrdd,  in  deference  to  a  long- 
continued  firactice,  the  indorsement  to  be 
unnecessary  to  tlie  transfer  of  a  promissory 
note  (not  undiT  seal)  payable  to  bearer, 
said  :  "  Wc  tliink  tin;  same  considerations 
based  on  a  similar  long-continued  practice 


in  regard  to  railroad  bonds,  together  with 
the  express  declaration  of  transmissibility 
appearing  on  the  face  of  the  bonds  in  con- 
troversy, and  tlie  manifest  necessity  of  the 
quality  of  negotiability  by  mere  delivery  to 
their  availability  to  accomplish  the  object 
expected  of  them,  would  require  us  to  hold 
them  to  be  negotiable  by  mere  delivery 
even  if  of  the  oj)inion  that  they  were 
sealed  instruments  according  to  the  strict 
construction  of  that  statute.  ...  In  the 
case  of  railroad  or  other  corporate  securi- 
ties, however,  the  attaching  of  a  corporate 
seal  bears  a  strong  analogy  to  the  signa- 
ture of  a  natural  person,  and  is  its  sub- 
stantial equivalent.  In  view  of  the  vast 
sums  of  money  rej)resented  by  this  class 
of  securities,  and  of  the  existence  of  a 
practice  of  passing  them  from  hand  to 
hand  by  delivery,  so  universal  and  long 
continued  as  to  be  within  the  common 
knowledge  of  every  one,  they  should  not 
be  shorn  of  this  valuable  attribute  on  this 
account,  unless  the  words  of  the  statute 
and  the  former  decisions  of  the  court  im- 
peratively re(iuire  it." 


§  4.]  NATUEE   AND   ISSUE   OF   B0ND3.  17 

bonds  within  the  prohibition  of  the  Wisconsin  statute,  providing 
that  "  no  corporation  shall  issue  any  bonds  .  ,  .  except  for 
money,  labor,  or  property,  estimated  at  its  true  money  value, 
actually  received  by  it,  equal  to  seventy-five  per  cent  of  the  par 
value  thereof."  Bonds  hypothecated  without  a  stipulation  that 
they  shall  be  accounted  for  at  not  less  than  seventy-live  cents  on 
the  dollar  of  their  value  are  void.^ 

Under  a  constitutional  or  statutory  provision  which  expressly 
forbids  a  company  to  issue  bonds  except  for  money  paid,  labor 
done,  or  property  actually  received,  it  cannot  dispose  of  its  bonds 
by  pledging  them  for  an  antecedent  debt.^ 

So  under  a  statute  authorizing  the  issue  of  bonds  by  a  railroad 
company  to  an  amount  not  exceeding  the  capital  secured  by 
mortgage  of  the  property  and  franchises,  such  bonds  cannot  be 
issued  otherwise  than  for  a  new  adequate  valuable  consideration 
increasing  the  available  funds  of  the  corporation.^ 

A  statute  forbidding  the  issuance  of  bonds  except  for  money, 
labor,  or  property  received,  is  sufficiently  complied  with  where 
the  bonds  are  issued  in  payment  for  the  construction  of  the  com- 
pany's road,  and  the  amount  of  the  issue  does  not  unreasonably 
exceed  the  value  received.* 

Such  a  statute  cannot  be  construed  as  indicating  a  purpose  to 
make  the  validity  of  every  issue  of  bonds  dependent  upon  the 
inquiry  whether  the  money,  property,  or  labor  actually  received 
therefor  was  of  equal  value  in  the  market  with  the  bonds  issued.^ 

Under  a  similar  constitutional  provision  in  Texas,  it  has  been 
held  that  bonds  sold  at  ninety  cents  on  the  dollar  were  not  void, 
but  were  binding  obligations  to  the  extent  of  the  money  received. 
For  the  excess  the  company  received  notbing,  cither  in  money, 
labor,  or  property.^ 

Where  a  railroad  is  taken  as  the  consideration  of  an  issue  of 
stock  and  bonds,  the  question  whether  there  has  been  an  over- 
valuation is  to  be  determined  with  reference  to  its  actual  capacity 

Pfister    V.    Milwaukee    Electric    Ey.  §  11,  art.  12,  and  the  coiTssponding  pro- 
Co.   et  al.  (1892),    83  Wis.    86  ;  s.  c.   53  vision  of  the  Civil  Code,  §  359. 
N.  W.  Rep.  27.  3  Kemble  v.  Wilmington  R.  Co.  (1878), 

In  Mo  wry  v.  F.  L.   &  T.  Co.,  76  Fed.  13  Phil.  469. 
Rep.   45,  the  same  statute  was  construed  *  Brown  v.   Duluth,  M.,  &  N.  Ry.  Co. 

and   held   not   to  apply  to  a   deposit   of  (1893),  53  Fed.  Rep.  889  ;  s.  c.  54  Am. 

bonds  under  a  reorganization  agreement.  &  Eng.  R.  R.  Gas.  219. 
See  also  Andrews  v.  Xat.  Foundry  Co.j^S  5  Memphis  &  Little  Rock  Railroad  v. 

Fed.  Rep.  166.  Dow  (1887),  120  U.  S.  298. 

2  Farmers'   Loan  &   Trust  Co.  v.   San  6  Northside  Ry.    Co.   v.   Worthington 

Diego  Car  Co.  (1891),  45  Fed.  Rep.  518;  (1895).    88    Texas,    573.     See    also  §  2, 

so  construing  the  California  Constitution,  above,  note  "  Texas." 


18 


RAILWAY   BONDS   AND    MORTGAGES. 


[chap.  I. 


to  make  net  earnings  at  the  time  of  the  transaction,  and  not  by 
the  price  originally  paid  for  it.-^ 

Under  the  law  of  Alabama,  bonds  issued  by  a  railroad  com- 
pany, and  taken  in  part  payment  by  a  construction  company  for 
the  construction  of  its  road,  have  been  held  not  to  be  void  where 
there  was  no  over- valuation,  and  the  circumstances  indicated  that 
there  had  been  a  fair  exercise  of  judgment  and  discretion  on  the 
part  of  the  railroad  company,  honestly  directed  to  secure  a  sub- 
stantial compliance  with  the  law.^ 

Bonds  issued  for  the  purpose  of  constructing  a  road  are  not 
invalidated  by  the  fact  that  the  road  could  have  been  or  was  con- 
structed for  less  than  the  amount  of  the  bonds  issued  to  pay 
therefor.^ 

(c)  Construction  of  Statutory  Provisions  limiting  the  Amount 
to  which  Bonds  may  he  issued.^  —  The  execution  by  a  company  of 
a  mortgage  on  its  own  real  estate  to  secure  bonds  has  been  held 
to  be  a  "  transfer  of  real-estate  securities,"  within  the  meaning 
of  the  Iowa  statute  (McClain's  Code,  §  1611),  which  provides 
that,  without  such  transfer,  the  maximum  of  the  corporate  in- 
debtedness shall  not  exceed  two-thirds  of  its  capital  stock." 

Bonds  of  a  railroad  company  in  the  hands  of  directors  of  the 
company,  who  had  full  knowledge  that  the  bonds  issued  were  in 
excess  of  the  amount  of  stock  actually  paid,  have  been  held  by 


1  Grant  et  al.  v.  East  &  West  R.  Co.  of 
Ala.  ctal.  (1893),  54  Fed.  Rep.  569,  af- 
firming Same  v.  Same  (1892),  52  Fed. 
Rep.  531.  A  large  number  of  cases  are 
cited  in  the  opinion  as  to  payment  for 
bonds  in  property. 

If  bonds  are  delivered  in  payment  for 
work  done  and  materials  furnished,  it  is 
equally  as  good  as  if  they  had  been  sold 
for  cash.     See  7  Fed.  Rep.  796  (1881). 

2  Coe  V.  East  &  West  R.  Co.  ct  al. 
(1892),  52  Fed.  Rep.  531. 

2  Farmers'  Loan  &  Trust  Co.  i'.  Rocka- 
way  Valley  R.  Co.  (1895),  69  Fed.  Rop.  9. 

*  As  to  the  rights  of  holders  where 
there  are  contractual  limitations  on  the 
issue,  see  Cliap.  II.,  Art.  II. 

s  First  Nat.  Bank  of  Montpelier  v. 
Sioux  City  Terminal  R.  &  Warehouse  Co. 
(1895),  69  Fed.  Rep.  441. 

The  same  case  holds  that  the  provi- 
sions of  tlic  same  section,  that  the  real 
estate  thus  transferred  shall  be  "unin- 
cumbered," is  Rufricicntly  complied  with 
where  the  properly  is  a  terminal  station 


and  warehouse,  although  it  has  previously 
been  leased  to  a  railroad  company.  The 
ground  taken  by  the  court  was  that  the 
terminal  property  was  of  no  value  unless 
leased  to  a  transportation  company,  and 
that  the  lease  of  the  property  was  actu- 
ally the  only  means  by  which  it  could  be 
made  to  serve  as  a  security  for  the  bonds. 
See  Fidelity,  etc.  Co.  v.  West  Penn.,  etc. 
R.  Co.  et  al.  (1891),  138  Pa.  St.  424  ; 
s.  c.  21  Atl.  Rep.  21,  to  an  amount  where 
a  company  had  issued  bonds  more  than 
twice  the  amount  of  the  capital  stock 
paid  in,  and  executed  a  mortgage  to  se- 
cure them  in  contravention  of  the  act  of 
April  4,  1868,  P.  L.  Pa.  62.  The  court 
reaffirmed  Reed's  Appeal  (1888),  122  Pa. 
St.  565;  s.  c.  16  Atl.  Rep.  100,  holding 
that  the  mortgage  was  unauthorized,  and 
might  he  held  inoperative  and  void  as 
to  parties  having  tlie  right  to  complain, 
but,  as  between  bo7ia  fide  holders  of  the 
mortgnge  bonds  and  the  company,  the 
mortgage  was  a  lien  upon  the  mortgaged 
property. 


§  5. J  NATURE   AND   ISSUE   OF   BONDS.  19 

the  Court  of  Errors  and  Appeals  of  New  Jersey  to  be  invalid  and 
worthless.^ 

But  where  such  pass  in  good  faith  to  third  parties,  who  have  no 
knowledge  of  their  being  a  part  of  an  over-issue,  or  the  real  over- 
issue of  the  bonds  occurs  subsequently  to  their  obtaining  title  to 
them,  the  rule  is  different,  and  they  will  be  entitled  to  be  paid,^ 

§  5.  Rate  of  Interest  at  which  Bonds  may  be  issued.  —  That  the 
statutes  regulating  the  rate  of  interest  on  bonds  do  not  apply 
to  bonds  issued  under  reorganization  agreements,  see  Chap. 
XXXVIL,  post. 

In  determining  how  far  bonds  shall  be  invalidated  for  the  reason 
that  they  reserve  more  than  the  legal  interest,  the  essential  point 
is  upon  the  question  as  to  the  laws  of  what  State  was  the  contract 
entered  into.  The  usual  presumption  is  that  the  State  is  the 
one  where  the  corporation  has  its  legal  home,  and  this  presump- 
tion is  not  rebutted  by  the  fact  that  the  interest  is  made  payable 
in  another  State,  the  arrangement  being  regarded  as  one  merely 
for  the  convenience  of  coupon-holders,  and  not  as  having  the 
effect  of  bringing  the  contract  under  the  familiar  qualification  of 
the  general  rule,  viz.,  that  the  law  of  the  place  of  performance 
yields  to  the  law  of  the  place  of  the  contract.  Thus  where  a  Ver- 
mont railroad  company  issued  bonds,  the  interest  on  which  was  to 
be  paid  in  Boston,  it  was  held  that,  as  the  parties  had  apparently 
contracted  with  special  reference  to  the  law  of  Vermont,  and 
made  the  interest  payable  at  Boston  merely  because  it  was  a 
financial  centre,  the  contract  was  governed  by  that  law,  by  which 
the  result  of  stipulating  for  a  usurious  rate  of  interest  was  not  to 
vitiate  the  obligation,  but  to  disable  the  creditor  from  collectino- 
more  than  the  legal  rate.^ 

1  Steelnian  e<  aZ.  y.  Baker  (N.  J.,  1896),  the  effect  of  usury  in  these  bonds  by 
33  Atl.  Rep.  815.  P.  L.  N.  J.,  1878,  p.  pleading  the  statute  of  New  York,  whicli 
20,  ch.  xii.,  §  20,  limits  the  issue  of  bonds  forbids  corporations  pleading  usury  as  a 
of  railroad  companies  to  the  amount  of  defence.  The  court,  however,  held  that  as 
their  paid-up  capital  stock.  See  Nowell  v.  North  Carolina  was  the  State  where  the 
Andover  &  Redbridge  R.  Co.,  7  Jur.  N.  s.  work  was  done,  and  the  bonds  given  in 
Ch.  839.  payment  for  the  work,  and  where  the  prop- 

2  Physick  ct  al.  v.  Baker  (N.  J.,  1896),  erty  mortgaged  as  security  was  situated, 
33  Atl.  Rep.  815.  and  where  payment  could  be  enforced,  the 

8  Codman   v.   Vermont  &   C.    R.    Co.  laws   of    the    latter   State   as   to  interest 

(1879),  16  Blatchf.  165,  177  ;  s.  c.  5  Fed.  governed. 

Cas.,  Case  No.  2935,   following  Cheever  When  bonds   are   payable   in  a  State 

V.    Rutland   &    Burlington   R.    Co.    (Vt.,  where   corporations   cannot  interfere,  the 

1869) ;  s.  c.  4  Am.  Ry.  Rep.  291.  defence  of  usury,   unless  the  place  men- 

In  Commrs.  of  the  County  of  Craven  v.  tioned  is  adopted  as  a  shift  or  device  to 

Atlantic  &  N.  C.  R.  Co.  (1877),  77  N.  C.  avoid   the   statute  of   usury,   such   a   de- 

289,    the   bonds    were    payable    in    New  fence  will  not  avail.     See  12  Wall.  276 

York,  and  an  attempt  was  made  to  avoid  (1870). 


20  RAILWAY   BONDS   AND    MORTGAGES.  [CHAP.  I. 

(a)  WJien  an  Issue  of  Bonds  is  usurious.  —  A  railway  corpora- 
tion cannot  legally  sell  its  bonds  bearing  the  highest  legal  rate  of 
interest  at  a  discount  for  the  purpose  of  borrowing  money.  Such 
a  sale  would  be  in  effect  a  loan  and  a  usurious  transaction.^ 

(b)  When  an  Issue  of  Bonds  is  not  usui'ious.  —  It  has  been  held 
that  a  usury  law  has  no  application  in  a  case  where  the  transac- 
tion is  in  effect  an  issue  of  bonds  to  pay  for  the  completion  of  a 
road,  although  the  transfer  is  styled  a  loan  by  the  parties,  and 
although  the  sum  for  which  the  bonds  are  issued  is  largely  in 
excess  of  the  estimated  cost  of  the  work.^  In  many  States  there 
are  statutes  authorizing  railroad  companies  to  borrow  money  and 
sell  their  securities  at  any  rate  of  interest  or  price  they  may  deem 
proper,  and  it  has  been  said  that  a  company  is  at  liberty  to  sell 
its  bonds  at  any  price  it  pleases,  unless  prohibited  by  statute  (see 
13  Fed.  Rep.  524). 

A  statute  authorizing  railroad  companies  to  sell  their  bonds 
and  notes  at  such  prices  as  they  may  deem  expedient  justifies  a 
sale  of  such  bonds  at  less  than  their  par  value.^ 

So  a  charter  authorizing  the  company  to  borrow  money  "  in 
such  terms  as  might  be  agreed  upon  between  the  parties "  em- 
powers them  to  borrow  money  at  a  rate  of  interest  beyond  that 
established  by  the  general  law.* 

So  a  charter  which  declares  that  a  corporation  may  borrow 
money  on  such  terms  as  the  directors  may  determine  upon,  and 
may  issue  bonds  or  other  evidences  of  indebtedness,  authorizes 
the  corporation  to  sell  its  bonds  below  their  face  value,  and  where 
it  does  so  the  loan  is  not  usurious.^ 

Wherever  the  Statute  of  Usury  has  been  repealed,  no  objection 
can  be  raised  as  to  the  validity  of  bonds  on  the  score  of  their 
having  been  negotiated  at  less  than  par.^ 

1  Commrs.  of  the  County  of  Craven  v.  Manufg.  Co.  (1887),  96  N.  C.  298  ;  s.  c. 
Atlantic  &  N.  C.  R.  Co.  (1877),  77  N.  C.     3  S.  E.  Rep.  63. 

289 ;  West  Cornwall  Ry.   Co.  v.  Mowatt,  As  to  tlie  issuing  of  bonds  convertible 

17  L.  J.  Ch.  366;  Lire  Regent's  Canal  Iron-  into  stock,  and  a  statute  prohibiting  a  sale 

works  Co.,  3  Ch.   Div.  43  ;  In  re  Anglo-  of  stock  below  par,  see  Sturges  v.  Stetson 

Danubian,  etc.  Colliery  Co.,  20  Eq.  339  ;  (18.^.8),    1    Hiss.    246;  Fosdick  v.  Sturges 

In  re  Compagnie  Gendrale  de  Bellegarde,  (1858),  1  Biss.  255. 

4  Ch.  Div.  470.  «  Gamble   v.    Queen's   Co.  Water   Co. 

2  White  Water  Val.  Canal  Co.  v.  Val-  (1890),  123  N.  Y.  91  ;  s.  c.  25  N.  E. 
lette  (18.'.8),  21  How.  414.  Rep.  201  ;  32  Am.  &  Kng.  Corp.  Cas.  313; 

8  .Junction    Railroad   Co.    v.    B.nik    of  Stevens  v.   Watson    (1865),   4  Abb.  App. 

Ashland  (1870),  12  Wall.  226.  Cas.   202;  Rosa  v.  Buttcrfield  (1865),  33 

*  Morrison  ?-.  Katon  &  Hamilton  R.  Co.  N.  Y.  665.     See  N.Y.  Laws,  1850,  ch.  172. 

(1860),  14  Iiid.  110,  an  action  on  a  note  Bonds  are  not  invalidated  by  the  fact 

of  the  company.     See  Butler  v.  Edgerton,  that  the  company  is  empowered  to  issue 

15  Ind.  15;  Butler  v.  Myer,  17  Ind.  77.  them  at  a  certain  rate  of   interest,    and 

^  Traders'  National   Bank  v.  Lawrence  stipulates  that  the  interest  shall  be  paid 


§  6.]  NATURE   AND   ISSUE   OP   BONDS.  21 

A  statute  of  Arkansas  provided  that  "  Whenever  any  railroad 
company  .  .  .  shall,  in  the  o|)inion  of  the  dh-ectors  thereof,  re- 
quire an  increased  amount  of  the  capital  stock,  .  .  .  they  shall 
have  power  to  borrow  money  ...  at  a  rate  of  interest  not  ex- 
ceeding seven  per  cent  per  annum  .  .  ."  There  was  a  suit  to 
foreclose  a  mortgage  securing  bonds  issued  bearing  10  per  cent 
interest,  as  agreed  upon  in  a  plan  of  reorganization.  It  was  con- 
tended that  these  bonds  were  void,  having  been  issued  at  a  rate 
of  interest  greater  than  that  allowed  in  the  above-mentioned  act. 
The  court  sustained  the  validity  of  these  bonds  against  this  con- 
tention by  simply  saying  that  this  statute  had  no  application  to 
the  case,  for  there  was  here  no  increase  of  the  existing  capital 
stock  of  a  corporation.  This  new  railway  company  had  acquired 
the  ownership  of  the  interests  in  question  upon  terms  and  condi- 
tions, and  this  statute  was  no  obstacle  to  its  full  performance  of 
those  terms  and  conditions.^ 

Where  a  legislature  authorizes  the  indorsement  by  the  State 
of  bonds  of  a  railroad  company  bearing  interest  at  8  per  cent  per 
annum,  the  fair  construction  is  that  it  means  8  per  cent  in  any 
legal-tender  currency  on  which  the  parties  may  agree.^ 

Bonds  stipulating  for  semi-annual  payments  of  interest,  and 
that,  in  default  of  the  reasonably  prompt  payment  of  interest  as 
it  should  accrue,  the  principal  sum  might  be  treated  as  due  and 
payable,  are  not  invalid  because  the  provisions  of  the  act  autho- 
rizing their  issue  are  that  the  bonds  shall  bear  a  rate  of  interest 
not  exceeding  8  per  cent  per  annum,  and  have  no  longer  than 
thirty  years  to  run.^ 

§  6.  Power  to  issue  Bonds  after  Consolidation.  —  The  general 
rule  that  a  consolidated  company  acquires  the  charter  powers, 
privileges  and  immunities  of  the  constituent  companies'*  is  appli- 
cable to  the  power  to  issue  bonds.^ 

semi-annually.    Coe  v.  Columbus,  P.  &  R.  of  6  per  cent  interest.     The  bonds  to  be 

Co.  (1859),  10  Ohio  St.  372.  given  the  State  for  the  loan  of  the  School 

1  Memphis   &   Little  Rock  Railroad  v.  Fund  were  to  run  ten  years,  and  a  sinking 

Dow  (1887),  120  U.  S.  300.  fund  was  to  be  provided  for  their   pay- 

^  Young  V.  Montgomery  &  Eufaula  R.  nient.     As  issued  they  were  to  run  fifteen 

Co.  (1875),  2  Woods,  614.  years,  and  no  sinking  fund  was  required 

8  Newport    &    Covington    R.     Co.    v.  to  be  set  apart  for  their  payment.     The 

Douglass    (1877),    12    Bush    (Ky.),   673;  court  held  that  these  circumstances  were 

s.  c.  18  Am.  Ry.  Rep.  221.  not  of  the  essence  of  the  contract,  and  that 

In  Campbell   v.   Tex.  &  New  Orleans  the  legislation  authorizing  the  changes  did 

R.   Co.   (1872),   2  Woods,  263,   bonds  of  not  impair  the  obligation  of  the  contract 

a  railroad    company    which,    by   the   an-  contained  in  the  original  first  mortgage, 
thority  of  the  statutes  were  to  bear  6  per  *  Thompson  on  Corp.,  §  365. 

cent  interest,   were  issued  to  bear  8  per  ^  See,  for  example,  Coe  v.  New  Jersey 

cent  interest.      They  were  ordered  to  be  Midland  Ry.  Co.  (1879),  31  N.J.  Eq.  10.5. 
paid  with  a  priority  only  to  the  extent  The    legislature    of    Connecticut    pro- 


22  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  I. 

When  several  years  have  elapsed  since  the  consolidation  of  two 
companies,  and  the  issue  of  bonds  by  the  consolidated  company,  a 
stockholder  will  not  be  permitted,  as  against  bona  fide  holders  of 
such  bonds,  to  raise  the  objection  that  they  are  invalid  for  the 
reason  that  the  consolidation  was  illegal.^ 

§  7.  Validity  of  Bonds.  1.  Miscellaneous  Cases. — An  issue  of 
bonds  in  payment  for  the  construction  of  a  railroad  will  not  be 
invalidated  by  the  fact  that  the  railroad  could  have  been,  or  was, 
perhaps,  built  and  constructed  for  less  than  the  amount  of  the 
bonds  which  were  issued  to  pay  for  it ;  especially  is  this  true  where 
there  is  no  charge  of  fraud  in  the  inception  or  execution  of  the 
contract  for  the  construction  of  the  railroad.^ 

It  is  no  more  competent  for  stockholders  than  for  a  company 
to  question  the  authority  of  contracts  of  consolidation  or  the 
execution  of  mortgages,  after  the  lapse  of  several  years  and  the 
sale  of  bonds  to  bona  fide  purchasers  on  the  faith  of  such 
contracts.^ 

Where  a  railroad  company,  incorporated  in  and  under  the  laws 
of  one  State,  enters  into  a  contract  in  another  State,  which,  by  its 
terms,  is  to  be  performed  in  the  latter  State  and  is  valid  under 
its  laws,  prohibitions  in  the  corporate  charter,  which  would  render 
the  contract  illegal  in  the  State  where  the  corporation  was  organ- 
ized, do  not  render  it  illegal  in  the  other  State ;  their  only  effect 
in  the  other  State  is  as  restrictions  on  the  corporate  power.  Thus, 
although  a  law  of  the  State  where  the  corporation  was  organized 
may  have  positively  forbidden  the  sale  of  its  bonds  at  less  than 
par,  yet  if  the  bonds  are  issued  and  sold  in  another  State,  and  the 
interest  and  principal  are  both  payable  there,  the  courts  of  the 

vided  that,   whenever   a   certain    railroad  new  company  became  possessed  of  all  the 

company  owning  a  road  lying  partly  with-  rights   in    Connecticut    which    had   been 

in  that  State  should  be  consolidated  with  possessed  by  the  old  company,  succeeding 

any  other  company  in  the  State  of  New  to  the  power  possessed  by  the  old  company 

York   in    pursuance   of   the   laws  of   the  in  both  States  to  issue  its  bonds  to  an 

latter    State,    the    new   company    should  amount  necessary  for  completing  its  road, 

have   all   the  rights  within  the  State  of  and  to  mortgage  its  property   and   fran- 

Connecticut  that  were  possessed   by  the  chises  for  their  security.     Mead  v.   New 

old.     In  a  case  involving  the  power  of  the  York  R.  Co.  (187!)),  46  Conn.  199  ;  s.  c.  17 

consolidated  corporation,  the  existence  of  Am.  Ky.  Rep.  367.     As  to  bonds  given  for 

which  liad  lx!en  recognized  by  an  act  sub-  the  purchase  ])rice  of  the  road,  see  Holland 

sequently  passed  by  the  New  York  legis-  v.  Lee,  71  Md.  338  ;  s.  c.  18  Atl.  Rej).  661. 
lature,   it  was  held  tliat  this  act  validated  i  Dimpfel  v.  Ohio  &  M.  Ry.  Co.  (1879), 

and  establislied  the  agreement  under  whicli  9  Biss.  127. 

the   consolidation    was   made,    and    that,  ^  J'armers'  Loan  &  Trust  Co.  v.  Rock- 

wlien  the  legal  existence  of  the  new  cor-  away  Valley  R.  Co.  et  al.  (1895),  69  Fed. 

poration  in  the  State  of  New  York  became  Rep.  9. 

thus  established,  it  satisfied  the  recpiire-  '  Dimpfel  r.  Ohio  &M.  Ry.  Co.  (1879), 

ments  of   the  Connecticut   act,    and   the  9  Biss.  127. 


§  7.]  NATURE   AND   ISSUE   OP   BONDS.  23 

latter  State  in  passing  upon  the  rights  of  a  bona  fide  holder  of 
the  bonds  will  test  the  validity  of  the  issue  by  the  local  law.^ 

A  foreclosure  sale,  in  proceedings  instituted  by  the  holders  of 
railroad  bonds,  in  a  State  where  such  bonds  are  valid,  will  be 
treated  as  null  and  void  in  the  courts  of  another  State  in  which 
their  issue  is  unconstitutional  and  contrary  to  public  policy.  In 
such  a  case  a  decree  in  the  first  State  is  not  binding  upon  the 
courts  of  the  second,  and  the  sale  will  be  ineffective  to  pass  the 
title  to  that  portion  of  the  corporate  property  which  is  situated 
in  the  latter.^ 

But  such  a  sale  will  be  recognized  by  the  second  court,  if  a  part 
of  the  bonds  are  valid,  for  the  invalidity  of  the  remainder  cannot 
then  affect  the  validity  of  the  foreclosure  proceedings.^ 

Bonds  executed  in  proper  form  and  according  to  legal  require- 
ments for  sale  by  a  railroad  company  have  no  validity  until 
delivered  by  the  company.* 

In  Sickles  v.  Richardson  the  court  held  that  bonds  never 
delivered  in  the  course  of  business,  and  levied  upon  and  sold  to 
satisfy  a  judgment,  were  invalid ;  that  no  title  passed  by  the  sale 
to  the  purchaser.  It  was  held,  however,  that  bonds  of  the  same 
class  pledged  for  advances  made  were  valid  bonds,  as  there  had 
been  in  such  a  case  a  delivery ;  further,  the  pledgee,  though  a 
purchaser  of  the  bonds,  as  claimed  by  other  bondholders  at  a 
sale  under  execution,  had  at  least  a  title  which  would  require  the 
company  to  redeem  his  bond  by  payment  of  the  sums  for  which 
they  were  pledged,  in  order  to  divest  his  title. 

The  Supreme  Court  of  Illinois  have  sustained  the  validity  of 
bonds  issued  and  sold  by  a  railroad  company,  where  the  proceeds 
of  the  sale  were  used  in  the  legitimate  construction  of  its  road,  as 
not  in  contravention  of  the  constitutional  provision  of  that  State 
as  to  what  bonds  should  be  issued  for. 

The  court  held  that  this  provision  was  never  intended  to  limit 
the  issue  of  bonds  by  a  railroad  company  to  such  only  as  would 
be  in  payment  for  an  existing  obligation  for  money,  labor,  and 

1  Ellsworth  V.  St.  Louis,  AltoD,  &  the  "increase  of  indebtedness"  without 
Terra  Haute  R.  Co.  (1885),  98  N.  Y.  553;  the  consent  of  the  stockholders  (act  of 
Bank  of  Ashlaud  v.  Jones,  16  Ohio  St.     April  18,  1874). 

145.  3  Rothschild  v.  Rochester  R.  Co.  (1887), 

2  Appeal  of  State  Line  R.  Co.  (1886),     1  Ry.  &  Corp.  L.  J.  321. 

1  Ry.  &  Corp.  L.  J.  139  [Penn.  Common  «  Sickles  v.  Richardson  (1881),  23 
Pleas  ;  case  affirmed  on  appeal  by  the  Hun,  559.  See  also  Coddington  v.  Gil- 
Supreme  Court  without  discussion].  The  bert  (1858),  17  N.  Y.  489;  Cunningham  v. 
constitutional  provision  infringed  by  the  Penn.,  Slatington,  &  N.  E.  R.  Co.,  11 
issue  of  these  bonds  was  that  relating  to  N.  Y.  St.  Rep.  663. 


24 


RAILWAY   BONDS   AND    MORTGAGES. 


[chap.  I. 


property  actually  received  and  appraised  for  the  purposes  of  the 
companj.^ 

Bonds  taken  as  a  bonus  on  stock  subscriptions  by  directors  of  a 
company,  in  their  own  hands  or  the  hands  of  others,  or  pledgees, 
have  been  held  not  to  be  valid  claims  on  a  fund  for  distribution 
after  a  foreclosure  sale.^ 

Bonds  of  a  railroad  company  are  not  rendered  void  because  of 
being  secured  by  a  mortgage  which  the  company  may  have  had 
no  authority  to  execute,  neither  does  the  illegality  of  the  rate  of 
interest  avoid  a  bond.  It  is  good  for  the  sum  actually  loaned 
with  the  legal  rate  of  interest.^ 

All  bonds  issued  by  railroad  companies  except  for  the  purposes 
and  in  the  mode  authorized  by  the  statute  of  Massachusetts  upon 
that  subject  have  been  held  to  be  void.* 

A  railroad  company  has  been  held  not  liable  even  to  a  bona  fide 
purchaser  of  a  stolen  bond  which  lacked  the  seal  of  the  company 
and  a  certificate  of  the  trustees  when  stolen,  but  to  which  a  seal 
and  certificate  had  been  affixed  and  inserted  which  were  shown 
to  be  forged.^ 


1  Peoria  &  Springfield  R.  Co.  v.  Thomp- 
son (1882),  103  111.  117;  s.  c.  7  Am.  & 
Eng.  R.  R.  Cas.  101.  As  to  validity  of 
bonds  not  being  affected  by  conditions 
precedent  not  having  been  substantively 
fulfilled,  see  Corp.  of  Quebec  v.  Quebec  C. 
Ry.  Co.,  10  Can.  S.  C.  Rep.  563;  Bickford 
V.  G.  J.  Ry.  Co.,  1  Can.  S.  C.  Rep.  696. 
See  Union  Trust  Co.  v.  Nevada  &  0.  R. 
Co.,  10  Sawy.  122. 

2  Duncomb  v.  New  York,  Housa tonic, 
&  Northern  R.  Co.  (1881),  84  N.  Y.  190  ; 
s.  c.  4  Am.  &  Eng.  R.  R.  Cas.  293. 

In  McKee  v.  Grand  Rapids  &  Reed's 
Lake  Street  Ry.  Co.  (1879),  41  Mich.  274, 
bonds  meant  only  to  be  sold  in  open  mar- 
ket which  had  been  turned  over  to  a 
mortgagee  (who  knew  they  had  never 
been  sold),  as  collateral  security  for  the 
private  debts  of  the  treasurer  of  the  com- 
pany, who  had  a  controlling  interest  in  its 
property,  without  authority  from,  or  rati- 
fication by,  the  corporation.  As  against 
a  judgment  creditor  of  the  corporation, 
tliese  l)onils  were  ludd  not  to  have  been 
prof)erly  issued  ami  to  be  invalid,  so  far 
as  to  prevent  giving  the  mortgagee  pri- 
ority of  lien  over  the  levy  of  the  execution 
of  the  judgment  creditor. 

•  Philade]|)liia    &    Siiiiliury    R.    Co.  v. 


Lewis  (1859),  33  Pa.  St.  33  ;  Wood 
V.  Whelen  (1879),  93  111.  153  ;  Beecher  v. 
Marquette  &  Poe  Rolling  Mill  Co.  (1881), 
45  Mich.  103. 

In  Jesup  V.  City  Bank  of  Racine  (1861), 
14  Wis.  331,  bonds  and  mortgage  were 
held  valid  except  as  to  a  provision  "that 
the  principal  sum  should  become  due 
at  the  option  of  the  holder  upon  default  in 
the  payment  of  interest,"  inserted  in  the 
bonds  and  mortgage  by  the  president  of 
the  company,  without  corporate  authorit}', 
upon  the  rule  that  where  an  agent  adds 
something  beyond  his  authority,  the  ex- 
cess will  not  invalidate  that  which  may 
well  stand  without  it. 

If  there  was  want  of  authority  origi- 
nally to  issue  these  bonds  with  a  provision 
changing  the  time  of  maturity  from  fifteen 
years  to  the  option  of  the  holders  upon 
default,  and  the  board  of  directors  had 
ratified  it,  that  would  have  rendered  them 
valid.  But  in  this  case  the  i)resideut 
may  have  relied  on  his  general  authority 
as  agent  to  dispose  of  all  securities,  and, 
if  so,  that  would  have  been  no  ratification. 

4  Commonwealth  v.  Smith  (1865),  10 
Allen,  448.      (See  above,  §  4  (a).) 

6  Mnas  V.  Missouri,  K.  &  J.  Ry.  Co. 
(1880),  83  N.  Y.  223  ;  s.  c.  3  Am.  &  En^^. 


§  7.]  NATURE   AND   ISSUE   OF   BONDS.  25 

(2)  Holders'  Rights  though  Bonds  are  void.  —  The  holders  of 
bonds  which  had  been  declared  void  in  this  case  on  account  of 
the  construction  company  to  which  they  were  issued  having 
some  of  the  directors  of  the  railroad  company  as  members  of 
its  board  of  directors,  were  held  entitled  to  a  decree  of  payment 
of  the  sums  actually  expended  for  construction  under  this 
contract.-' 

The  invalidity  of  some  of  the  bonds  issued  by  a  railroad  com- 
pany secured  by  a  mortgage  cannot  affect  the  validity  of  the 
mortgage  or  the  validity  of  proceedings  for  its  foreclosure.^ 

(3)  Burden  to  show  Validity  or  Invalidity. — Where  railroad 
bonds  are  valid  on  their  face,  the  burden  is  not  upon  the  holder 
to  show  that  the  provisions  of  law  authorizing  their  issue  have 
been  complied  with,  but  upon  the  party  claiming  them  to  be 
invalid  to  show  their  invalidity.  In  the  case  cited  there  was  no 
ground  for  claiming  that  the  bonds  were  not  issued  in  accordance 
with  the  charter,  and  without  regard  to  the  amount  expended  and 
the  sworn  statement  of  the  engineer.  There  was  no  proof  on  the 
trial  that  there  was  any  failure  in  this  respect ;  the  plaintiff  was 
held  not  bound  to  prove  that  these  provisions  of  the  law  were 
complied  with.^ 

Nor  may  it  be  shown  against  hona  fide  holders  of  bonds  issued 
by  a  railroad  corporation  that  restrictions  imposed  by  its  charter 
upon  the  power  to  negotiate  its  bonds  were  violated.  Such  cor- 
porations having  general  power  to  issue  bonds,  persons  dealing 
therein,  in  the  absence  of  notice,  have  the  right  to  assume  that 

R.  R.  Cas.  30,  affirming   Same  v.  Same  Co.  (1887),  1  Ry.  &  Corp.  L.  J.  321,  re- 

(1877),  11  Hun,  8.     See  Wylie  i;.  Missouri  versing    appeal    of    State    Line    R.     Co. 

Pac.  R.  Co.,   41  Fed.  Rep.  623  ;  s.  c.  43  (1880),  1  Ry.  &  Corp.  L.  J.  139.     See  as 

Am.  &  Eng.  R.  R.  Cas.  431.  to  validity  of  bonds  sold  to  a  syndicate  of 

See  as  to  the  effect  of  numbers  of  bonds  which  the  directors  of  the  company  were 

in  determining  the  validity  or  invalidity  members  under  Ohio  statutes,  Union  Trust 

of  the  bonds  where  there  is  an  over-issue.  Co.  v.  New  York  C.  &  S.  L.  R.  Co.  (1886), 

State  ex  rel.  Plock  v.  Cobb  (1879),  64  Ala.  1  Ry.  &  Corp.  L.  J.  50. 
127;  s.  c.  7  Am.  &  Eng.  R.  R.  Cas.  147.  ^  Thomas  v.  Brownville,  Fort  Kearney, 

See  as  to  validity  of  bonds  issued  by  a  &  Pac.  R.  Co.  (1883),  109  U.  S.  522.     On 

consolidated    railroad    company    for    the  the  question  whether  money  received  by  a 

bonds  of  its  constituent  companies,  Tay-  company  on  a  pledge  of  void  bonds  must 

lor  V.  Atl.  &  Great  Western  R.  Co.  (1878),  be  restored,  see  Andrews  v.  National  Co., 

57  How.  Pr.  26.  See  as  to  validity  of  bonds,  76  Fed.  Rep.  176. 

Rorer  on  Railroads,  252 ;  Redfield  Am.  Ry.  ^  Graham  i'.  Boston,  Hartford,  &  Erie  R. 

Cases,  588.     See  as  to  the  constitutional  Co.  (1886),  118  U.  S.  61. 
provisions  of  Pennsylvania  requiring  the  ^  Nichols  v.    Mase  (1883),  94    N.   Y. 

assent   of    stockholders   not    invalidating  160  ;  s.  c.  17  Am.  &  Eng.  R.  R.  Cas.  230, 

bonds  issued  as  collateral  security  for  a  affirming  Same  v.  Same    (1881),  25  Hun, 

prior  indebtedness  of  a  railroad  company,  640  ;  see  also  Heinshiemer  v.  Dayton  R. 

Rothschild  v.  Rochester  &  Pittsburg  E.  Co.  (188S),  3  Ry.  &  Corp.  L.  J.  268. 


26  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  I. 

all  restrictions  upon  the  power  to  issue  have  been  complied 
with.i 

(4)  Estoppel.  —  Junior  mortgagees  and  all  parties  claiming 
under  them  are  estopped  from  questioning  the  validity  of  bonds 
issued  under  a  former  mortgage,  where  the  subsequent  mortgage 
is  made  in  express  terms  subject  to  the  bonds  secured  by  this 
former  mortgage.  The  company  can  thus  waive  objections  to 
their  validity .^ 

So,  general  creditors  of  a  railroad  company  who  had  given  credit, 
after  notice  of  a  prior  issue  of  bonds,  and  execution  of  a  mortgage, 
have  been  held  to  be  in  the  position  of  the  company  and  estopped 
to  deny  the  validity  of  the  bonds  and  mortgage,  on  the  ground 
that  the  company  had  issued  bonds  to  an  amount  more  than 
double  the  amount  of  paid-up  stock,  —  an  act  which  was  ultra 
vires,  it  being  positively  prohibited  by  the  laws  of  the  State.^ 

Upon  a  contention  that,  as  the  bonds  of  a  railroad  company 
which  were  to  be  exchanged  for  State  bonds  were  fraudulently 
issued  by  the  officers  of  the  company,  and  the  issue  of  the  State 
bonds  was  unconstitutional,  the  bondholders  could  therefore 
receive  from  the  company  only  the  amount  they  paid  for  them, 
the  Supreme  Court  of  the  United  States  held  that  the  bonds, 
though  void  as  to  the  State,  were  valid  as  to  the  company 
"which  sold  them ;  that  having  been  put  upon  the  market  as 
valid  bonds,  the  companies  were  estopped  from  setting  up  their 
unconstitutionality.* 

1  Ellsworth  V.  St.  Louis,  Alton,  &  Terre  *  Railroad  Companies  v.  Schutte  (1880), 
Haute    R.    Co.    (1888),    98   N.    Y.    553,     103  U.  S.  118,  144. 

affirming  Same  r.  Same  (1884),  33  Hun,  7.  In   Kelly  v.  Trustees,  etc.  (1877),   58 

2  Bronson  et  al.  v.  La  Crosse  &  Mil-  Ala.  489  ;  s.  c.  21  Am.  Ry.  Rep.  138,  it 
waukee  R.  Co.  et  al.  (1863),  2  Wall.  283.     was   held   that   although   railroad    bonds 

8  Fidelity,  etc.  Co.  v.  West.  Penn.,  etc.  were  indorsed  by  the  State  in  contraven- 
R.  Co.  (1891),  138  Pa.  St.  494  ;  s.  c.  21  tion  and  fraud  of  the  internal  improve- 
All.  Rep.  21.  See  also  Reed's  Appeal  ment  law  of  the  State,  and  the  indorse- 
(1888),  122  Pa.  St.  565  ;  s.  c.  16  Atl.  ment,  by  reason  thereof,  was  void,  the 
Rep.  100  ;  Graham  v.  Railroad  Company  corporation  would  not  be  relieved  of  its 
(1880),  102  U.  S.  148.  liability    for   such   bonds   which    it    had 

As  to  estoppel  of  a  company  to  claim  secured  by  a  deed  of  trust  ujjon  its  prop- 
that  its  bonds  were  invalid  as  having  been  erty.  In  Tyrell  v.  Cairo  &  St.  Louis  R. 
issued  in  contravention  of  a  statute  limit-  Co.  (1879),  7  Mo.  Ap.  294,  the  defence 
ing  th(!m  in  amount  to  the  amount  of  of  ultra  vires  was  held  not  to  be  available 
its  capital  stock,  see  Fanners'  Loan  &  against  holders  for  value  of  negotiable 
Trust  Co.  et  al.  v.  Toledo,  A.  A.  &  N.  M.  bonds  issued  by  the  directors  of  the  cor- 
Ry.  Co.  et  al.  (1895),  67  Fed.  Rep.  49,  ])oration  where  the  stocikholders  failed  to 
which  cites  to  the  same  point  Allis  v.  take  any  steps  to  re])udiate  the  action  of 
Jones,  45  Fed.  Hcj).  148  ;  Wood  v.  Water-  the  directors,  and,  to  the  contrary,  allowed 
works  Co.,  44  Fed.  Reji.  146 ;  Water  Com-  the  bonds  to  be  sold,  and  availed  tliem- 
pany  v.  DeKay,  36  N.  J.  Eq.  648.  selves  of  the  benefit  thereof.     In  Chicago 


§  7.]  NATURE  AND   ISSUE   OP   BONDS.  27 

Even  if  an  issue  of  bonds  be  entirely  void,  as  being  in  violation 
of  an  express  statutory  provision  limiting  the  amount  of  the  issue 
to  double  the  amount  of  capital  stock  paid  in,  general  creditors 
who  give  credit  to  the  company  with  full  notice  of  the  execution 
of  the  mortgage  and  the  negotiation  of  the  bonds  must  be  re- 
garded as  having  elected  to  do  so  subject  to  the  earlier  lien,  and 
will,  therefore,  be  postponed  to  the  bondholders  in  the  distribu- 
tion of  the  proceeds  to  the  extent  of  the  money  actually  received 
by  the  company  from  the  sale  of  the  bonds. ^ 

The  holder  of  bonds  is  not  estopped  to  set  up  the  invalidity  or 
want  of  consideration  of  bonds  other  than  those  he  holds.^ 

(5)  Lack  of  Certification  of  Bonds.  —  The  point  has  been  taken 
that  if  bonds  do  not  have  the  certificate  of  the  trustee  to  their 
genuineness,  as  required  by  the  mortgage,  they  are  void.  But 
tills  was  connected  with  notice  of  their  invalidity,  and  without 
having  parted  with  value  for  them.^ 

Bonds  of  a  railroad  company  issued  without  any  authority  ex- 
isting in  the  officers  who  issued  them,  by  virtue  of  a  specific  vote 
previously  passed  or  existing  at  the  time  of  their  issue,  in  pay- 
ment of  and  allowed  toward  liabilities  of  the  company,  were 
held,  by  the  Maine  Supreme  Judicial  Court,  cured  of  the  effects 
of  this  irregularity  by  the  company's  subsequent  action  approving 
and  ratifying  the  unauthorized  acts  of  its  officers.* 

(6)  Ratification  of  Bonds.  —  Certain  bonds  of  a  railroad  com- 
pany were  held  to  be  valid  except  as  to  a  provision  inserted  with- 

D.   &  V.  Ry.   Co.   et  al.  v.   Loevventhal  closure  suit  on  the  ground  that  some  of 

(1879),  93  111.  433,  it  was  held  that  where  the  bonds  were  without  consideration  be- 

the  proof  clearly  showed  that  the  railway  cause  the  railroad  could  have  been,  or  per- 

conipany  never  received  any  consideration  haps  was,  built  and  constructed  for  less 

for  bonds  issued  by  it  to  the  payee,  a  con-  than  the  amount  of  the  bonds  issued  ;  but 

tractor,  which  bonds  were  secured  by  a  he  can  raise  the  question  as  to  whether 

mortgage  on  its  road,  this  would  cousti-  any  part  of  the  bond   issue  was   fraudu- 

tute  a  good  defence  against  the  payee  or  lent  before  the  master  on  the  distribution, 

person  to  whom  delivered,  and  as  against  Fanners'  Loan  &  Trust  Co.  v.  Rockaway 

a   bo7ia  fide   purchaser  when   seeking   to  Valley  R.  Co.  (1895),  69  Fed.  Rep.  7,  11. 

foreclose    the    mortgage    in    a    court    of  See    also    Farmers'    Loan    &    Trust    Co. 

equity.     How  far  binding  on  company  in  et  al.  v.  Toledo,  A.  A.   &  N.  M.  Ry.  Co, 

hands  of  bona  fide  purchasers,   see  Heb-  et  al.  (1895),  67  Fed.  Rep.  49,  where  the 

berd  v.  Southwestern  Land  &  Cattle  Co.  decree  of  foreclosure   expressly   provided 

(N.  J.  Eq.),  36  Atl.  Rep.  122.  that    the    bonds    might    be    attached    as 

1  Fidelity,  etc.  Co.  v.  Western  Penn.,  fraudulent  on  the  distribution. 

etc.  R.  Co.  (1891),  138  Pa.  St.  494  ;  s.  c.  8  Chicago,  St.  Louis,  &  New  Orleans 

21  Atl.  Rep.  21.  R.   Co.    v.  Macomb  (1880),  2  Fed.   Rep. 

2  Farmers'  &  Merchants'  Bank  v.  West     18,  Choate,  D.  J. 

Electric  Ry.  &  Light  Co.  (Tex.,  1896),  36  <  Mason  v.  York  &  Cumberland  R.  Co. 

S.  W.  Rep.  131.  (1861),  52  Me.  82. 

A  bondholder  cannot  defend  a  fore- 


28  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  I. 

out  authority.  If  the  board  of  directors  had  subsequently 
ratified  the  bonds  as  issued,  that  would  have  rendered  them  valid 
as  to  all  their  provisions.^ 

In  so  far  as  the  validity  of  the  bonds  is  dependent  upon  the 
regularity  of  the  proceedings  incident  to  the  issue  of  bonds,  the 
case  is  obviously  one  where  the  principle  omnis  ratihabitio  retro- 
trahitur,  et  mandato  priori  cequiparatur  is  applicable.  Thus  any 
invalidity  arising  from  a  want  of  original  authority  in  the  direct- 
ors is  cured  by  the  subsequent  recognition  of  their  binding  effect 
at  annual  meetings  of  the  company,  and  its  payment  of  the  inter- 
est upon  the  indebtedness.^ 

§  8.  Objections  to  the  Validity  of  the  Bonds  on  the  Ground  of  the 
Relations  of  the  Purchasers  to  the  Corporation.  —  A  sale  of  bonds  to 
a  director  of  the  company  issuing  them  cannot  be  impeached  by 
the  corporation,  where  the  director  has  paid  full  value  for  the 
bonds,  and  the  money  has  been  received  and  appropriated  to 
corporate  uses,  with  the  knowledge  and  approval  of  the  stock- 
holders.^ 

Neither  will  bonds  issued  by  a  railroad  company  to  a  construction 
company  be  rendered  void  by  the  fact  that  all  the  stockholders  of 
the  one  company  were  also  stockholders  of  the  other,  or  by  the 
fact  that  the  two  corporations  have  substantially  the  same  directors 
who  were  the  active  agents  in  negotiating  the  contract.* 

So  where  a  contract  is  made  whereby  a  person  controlling  the 
board  of  directors  is  to  receive  in  bonds  the  full  value  of  prop- 
erty conveyed  to  a  corporation,  such  bonds  being  secured  by  a 
mortgage  on  the  same  property,  and  also  a  large  amount  of  the 
stock  of  the  company  for  which  no  consideration  is  received  by 

1  Jesup  V.  City  Bank  of  Racine  (1861),  lation  of  the  law,  if  it  has  inured  to  the 
14  Wis.  331.  See  Stainback  v.  Junk  benefit  of  the  railroad  company,  and  was 
Bros.'  Lumber  &  Mfg.  Co.  (Tenn.,  1897),  the  best  avuilalJe  method  for  securing  the 
39  S.  W.  Reji.  530;  Quebec  v.  Quebec  C.  construction  of  tlie  road,  and  there  was  no 
Ry.  Co.,  10  Sup.  Ct.  Rep.  (Can.)  563.  palpable  over- valuation  of  the  woYk  per- 

2  Farmers'  Loan  &  Truht  Co.  v.  Toledo,  formed  and  moneys  advanced,  nor  under- 
A.  A.  &  N.  W.  R.  Co.  (1895),  67  Fed.  valuation  of  the  stock  and  bonds  received 
Rep.  49  ;  Mason  v.  York  &  Cumberland  in  ]iaymcnt."  Compare  Van  Cott  v.  Van 
R.  Co.  (1861),  52  Me.  82.  Brunt  (1880),  82  N.  Y.  535  ;  Barr  v.  New 

8  Union  Loan  &  Trust  Co.  v.  Southern  York,   L.  E.   &  W.   R.    Co.    (1891),   125 

Cal.  Motor  Road  Co.  (1892),  51  Fed.  Rep.  N.  Y.  263  ;  s.  c.  26  N.  E.  Rep.  145,  re- 

840.  ferred  to  with  approval  by  the  court.     See 

<  Coe  V.   East  &  West  R.  Co.  of  Ala.  Bufhvlo  L.  T.  &  S.  D.  Co.  v.  Medina  Gas 

(1892),  52  Fed.   Rep.   531,  citing  several  &  K.  L.  Co.,  42  N.  Y.  Supp.  781,  where 

deriisions  of  the  U.  S.  Supreme  Court.  bonds  were  h('ld  valid  though  negotiated 

The   court   said  tliat  such  a  contract  by  an  officer  other  than  the  one  designated 

".should  not  be  .set  aside  on  technicalities,  in  the  resolution  authorizing  them. 
but  only  in  case  of  palpable  intended  vio- 


§§  9,  10.]  NATURE   AND   ISSUE   OF   BONDS.  29 

the  corporation,  the  bonds  issued  in  pursuance  of  the  contract 
will  be  void,  except  as  against  bona  fide  purchasers.^ 

Bonds  given  to  a  director  as  a  mere  bonus  on  his  subscribing 
to  the  stock  are  without  consideration.  The  director,  being  a 
trustee  of  the  company,  has  no  right  to  receive  the  bonds,  and  in 
his  hands  they  are  void.^ 

Where  a  board  of  directors  pass  a  resolution  reciting  authority  in 
the  president  and  secretary  to  issue  bonds,  the  receipt  of  a  bid  for 
the  bonds  from  them  as  individuals,  and  the  acceptance  of  the  bid, 
and  the  bonds  are  then  delivered  to  a  person  as  security  for  a  claim 
against  the  president  and  secretary  individually,  such  person  is  not 
a  bona  fide  purchaser  acting  in  reliance  on  such  resolution.^ 

§  9.  Informality  of  Issue,  -when  this  is  an  Objection  of  "which 
only  Corporations  can  take  Advantage.'*  —  Although  a  statute  de- 
clares that  the  proceedings  at  a  meeting  of  the  stockholders  shall 
not  be  "  of  any  force  or  effect "  unless  certain  formalities  are 
observed  in  advertising  the  meeting,  it  is  only  the  stockholders 
themselves  who  can  raise  any  question  as  to  the  validity  of  bonds 
issued  at  a  meeting  held  without  the  exact  notice  required  by  the 
statute.  The  right  of  a  holder  of  the  bonds  cannot  be  contested 
by  the  grantee  of  the  parties  who  purchased  the  corporate  prop- 
erty at  an  execution  sale.^ 

§  10.  When  the  Company  is  estopped  to  dispute  the  Validity  of 
Bonds.  —  It  is  a  familiar  rule  that  a  corporation  cannot  reap  the 
benefit  of  a  loan,  and  then  refuse  to  repay  it  on  the  plea  that  it 
had  no  power  to  borrow  the  money .^ 

1  Central  Trust  Co.  v.  New  York  R.  *  Compare  Chap.  VII. 

Co.  (1886),  18  Abb.  N.  C.  (X.  Y.)  381.  6  Beeclier  v.  Marquette  &  Pac.  Rolling 

2  Duncomby.  New  York  R.  Co.  (1881),     Mill  Co.  (1881),  45  Mich.  103. 

84  N.  Y.  190,  203  ;    4  Am.  &  Eng.  R.  R.  «  North  Hudson  Mut.  B.  &  L.  Assn.  v. 

Cas.  293.  First  Nat.  Bank  (1891),  79  Wis.  31  ;  s.  c. 

3  Germania  Safety  Vault  &  Trust  Co.  47  N.  W.  Rep.  300,  citing  the  following 
V.  Boynton  (1896),  71  Fed.  Rep.  797.  See  cases:  Ohio  &  M.  Ry.  Co.  v.  McCarthy, 
also  Steelman  i'.  Baker,  siqyra,  §  4  (c).  96    U.    S.    258  ;    Whitney   Arms   Co.    v. 

But  where  a  first  issue  of  bonds  is  valid.  Barlow    (1875),    63    N.    Y.    62;    Union 

and   afterwards   such    bonds   become   the  "Water  Co.   v.  Murphy's  Flat  Flume  Co. 

property  of  directors,   who  subsequently  (1863),   22  Cah    620  ;    Sussex  R.    Co.   v. 

become  charged  with  a  knowledge  that  a  M.  &  E.  R.  Co.  (1868),  19  N.  J.  Eq.  13; 

later  issue  of  bonds  was  not  ujjon  a  paid-up  Close  •!;.  Glenwood   Cemetery,   107  U.   S. 

stock  basis,  it  was  held  that  the  first  issue  466  ;  Shrewsbury  Ry.  Co.  v.  London  Ry. 

was  valid,  and  that  in  a  suit  to  have  the  Co.,  16  Beav.  441  ;  Auerbach  v.  Le  Sueur 

mortgage  declared  void  the  bonds  could  Mill  Co.    (1881),  28  ]\linn.  291  ;  Wright 

not  be  taken  from  them  either  as  a  pen-  i".  Hughes  (1889),  119  Ind.  324  ;  Jones  v. 

alty,  or  as  a  contribution  to  the  general  Nat.  Bldg.  Assn.,  94  Pa.  St.  215  ;   Wil- 

dividend  fund  for  the  holders  of  subsequent  liams  v.  Stevens   Point    Lumber   Co.,  72 

issues.     Physick  u.  Baker  (1895),  53  New  Wis.    487;    s.  c.   40   N.    W.   Rep.   154; 

Jersey  Eq.  673;  s.  c.  33  Atl.  Rep.  815.  Manuf.    L.   Co.   v.  Conover,  5   Phil.   18. 


30 


RAILWAY   BONDS    AND   MORTGAGES. 


[chap.  I. 


This  rule  operates  for  the  benefit  of  bondholders.  Thus,  where 
all  the  stockholders  agree  to  an  issue  of  bonds,  knowing  that  the 
amount  authorized  is  beyond  that  permitted  by  the  law,  the  cor- 
poration cannot,  after  having  received  and  enjoyed  the  fruits  of 
the  bonds,  assail  their  validity  in  the  hands  of  bona  fide  holders  on 
the  ground  that  the  issue  was  in  excess  of  the  statutory  amount.^ 

A  company  could  not  be  allowed  to  disavow  and  repudiate  its 
own  acts  to  the  injury  of  bona  fide  holders  of  its  bonds  without 
notice,  where  the  trust  deed  and  bonds  had  been  executed  with 
all  the  legal  formalities  required  by  the  company's  charter,  and 
the  bonds  negotiated  in  open  market,  the  proceeds  of  the  sale 
paid  to  it,  and  appropriations  made  by  it  to  pay  the  interest.^ 

Nor  can  such  an  equity  be  set  up 
against  an  equitable  transferee,  whether 
the  security  was  transferable  at  law  or  not, 
if,  by  the  original  conduct  of  the  company 
in  issuing  the  security,  or  by  the  subse- 
quent dealing  with  the  transferee,  he  has 
a  superior  equity.  In  re  Agra  &  Master- 
man's  Bank,  L,  R.  2  Ch.  391;  In  re  Blakely 
Ordnance  Company,  L.  R.  3  Ch.  154;  Dick- 
son V.  Swansea  Vale  and  Neath  &  Breem 
Junction  Ry.  Co.,  L.  R.  4  Q.  B.  44. 

In  the  winding  up  of  a  canal  company 
under  the  English  laws,  the  claims  were 
as  follows :  C.  claimed  as  the  transferee  of 
debentures  for  value  of  Y.,  a  sul>contractor, 
to  whom  the  contractor  had  transferred 
them  for  a  nominal  consideration.  P. 
claimed  on  debentures  deposited  as  se- 
curity of  a  bill  against  the  contractor  due 
Y.,  which  he  had  discounted.  These  de- 
bentures were  not  ti'ansferred  to  P.,  and 
the  transfer  to  Y.  was  not  registered. 

T.  took  a  transfer  of  debentures  from 
Y.  for  a  nominal  consideration,  which  had 
not  been  registered  in  the  name  of  the 
contractor,  but  the  transfer  to  Y.  had  been 
registered,  and  T.  alleged  that  he  gave 
value  to  Y.  C.  had  a  transfer  for  full 
value,  and  registered.  These  debentures 
had  been  authorized  by  a  resolution  passed 
at  a  meeting  of  the  shareholders,  at  which 
an  insufficient  number  were  present.  The 
contractor  to  whom  the  company  issued 
them  was  present  at  the  meeting  and 
knew  that  fact.  Upon  the  principles  just 
stated,  the  court  held  that  C.  had  a  valid 
claim  to  be  ]iaid  up  his  debentures,  and 
that  the  comiiany  was  estopped  from  set- 
ting u]>  the  irregidarity  of  issuing  them. 
They  also  held  that  P.  and  T.  must  be 


Compare  Reed's  App.  (1888),  122  Pa.  St. 
56.5  ;  Fidelity,  etc.  Co.  v.  Western  Penn., 
etc.  R.  Co.  (1891),  138  Pa.  St.  494. 

1  Wood  et  al.  v.  Corry  Waterworks 
Co.  et  al.  (1890),  44  Fed.  Rep.  146. 

2  Harrison  v.  A.  &  E.  R.  Co.  (1878), 
50  Md.  490. 

Where  a  company  have  power  to  issue 
securities,  an  irregularity  in  the  issue  can- 
not be  set  up  against  even  the  oiigiual 
holder  if  he  has  a  right  to  presume  omnia 
rite  acta.  Fountaine  v.  Carmarthen  Ry.  Co., 
L.  R.  5  Eq.  316  ;  Jones  v.  Municipality, 
etc.,  20  N.  B.  78  ;  21  N.  B.  200 ;  In  re  Far- 
linger,  etc.,  16  Out.  Rep.  722  ;  Lewis  v. 
Brady,  17  Ont.  Rep.  377  ;  Township,  etc. 
V.  Toronto  &  N.  Ry.,  17  Grant  Ch.  425; 
Anderson  v.  Gold  Jline  Co.,  1  Australian 
Jurist,  161 ;  In  re  Worcester  Exchange,  3 
De  G.,  M.  &  G.  180  ;  In  re  Tyson's  Reef 
Co.,  3  W.  W.  &  A.  B.  Cas.  at  Law,  162  ; 
G.  T.  Ry.  Co.  V.  Corporation,  etc.,  10  R.  _L. 
612;  Bank  v.  Cheney,  15  Up.  Can.  Q.  B. 
400  ;  Hampshire  Land  Co.,  In  re,  Portsea 
Island  Building  Soc,  Ex  parte  (1896),  2 
Ch.  743  ;  Hill  v.  Manchester  &  Salford 
Waterworks  Co.,  2  B.  &  Ad.  544  ;  In  re 
German  Mining  Co.,  4  De  G.,  M.  &  G.  19; 
In  re  Magdalena  St.  Nav.  Co.,  Johns.  690  ; 
Baker's  C^ase,  1  Dr.  &  Sm.  55  ;  Troup's 
Case,  29  Beav.  353;  Hoare's  Case,  30  Beav. 
225  ;  Pare  v.  Clegg,  29  l^eav.  589  ;  Agar  v. 
Athenseum  Life  Ass.  Soc,  6  W.  R.  277. 

If  suf;h  security  be  legally  transferable, 
such  an  irregularity,  and,  a  fortiori.,  any 
equity  against  the  original  holder,  cannot 
bfi  asserted  by  the  company  against  a  bona 
fide  transferee  for  value  witliout  notice. 
Webb  V.  Commissioners  of  Ileruo  Bay, 
L.  R.  5  Q.  B.  642. 


§  10.]  NATURE   AND   ISSUE   OP   BONDS.  31 

The  principle  by  which  a  company  may,  in  certain  cases,  be 
precluded  from  disputing  its  liability  upon  bonds,  for  the  reason 
that  the  proceeds  have  been  devoted  to  corporate  uses,  operates 
quite  independently  of  the  question  whether  the  bonds  in  the 
given  case  are  negotiable  instruments  or  not.^ 

Nor  can  a  corporation  deny  its  corporate  existence  for  the  pur- 
pose of  escaping  liability  on  bonds  issued  by  it  as  a  corporation. 
As  was  emphatically  said  by  the  court  in  an  Illinois  case :  "  We 
are  not  saying  that  a  corporation  is  estopped  by  its  bonds  and 
mortgage  from  raising  the  question  as  to  whether,  in  making 
them,  it  was  acting  within  its  chartered  powers.  But  we  do  say, 
that  where  a  company  has  issued  its  bonds  and  mortgages  under 
the  circumstances  above  detailed,  the  courts  of  every  civilized 
country  must  hold  it  estopped  from  denying  its  own  corporate 
existence,  for  such  a  defence  is  repugnant  to  every  sentiment  of 
justice  and  good  faith."  ^ 

In  a  case  before  the  Supreme  Court  of  the  United  States  the 
ground  was  taken  that,  as  certain  bonds  of  a  railroad  company,  to  be 
exchanged  for  State  bonds,  were  fraudulently  issued  by  the  officers 
of  the  company,  the  issue  of  the  State  bonds  was  unconstitutional, 
and  the  bondholders  could  therefore  receive  from  the  company 
only  the  amount  they  paid  for  them  ;  but  it  was  held  that  the 
bonds,  thougli  void  as  to  the  State,  were  valid  as  to  the  company 
which  sold  them ;  that,  having  been  put  upon  the  market  as 
valid  bonds,  the  companies  were  estopped  from  setting  up  their 
unconstitutionality.^ 

So  it  has  been  held  in  Alabama  that,  although  railroad  bonds 
were  indorsed  by  the  State,  in  contravention  and  fraud  of  the 
Internal  Improvement  Law  of  that  State,  and  the  indorsement  was 
therefore  void,  the  company  was  nevertheless  liable  on  such  of  the 
bonds  as  it  had  secured  by  a  trust  deed  on  its  property.^ 

treated  as  equitable  transferees  only,  but  the  directors,  and,  to  the  contrary,  allowed 

without  reason  to  suspect  any  irregularity  the  bonds  to  be  sold,  and  availed  theni- 

in    the    issue,    and    that    they    could    be  selves  of  the  benefit  thereof, 
allowed    to   recover   such  a  sum  as  they  ^  Des  Moines  Gas  Co.  v.  West  (1878), 

might  be  able  to  show  to  have  been  bona  50  Iowa,  16.     A  like  ruling  as  to  certifi- 

Jide  advanced  by  them  upon  the  debentures  cates  rei)resenting  dividends  on  preferred 

they  held.    In  re  Romford  Canal  Company  stock   which   the  holder   was   entitled   to 

(1883),  L.   R.  24  Ch.  Div.  85.     See  also  convert  into  bonds  was  made  in  Chaffee  v. 

Bill  V.  Dareuth  R.  Co.,  1  H.  &  N.  305.  Rutland  R.   Co.   (1882),   55  Vt.   110;  16 

In  Tyrell  v.  Cairo  &  St.  Louis  R.  Co.  Am.  &  Eng.  R.  R.  Gas.  408. 
(1879),  7  Mo.  Ap.  294,  the  defence  of  2  j^acine  &  Mississippi  R.  Co.  v.  Farm- 
ultra  vires  was  held  not  to  be  available  ers'  Loan  &  Trust  Co.  (1868),  49  111.  331. 
against  holders  for  value  of  negotiable  ^  Railroad  Companies  v.  Schiitte 
bonds  issued  by  the  directors  of  the  corpo-  (1883),  103  U.  S.  118,  144. 
ration  where  the  stockholders  failed  to  *  Kelly  v.  Trustees,  etc.  (1877),  58 
take  any  steps  to  repudiate  the  action  of  Ala.  489  ;  s.  c.  21  Am.  Ry.  Rep.  138. 


32  RAILWAY    BONDS    AND    MORTGAGES.  [CHAP.  I. 

The  same  principle  of  estoppel  will  be  enforced  against  any  one 
who  sells  and  gives  currency  to  the  bonds.  Thus  a  contractor  to 
whom  bonds  have  been  issued  in  part  payment  for  work  done  by 
him,  and  who  had  thereafter  purchased  the  corporate  property  at 
a  receiver's  sale,  subject  to  all  legal  liens,  and  organized  a  new 
company,  to  which  he  transferred  the  property,  was  held  estopped 
from  alleging  the  invalidity  of  the  bonds  as  a  defence  to  a  fore- 
closure suit  instituted  by  the  holders  of  the  bonds.^ 

§  11.  Bonds  not  void  because  Mortgage  securing  them  is  unau- 
thorized. —  The  bonds  being  the  principal  thing,  and  the  mortgage 
securing  them  the  accessary  merely,  the  fact  that  a  company  has 
exceeded  its  authority  in  executing  the  mortgage  will  not  have  any 
effect  on  the  validity  of  the  bonds.^ 

§  12.  Deferred  Income  Bonds,  Power  to  issue.  —  Whether  a  gen- 
eral authority  to  borrow  money  entitles  a  railroad  company  to  issue 
deferred  bonds  without  any  provision  for  redemption  is  a  question 
as  to  which  there  is  a  direct  conflict  between  two  courts.  By  the 
Federal  Circuit  Court  for  the  Eastern  District  of  Pennsylvania  it 
has  been  held  that  such  an  authority  is  applicable  only  to  such 
methods  of  borrowing  as  fall  within  the  ordinary  sense  of  the 
word,  and  cannot  be  made  to  cover  any  transaction  which  does 
not  embrace  the  essential  feature  of  a  loan ;  viz.,  an  obligation  to 
return  the  property  borrowed.^ 

The  Supreme  Court  of  Pennsylvania,  on  the  other  hand,  has 
ruled,  in  regard  to  the  same  transaction,  that  the  power  to  issue 
irredeemable  bonds  was  one  which  might  be  exercised  without 
any  specific  authority  in  the  company's  charter.* 

1  De  Kay  v.  Yoovhis  (1882),  36  N.  J.  ^  Phila.  &  Read.  R.  Co.'s  App.  (Penn., 
Eq.  37.         ^  1882),  4  Am.  &  Eng.  R.  R.  Cas.  118.     The 

2  Phila.  &  Sunbury  R.  Co.  r.  Lewis  court  considered  that  the  view  taken  in 
(18.^9),  33  Pa.  St.  33.  the  case  just  cited  was  too   narrow,  and 

3  Taylor  v.  Phila.  &  Read.  R.  Co.  that  "while  the  borrowing  of  money  is 
(1881),  7  Fed.  Rep.  386;  s.  c.  3  Am.  &  usually  accompanied  by  a  contract  for  the 
Eng.  R.  R.  Cas.  163.  The  company  in  this  return  of  the  jjrincipal  in  a  stated  time,  it 
case  was  undertaking  to  issue  deferred  is  not  always  nor  necessarily  so."  The 
bonds  on  the  English  j)lan,  which  placed  word  "borrow,"  in  its  broader  sense,  it 
the  bondholders  virtually  in  the  position  was  thought,  simply  implies  a  contract  for 
of  stockholders,  except  as  regards  the  the  use  of  money.  If  a  sum  of  money, 
right  to  vote.  The  issue  was  enjoined  at  repayment  of  which  is  not  to  be  demanded, 
the  suit  of  a  stockholder  on  the  ground  is  voluntarily  advanced,  the  transaction  is 
stated  in  the  text,  the  court  jjointing  out  prcsinnably  entered  into  for  some  benefit 
that  in  England  such  schemes  are  expressly  to  the  lender.  Judge  Mercur  dissented, 
aulliorized  by  act  of  Parliament.  In  the  on  the  ground  that  the  contract,  being 
rejKirter's  note  to  this  case  it  is  suggested  one  which  entitled  a  stockholder  who  ad- 
tliat  the  "  [irefcrred  stock"  cases  present  vanced  $15  to  receive  $50,  was  usurious, 
some  points  of  analogy.  See  Kent  v.  Quick-  and  should,  therefore,  not  be  enforced  by 
silver  Mining  Co.  (187S»),  78  N.  Y.  159.  a  court  of  equity. 


§§  13,  14.]  NATURE    AND  ISSUE   OF   BONDS.  33 

§13.  Validity  of  Pledges  of  Bonds.  —  Railroad  bonds,  bciui^ 
negotiable  securities,  may  be  pledged  like  other  commercial 
papcr.^ 

A  company  empowered  to  issue  bonds  to  pay  for  tlie  construc- 
tion or  operation  of  a  road  may  pledge  its  bonds  to  raise  money 
for  the  discharge  of  a  debt  already  incurred  for  either  of  those 
purposes.^ 

An  office  being  an  essential  adjunct  of  the  business  of  a  rail- 
road company,  a  debt  incurred  for  rent  of  an  office  is  within  this 
principle.^ 

A  claim  of  a  president  of  a  company  for  his  salary,  being  as 
legitimate  as  any  other  claim  for  services,  may  be  secured  by  a 
pledge  of  the  company's  bonds.^ 

Although  a  note  given  by  a  company  for  money  borrowed  from 
a  loan  company  may  be  void,  as  being  in  violation  of  the  statute 
against  unauthorized  banking,  the  loan  itself  and  the  bonds 
pledged  as  a  security  therefor  are  valid  and  enforceable.^ 

A  pledge  of  bonds  to  secure  the  private  debts  of  a  railroad  com- 
pany's treasurer  is  void,  as  against  a  subsequent  judgment  creditor, 
where  the  pledgee  is  aware  of  the  purpose  for  which  he  received 
the  securities,  although  the  pledgor  is  the  virtual  owner  of  the 
road,  and  the  debts  were  incurred  in  building  it.^ 

Where  the  bonds  of  a  corporation  are  issued  on  the  understand- 
ing that  they  are  to  be  sold  for  cash,  but  are  in  fact  pledged  to  a 
creditor  as  collateral  to  secure  corporate  notes  held  by  him,  the 
objection  that  this  disposition  of  them  is  unlawful  is  one  that  is 
open  only  to  the  corporation  or  the  stockliulders.'^ 

§  14.  When  the  Issue  of  Bonds  -will  be  enjoined.^ — It  need 
scarcely  be  said  that  a  stockholder  can  always  procure  an  in- 
junction to  restrain  an  issue  of  bonds  which  is  ultra  vires.- 

A  stockholder  in  one  company  which  is  the  equitable  owner 
of  stock  in  a  second  company  which  is  a  stockholder  in  a  third 
company,  is   a   stranger  to  the    affairs   of   the  third    company, 

1  Morris  Canal  &  Banking  Co.  V.  Fisher  ''  Beecher   v.    Marquette   &   Pac,   etc. 

(18o5),  9  N.  J.  Eq.  667.  Rolling  Mill  Co.  (1881),  45  Mich.  103. 

■■^  Duncomb  17.   New  York,  Housatonic,  8  For  suits  to  annul  bonds,  see  Chap.  II. 

&  Northern  R.  Co.  (1881),  84  N.  Y.  190  ;  »  For  recognitions  of  this  doctrine  see 

.s.    u.   4    Am.    &    Eng.    R.    R.    Cas.    293  Taylor  v.  Phila.  &  Read.  R.  Co.  (1881),  7 

(1881).  Fed.  Rep.  386  ;  s.  c.  3  Am.  &  Eng.  R.  R. 

^  Ibid.  Cas.  163  ;  Fidelity,  etc.  Co.  v.  West  Penn., 

*  Ibid.  etc.  R.  Co.  (1890),  138  Pa.  St.  494;  s.  c. 

^  Ihid.  21  Atl.  Rep.  21.     In  the  second  case  the 

^  McKee   v.   Grand   Rapids   &    Reed's  right   of  the  stockholders  in  such  a  ca.se 

Lake    Street   Ry.    Co.    (1879),    41    Mich,  was   referred    to    as   being    a    matter    of 

274.  course. 


34  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  I. 

and  not  entitled  to  maintain  a  suit  to  enjoin  it  from  issuing 
bonds.^ 

An  issue  of  bonds  will  also  be  restrained  by  injunction  where 
the  court  is  satisfied  that  they  are  about  to  be  issued,  not  for  the 
payment  of  money  actually  borrowed  for  the  purposes  authorized 
by  the  charter,  but  as  a  part  of  a  fraudulent  device  to  increase  the 
stock  .2 

Neither  preferred  nor  common  stockholders  can  complain  of  the 
issue  of  income  bonds  in  payment  of  the  consideration  of  a  con- 
tract shown  to  be  valid,  where  the  interest  payable  tliereon  is 
postponed  to  the  dividends  on  the  preferred  stock,  and  the  com- 
mon stockholders  are  given  the  opportunity  of  exchanging  their 
stock  at  par  for  the  bonds  to  the  total  amount  of  the  issue.^ 

§  15.  Suits  to  annul  Bonds.  —  If  corporate  bonds  are  delivered 
for  improper  purposes  by  an  officer  having  charge  of  them,  a  court 
of  equity  may  declare  them  void,  cancel  them,  and  set  aside  a 
deed  of  trust  given  to  secure  their  payment.  A  stockholder  or 
stockholders  combined  may  bring  a  suit  for  this  purpose,  where 
the  corporation  actually  or  virtually  refuses  to  institute  or  prose- 
cute such  a  suit.  If  there  is  a  reasonable  certainty  that  the  cor- 
poration will  refuse,  the  stockholders  may  bring  such  a  suit 
without  first  requesting  the  corporation  to  bring  it.  Such  suits 
may  be  brought  against  the  director  or  directors  who  have  been 
guilty  of  malversation  ;  but  it  is  absolutely  necessary  that  the  cor- 
poration be  joined  as  a  party,  —  usually  defendant.* 

And  where  no  attempt  has  been  made  to  enforce  the  payment 
of  bonds  thus  wrongfully  delivered  for  other  than  corporate  pur- 
poses, a  delay  of  eleven  and  a  half  years  by  stockholders  before 
bringing  such  a  suit  has  been  held  not  to  constitute  a  bar  to  the 
relief  sought.^ 

The  mei-e  fact  that  stockholders  to  whom  bonds  are  issued  have 
paid  no  consideration  for  them  will  not  entitle  the  holder  of  senior 
bonds  not  yet  due  to  have  the  new  issue  cancelled,  there  being  no 
averment  that  the  corporation  is  in  any  way  impairing  or  misusing 
the  mortgaged  propei'ty,  or  that  the  petitioner  has  any  lien  upon, 
claim  to,  or  control  of  the  earnings  of  the  company,  or  that  the 

1  Mayer  v.  Denver,  T.  &  Ft.  W.  II.  issue  of  stock  in  conversion  of  them  might 
Co.  etal.  (188!)),  38  Fed.  Rep.  ]i)7.  also  bo  enjoined. 

2  Belmont  V.  Erie  Ry.  Co.  (1809),  52  •'  Willonghby  v.  Chicap;o  Junction  By. 
Barb.  6:37.  It  was  also  intimated  that  while  &  lJni<m  Stockyards  Co.  (1892),  50  N.  J. 
Buch  bonds  reniained  in  the  liands  of  per-  Kq    6.56  ;  s.  c.  2B  Atl.  Rep.  277. 

sons  alTected  with  notice,  that  they  did  not  *  City  of  Chicaf:to  v.  Cameron  (1887), 

represent   a   hona  fide,   indebtedness,    but     120  111.  447;  s.  c.  11  N.  E.  Rep.  899. 
were  issued  with  a  fraudulent  design,  the  ''  Ibid. 


§  16.]  NATURE   AND   ISSUE   OP   BONDS.  35 

company  has  made  default  in  the  payment  of  the  interest  due 
on  the  bonds  held  by  him  or  his  co-bondhoklcrs.^ 

§  16.  Certificates  of  Indebtedness.^ — ^  In  the  adjustment  of  the 
affairs  of  embarrassed  companies,  a  change  in  the  form  of  their 
obligations  is  sometimes  provided  for  by  the  issue  of  cei'tificates 
of  indebtedness  representing  the  amount  of  the  valid  claims  of  a 
part  or  the  whole  of  the  creditors.  Such  an  issue  may  be  either 
for  the  mere  purpose  of  facilitating  a  funding  scheme,  being  made 
either  as  an  exercise  of  corporate  power  implied  from  the  au- 
thority to  execute  the  original  evidences  of  debt,^  or  by  virtue  of  a 
special  statute.^ 

It  may  be  made  under  a  statute  operating  virtually  as  a 
special  insolvency  act  giving  all  the  creditors  who  elect  to  take 
advantage  of  their  provisions  an  equal  participation  in  the 
security  provided  by  them,  without  regard  to  whether  they  are 
unsecured.^ 

A  railroad  company  which  was  limited  by  its  charter  to  divi- 
dends of  10  per  cent  on  a  capital  stock  which  could  not  be  further 
increased,  had  accumulated  from  its  earnings  over  and  above 
dividends  and  expenses  a  surplus  of  80  per  cent  on  its  capital 
stock.  It  was  concluded  to  use  this  in  constructing  and  equip- 
ping the  road,  purchase  of  property,  etc.,  to  increase  its  traffic. 
For  this,  in  proportion  to  stock  owned  by  each,  the  company 
issued  to  its  stockholders  certificates  which  it  called  "  interest 
certificates,"  which  certified  that  A.  B.,  "  being  the  holder  of 
shares  of  the  capital  stock  of  the  company,  was  entitled  to  $  , 
payable  ratably  with  the  other  like  certificates,  at  the  pleasure  of 
the  company  out  of  its  future  earnings,  with  dividends  thereon  at 
the  same  rates  and  times  as  dividends  should  be  paid  upon  the 
capital  stock  of  the  company."  The  certificates  were  declared 
transferable,  with  an  appointment  in  blank  of  an  attorney  to 
transfer  in  the  form  common  at  the  foot  of  certificates  of  stock. 
The  United  States  revenue  ofhcers  compelled  a  payment  of  an 

1  Bibb  V.  Montgomery  Iron  Works  The  substance  of  this  and  the  last  case  is 
(1893),   101   Ala.  301  ;  s.  c.  13  So.  Rep.     given  in  Chap.  II. 

224.  s  An  example  of  a  statute  of  this  class 

2  These  instruments  are  issued  by  re-  is  the  Massachusetts  act  of  1876,  ch.  236, 
ceivers  or  by  a  company.  The  rights  construed  in  Third  Nat.  Bank  of  Boston 
under  the  former  are  discussed  in  connec-  v.  Eastern  Railroad  Co.  (1877),  122  Mass. 
tion  with  Receivers'  Certificates.  240  ;  Smith  v.   Same    (1878),    124    Mass. 

3  As  in  Skiddyy.  Atlantic  &  Mississippi  154;  Pollock  v.  Same  (1878),  124  Mass. 
K.  Co.  (1879),  3  Hughes,  320,  323,  356.  158;  Elwell  v.  Same    (1878).    124  Mass. 

*  See,  for  example,  the  act  discussed  in  160;  Merchants'  Nat.  Bank  zj.  Same  (1878), 
Gibbes  i;.  Greenville,  etc.  R.  Co.  (1879),  13  124  Mass.  518  ;  Hamor  ct  aJ.  Execrs.,  etc. 
S.  C.  228  ;  4  Am.  &  Eng.  R.  R.  Cas.  459.     v.  Same  (1882),  133  Mass.  315. 


36  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  I. 

income  tax  on  these  certificates,  under  the  internal  revenue  laws 
of  the  federal  government.  In  an  action  by  the  company  to 
recover  the  money  thus  paid  from  the  collector,  the  U.  S.  Supreme 
Court  construed  these  certificates.  It  was  held  that  the  issue  of 
these  certificates  amounted  to  a  "dividend  in  scrip"  within  the 
twenty-second  section  of  the  Internal  Revenue  Act  of  June  30, 
1864,  as  subsequently  amended,  which  enacts  that  "  any  railroad 
company  which  may  have  declared  any  dividend  in  scrij)  or  money 
due  or  payable  to  its  stockholders  as  part  of  the  earnings,  profits, 
income,  or  gains  of  such  company,  carried  to  the  account  of  any 
fund  or  used  for  construction,  shall  be  subject  to  and  pay  a  tax  of 
five  per  centum  on  the  amount  of  such  dividends  or  profits,  when- 
ever and  wherever  the  same  shall  be  payable;"  and  which  author- 
ized the  company  making  such  dividend  to  withhold  the  5  per 
cent  tax.i 

1.  Refunding  Bonds. — An  embarrassed  railroad  company, 
being  unable  to  meet  its  bonded  obligations,  resorted  to  a  plan 
of  funding  the  old  indebtedness  in  new  bonds  :  for  amounts  under 
81,000  it  issued  to  the  holders  of  the  original  bonds  certificates  of 
indebtedness  ;  it  also  issued  certificates  of  indebtedness  in  the 
fractional  amounts  for  coupons  past  due,  not  requiring  those  who 
received  them  to  waive  the  mortgage  lien  nor  to  accept  the  last- 
mentioned  certificates  as  payment  of  the  coupons  for  interest  past 
due.  It  was  held  that  these  certificates  were  a  substitution  for 
the  old  obligations,  and  not  a  novation  of  the  contract,  and  that 

1  Bailey  v.  Railroad  Company  (1874),  the  company  should  be  authorized  to  in- 

22  "Wall.  604  ;  s.  c.  11  Am.  Ry.  Rep.  121.  crease  their  capital  to  an  amount  sufficient 

Referring  to  these  "  interest  certificates,"  for  the  purpose,  and  that  they  should  Iiave 

in   the   opinion    rendered  by  Mr.   Justice  a  pro  rata   share   in  the   distribution    of 

Clilford,  it  was  said  :  "  Such  a  paper,  tiiere-  whatever  assets  may  remain  at  the  dissolu- 

fore,  by  whatever  name  it  may  be  called,  tion  of  the  company."      Again  :  "  Corpo- 

is,  upon  its  face,  evidence  for  each  stock-  ration    bonds   are   the    representatives   of 

holder,  to  persons  with  whom  he  may  have  money,  because  they  are  issued  for  sale  in 

dealings,  of  the  amount  of  the  ])revious  negotiable  form;  but  ceititicates  of  stock 

net  earnings  of  the  company  ;  that  such  are  not  securities  for  money,  nor  are  they 

net  earnings  to  the  amount  specified   have  negotiable  instruments  in  the  strict  com- 

been  expended  in  constructing  and  equip-  mercial  sense.      Like  dividends  in  scrip, 

ping  the  railroad  and  in  the  purchase  of  they  are  simply  muniments  of  and  evidence 

real  estate  and  other  properties  api)ertain-  of  the  holdei''s  title  to  a  described  share  or 

ing  to  the  same,  and  that  the  holders  of  interest  in  the  property  and  franchises  of 

the  certificates  will  be  entitled  to  dividends  the  corporation  ;  and  the  dividend  in  scrij) 

wliencver   dividends    arc    paid    u])on    the  evidences  the  same  extent  of  interest  in 

oaf  >ital  stock."   Again:  "  Bona,  fide  \\o\f\n-i>,  such  ])roperty  and  franchise  as  the  dividend 

of  the  certificates  might  demand  that  the  of  stock,  except  that  it  is  the  right  of  the 

certificates  .sliould  lie  ])aid  out  of  the  future  conqtany  to  jiay  the  same  out  of  their  future 

earnings  of  the   company,  or    that    they  earnings,  and  that  the  dividend  in   .scrip 

should  be  converted  into  stock  whenever  confers  no  right  to  vote." 


§  16.]  NATURE   AND    ISSUE   OP    BONDS.  o" 

they  retained  the  lien  on  the  properties  which  the  original  obliga- 
tions were  entitled  to.^ 

2.  For  Coupons  unpaid. —  So  the  Supreme  Court  of  South  Caro- 
lina held  that  certificates  of  indebtedness  issued  by  a  company 
under  authority  of  statute  for  coupons  for  interest  due  and 
unpaid  on  its  bonds,  which  were  secured  by  a  lien  under  a  certain 
statute  which  was  extended  by  the  statute  authorizing  the  issue 
of  these  certificates  to  cover  them,  were  but  a  substitution  and 
not  a  payment,  and  therefore  retained  the  original  lien  on  the 
property  .2 

3.  To  preferred  Stockholders  — '"'' Scrip  Dividend^ — A  Ver- 
mont railroad  company  was  authorized  to  issue  preferred  stock  with 
the  lien  of  a  mortgage.  Instead  of  paying  dividends  which  were 
guaranteed  upon  such  stock,  it  issued  to  the  holders  of  the  same, 
certificates  of  "  scrip  dividends,"  some  of  which  on  their  face  in 
express  terms  showing  their  convertibility  into  any  mortgage 
bonds  the  company  might  issue,  others  not  showing  their  con- 
vertibility ;  but  in  the  case  of  the  latter  the  ofhcials  of  the  com- 
pany represented  to  purchasers  of  the  same  that  they  were 
convertible  by  action  of  the  stockholders.  One  contention  in 
the  case  involving  these  certificates  was  that  the  holders  were 
creditors  of  the  company  and  not  stockholders.  As  between 
the  holders  and  creditors  for  floating  indebtedness,  for  instance, 
the  court  held  the  holders  of  the  certificates  not  creditors, 
but  stockholders,  in  effect,  and  that  their  right  of  payment 
would  be  subordinate  to  that  of  the  owners  of  the  floating  in- 
debtedness. As  between  the  company  and  the  holders  of  these 
certificates  the  latter  were  held  to  have  the  right  to  convert  into 
bonds,  and  if  the  company  had  not  so  converted  them  or  refused 
to  do  it,  the  holders  had  a  right  of  action,  —  each  holder  in  a  suit 
in  his  own  name  for  money  against  the  company,  on  his  certifi- 
cates ;  and,  under  the  circumstances  of  this  case,  the  company 
was  estopped  from  denying  its  power  to  issue  such  certificates. 

As  to  the  consideration  for  them  the  court  said :  — 

"  The  right  to  dividends  of  7  per  cent  existed  under  the  charter 

when  there   should  be  funds  applicable.     As  before  shown,  this 

is  a  continuing  right.     The  company  issued  the  certificates  in 

settlement. 

*'  The  shareholder  took  them  in  settlement.     The  votes  were 

in  effect   to   pay  the  dividends  in  this  form.      The  certificates 

^  Ski<1(ly    V.    Atlantic,    Miss.    &   Ohio  2  Gibbs  v.  Greenville  &  Columbia  R.  Co. 

R.    Co.    (1879),    3    Hughes,     320,     323,     (1879),  13  S.  C.  228 ;  s.  c.  4  Am.  &  Eng. 
356.  R,  R.  Cas.  459. 


38  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP,  I. 

were  taken,  and  the  right  to  a  dividend  in  any  other  form 
surrendered. 

"  They  were  taken  in  settlement  of  a  claim  made  by  the  share- 
holders, and  recognized  as  valid  by  the  company  and  authorized 
by  the  terms  of  the  charter.  There  would  be  no  question  but 
that  this  would  constitute  a  good  consideration  if  the  financial 
condition  of  the  company  had  warranted  a  dividend."  Again 
they  said :  "  The  company  having  obtained  the  surrender  in  tlie 
exercise  of  a  power  existing  under  the  charter,  and  having  always 
treated  the  certificates  as  resting  upon  the  same  consideration  as 
though  given  in  surrender  of  a  dividend  actually  earned  and 
warranted,  cannot,  under  the  facts  disclosed,  be  heard  to  say  that 
the  certificate  holders  surrendered  nothing."  ^ 

An  individual  agreed  to  purchase  the  whole  stock  of  a  railroad 
company  from  one  who  held  it  after  the  sale  of  the  property  of 
an  old  company  under  foreclosure  of  a  mortgage  and  a  rein- 
corporation of  it,  and  as  consideration  gave  certificates  for  bonds 
of  the  company,  to  be  delivered  when  issued  and  secured  by 
mortgage,  which  were  signed  by  himself  as  president  and  another 
as  secretary  of  the  company.  There  was  a  contest  as  to  whether 
or  not  the  lien  of  the  certificates  was  superior  to  certain  statutory 
liens  of  holders  who  had  been  engaged  in  the  construction  of  the 
road. 

It  was  urged  that  the  certificates  for  bonds  had  all  the  force 
and  effect  of  the  bonds  agreed  to  be  issued,  and  that  the 
court  should  regard  the  mortgage  for  their  payment  as  having 
been  executed  at  the  execution  and  delivery  of  the  certificates. 
The  court  said :  "  To  make  [these  certificates]  binding  obliga- 
tions upon  the  part  of  the  corporation,  they  must  have  been 
authorized  upon  the  part  of  the  stockholders,  or  the  directory 
of  the  company,  or  must  have  been  within  the  scope  of  the 
l)usiness  of  the  com})any  and  powers  of  the  president  and  secre- 
tary, or  by  some  clear  and  unmistakable  act  on  the  part  of  the 
stockholders  and  directory,  ratified  and  confirmed."     The  court 

1  'liiifTi'e  V.  Rutland  R.  Co.  (1882),  55  on  them.     This  order  was  made  under  tlio 

Vt.  1 10;  s.  c.  16  Am.  &  Eng.  R.R.Cas.  408.  rule  in  Fosdiciv   v.  Schall,  99   U.   S.   235. 

Ill  Calhoun   v.  St.   Louis  &  E.  R.  Co.  In  United  States  v.  Wilson  (1882),  106  U. 

(1880),  14  Fed.  Rep.  9,  the  court  ordered  S.    520;    s.  c.  27   L.  Coop.   ed.   310,    the 

a  receiver  of  a   railroad  company  to   ]>ay  Supreme  Court  of  the  United  States  held 

cerlificate.s  of  indebtedness  issued  by  the  that  certificates  of  indebtedness  issued  by  a 

company  to  its  employees  for  work   and  receiver  of  a  I'ailroad  under  order  of  the 

labor  done  ami  for  supplies  an<l  materials  court  were  not  taxable  as  "circulation" 

furnished  in  preference  to  mortgage  liens,  under  the  United  States  revenue  laws,  as. 

Those  assigned  were  allowed  for  the  ainomit  in  tlicir  o])inion,  they  were  not  calculated 

{^'ivr-ii  for  tliciii,  ami  no  interest  was  allowed  or  intended  to  circulate  as  money. 


§§  17-19.]  NATURE   AND    ISSUE   OP   BONDS.  39 

held,  under  the  facts,  it  had  no  power  to  convert  these  certificates 
into  bonds  and  to  create  an  equitable  mortgage  to  secure  their 
payments.^ 

§  17.  State-aid  Bonds.  — The  nature  of  State-aid  bonds  and  the 
rights  created  by  them  have  been  discussed  in  the  following  cases. 

The  remedies  afforded  by  the  State  are  given  to  and  enforceable 
by  the  State  alone ;  they  cannot  be  set  up  by  the  purchaser  of  the 
road  in  a  contest  between  them  and  the  holders  of  indorsed 
bonds  secured  also  by  the  corporation's  mortgage,  whatever  might 
be  their  effect  if  the  State  were  a  party,  and  the  holders  of  in- 
dorsed bonds  secured  also  by  the  corporation's  mortgage  should 
seek  to  set  up  rights  under  the  mortgage  to  embarrass  the  State 
in  procuring  the  remedies.^ 

§  18.  Convertible  Land-grant  Certificates. —  Instruments  thus 
denominated  have  been  issued  under  these  circumstances.  Con- 
gress granted  to  the  State  of  Wisconsin  certain  lands  for  the 
purpose  of  aiding  in  the  construction  of  railroads.  The  State 
granted  them  to  a  company,  which  mortgaged  them  to  secure  a 
bonded  indebtedness.  This  mortgage  was  foreclosed  and  t!ie 
lands  transferred  to  a  new  company.  An  arrangement  was  made 
whereby  these  lands  were  devoted  to  the  payment  of  such  indebt- 
edness of  the  old  company  ;  but  the  conditions  of  the  grant  not 
having  been  complied  with,  the  title  still  remained  in  the  United 
States.  The  new  company  therefore  issued  these  instruments, 
certifying  that  after  a  certain  time  the  bondholders  were  entitled 
to  a  deed  to  proportionate  shares  of  the  land.  The  bonds  were 
surrendered  for  these. 

It  was  held  that  the  holders  of  these  certificates  had  power  to 
protect  the  lands  from  injury,  and  that  the  defendant  was  liable 
only  for  proceeds  of  timber  received  by  it,  or  for  timber  used  by  it. 
The  holders  were  the  beneficiaries  of  a  trust. ^ 

§  19,  Bonds  convertible  into  Stock.  —  Various  questions  aris- 
ing on  bonds  convertible  into  stock  are  discussed  in  the  cases  and 
books  referred  to  in  the  note  below.^  See  further  on  this  subject 
§  35,  below. 

1  Thompson  v.  Memphis,  Selma,  &  B.  8  Beecher  Ex.  v.  Chicago  &  N.  W.  R. 
R.  Co.  (1885),  24  Fed.   Rep.  338.  Co.  (1882),  14  Fed.  Rep.  211. 

2  Stevens  v.  Louisville  &  Nash.  R.  *  Sturges  u.  Stetson  (1858),  1  Biss.  246  ; 
Co.  (1880),  3  Fed.  Rep.  673  (1880),  Tenn.  Miller  v.  New  York  &  Erie  R.  Co.  {Uf>9), 
Bond  Cases  ;  Ralston  ?;.  Crittenden  (1882),  IS  How  Pr.  374  ;  Ramsey  r.  Erie  Ry.  Co. 
13  Fed.  Rep.  508  (1882);  Tompkins  v.  Little  (1869),  38  How.  Pr.  193  ;  Belmont  i'.  Erie 
Rock  &  Ft.  S.  Ry.  Co.  (1883),  15  Fed.  Ry.  Co.  (1869),  52  Barb.  637  :  Rorer 
Rep.  6;  s.  c.  18  Fed.  Rep.  344  (1883);  on  Railroads,  184;  Woods'  Ry.  Law, 
Williams  V.  Same  (1883),  ib.;  s.  c.  21  Fed.  616. 

Rep.  370. 


40 


RAILWAY   BONDS   AND   MORTGAGES. 


[chap.  I. 


I  20.  Exchanges  of  Bonds  and  Rights  thereunder.  —  Rights  aris- 
ing out  of  exchanges  of  bunds  have  been  discussed  in  the  cases 
noted  below.^     See  further  on  this  subject  §  36,  below. 


1  Appeal   of    AUentown    Nat.     Bank, 
(1884),  18  Rep.  6il ;  Barry  v.  Mo.  K.  &  T. 
Ry.  Co.  (1888),  7  Ry.  &  Corp.  L.  J.   198  ; 
Mead  V.  New  York,  Housatouic,  &  North- 
ern R.   Co.  (1870),   45  Couu.   199  ;  s.  c. 
17  Am.  Ry.  Rep.  367  ;  Union  Pac.  R.  Co. 
V.  Stewart,  95  U.  S.  279  ;  DeWitt  v.  Chi- 
cago, B.  &  Q.  R.  Co.,  41  Fed.   Rep.  484  ; 
Ames  V.  N.  0.,  M.  &  T.  R.  Co.,  2  Woods, 
206;  Turner  v.  Conant,  18  Abb.  X.  C.  160. 
For  some  of  the  statutes  in  some  of  the 
States  affecting  the  matters  covered  by  this 
chapter  see  the  following  :  Ala.,  Code  1886, 
§  158,  114,  Borrowing  money.    Ariz.,  Rev. 
Stat.  1887,  §  310,  ditto;  §  319,  Bonds  must 
not  exceed   capital    stock ;   §  320,    Bonds 
previously  issued  validated.    Ark.,  §  6175 
(10),  ditto  ;  §  6268,  Bonds  may  be  sold  at 
discount.      Cal.,   Civ.    Code,   §  456,   Bor- 
rowing money.     Colo.,  G.  L.,  eh.  xix. ,  §  4, 
Stat.  1891,  §  476,   Borrowing  money  ;  ch. 
XXX.,  §  618,  Issue  of  bonds  for  labor  done, 
etc.  Conn.,  Gen.  St.  1888,  §  3570,  Borrow- 
ing money  and  issuing  bonds  for  ;  mode  of 
disposal  of  bonds  ;  issue  of  bonds,  regula- 
tion of.    Fla.,  Rev.  St.  §2241  (10),  Issuing 
bonds.      Ga.,  Code  1882,  §  1689  (/)  [nn), 
Borrowing  money,  terms  of.     Idaho,  Rev. 
St.  1887,  §  2664,   Borrowing  money  ;   is- 
sue and  disposal  of  bonds.     111.,  Rev.  St. 
ch.  114,  §  22,    Issue  of  bonds  for  money, 
labor,  etc.;  §  20,  Borrowing  money.    Ind., 
Rev.  Sts.  1888,  §3911,  Borrowing  money  ; 
issuing  bonds,  terms  of  sale,  etc. ;  ch.  19, 
§  3019,   Disposal  of  bonds,  interest,  etc.  ; 
§  3020,  Sale  of  at  discount ;  ch.  37,  §  3948, 
Issue  of  bonds  by  comjiany  incorporated 
by  purchasers.     Iowa,  Code  1888,  §  1965, 
Issue  of  bonds.     Ky.,  Gen.  Laws,  §  771, 
Issue  of  bonds  ;  §  568,  Restrictions  ui)on 
issue  ;  must  be  for  value.     I^a.,  Rev.  L. 
1884,   §  692,  Borrowing  money  ;   issue  of 
bonds.     Me.,  Rev.  St.  1883,  ch.  51,  §  56, 
Issue  of  bonds  ;  terms  of  sale.     Md.,  Pub. 
Gen.  Laws  1888,  art.  23.  §171,   l5orrow- 
ing  money,  restricted  to  amount  of  caiiitnl 
stock,  etc.;   §  189,   By   a   new   company 
formefl   by   purchasers.      Ma.ss.,    Pub.  St. 
1882,  ch.  112,  §  62,  Issue  of  bonds  ;  §  65, 
Sold  at  Ieb8  than  par.    Mich. ,  1 882,  §  3352, 


Borrowing  money  ;  §  3409, 1.ssue  of  bonds, 
must  be  for  money,  labor,  etc.  Minn.,  St. 
1891,  §  2460,  Borrowing  money  ;  issue  of 
bonds  ;  §  2523,  For  money,  labor,  etc. ; 
§  2529,  Terms  of  sale  of  bonds,  in  discre- 
tion of  officers.  Miss.,  Code  1892,  §  3581, 
Issue  of  bonds  ;  §  3600,  Issue  of  bonds,  for 
labor,  etc.  Mo.,  Rev.  St.  1889,  ch.  42, 
§  2499,  Issue  of  bonds,  for  labor  done,  etc.; 
§  2543  (8),  For  construction  and  equipment. 
Mont.,  Civ.  Code  1895,  §  525,  Issue  of 
bonds  for  actual  value  ;  §  899,  Borrowing 
money  ;  issue  of  bonds  ;  interest  on  bonds. 
Nebr.,  Comp.  Laws  1895,  §§  1759,  1820, 
Issue  of  bonds  ;  §  4043,  By  street-railway 
companies.  Nev.,  Gen.  St.  1885,  §  849, 
Borrowing  money  ;  issue  of  bonds  ;  limi- 
tation on  rate  of  interest.  N.  H.,  Pub.  St, 
1891,  ch.  157,  §  26,  Discount  of  bonds. 
N.  J.,  Rev.  St.  1709-1877,  p.  519,  §  6, 
Bonds  sold  below  par  ;  Supp.  to  Rev.  1877- 
1886,  p.  153,  §  35,  Payment  of  bonds 
provided  for  by  increase  of  capital  stock  ; 
pp.  824,  825,  §  12,  Borrowing  money  ; 
issue  of  bonds ;  limited  to  amount  of 
capital  stock  ;  p.  839,  §  59,  By  consolidated 
company  ;  p.  842,  §  71,  Borrowing  money, 
consolidated  company  ;  p.  847,  §  94,  Issue 
of  bonds  to  complete  leased  roads  ;  N.  M., 
Comp.  Laws  1884,  §  2665  (4),  Borrowing 
money  ;  issue  of  bonds  ;  terms,  etc.  N.Y., 
Rev.  St.  (8th  ed.),  p.  1752,  §  10,  Bor- 
rowing money  ;  p.  1775,  §  1,  Borrowing 
money.  N.  C,  Code  1883,  §1957  (10), 
Borrowing  money  ;  issue  of  bonds.  >«". 
Dak.,  Code  1895,  §  2877,  Issue  of  bonds 
for  value,  etc. ;  §  2906,  Formalities  ; 
§2947  (11),  For  construction  and  eipiiji- 
ment  ;  §2962,  Defenceof  usury  jirohibitcd. 
Ohio  Rev.  St.  1890,  §§3286-3290,  3309 («), 
Issue  of  bonds  ;  §  9814,  By  narrow-gauge 
companies  ;  §  3313,  Bonds  purchased  by 
directors  void.  Okl.,  St.  1893,  §  1011, 
Issue  of  bonds  ;  §  1023,  Plea  of  usury 
prohibited.  Pa.,  Dig.  Suppl.  1887,  p.  2378, 
§  5,  Issue  of  bonds  for  value,  etc.  ;  capi- 
tal stock  must  b(!  fully  paid  up  ;  Dig. 
1883,  p.  1415,  §  6,  Restricted  to  so  much 
per  mile;  Dig.  Supp.  1887,  p.  1416,  §  8, 
Limited    to    double    the   stock   paid    ni>; 


§21.] 


NATURE   AND   ISSUE   OP   BONDS. 


41 


§21.  "Lloyd's  Bonds."  —  Bonds  issued  purporting  to  be  for 
work  done  or  materials  supplied  for  the  purposes  of  the  undertak- 
ing are  called  in  England  "  Lloyd's  Bonds ; "  and  these  have  been 
sometimes  issued  by  companies  for  the  purpose  of  defeating  the 
limitations  by  Parliament  on  the  power  of  companies  to  borrow 
money.  They  may  be  sued  upon,  judgment  recovered,  and  exe- 
cution issued.  In  re  Cork  &  Youghal  R.  Co.^  the  holders  of  sucli 
bonds  were  held  to  have  a  valid  claim  against  the  assets  of  the 
company  to  the  extent  the  company  had  been  benefited  by  the 
money  raised  on  the  bonds. 


p.  1422,  §  43,  Same  as  to  narrow-gauge 
companies;  p.  140,  §  77,  By  consoliilated 
companies.  S.  C,  Gen.  St.  1882,  ilort- 
gages  must  include  bonds  previously  issued. 
So.  Dak.,  Comp.  L.  1887,  §  2981,  Borrow- 
ing money  ;  issue  of  bonds.  Tenn,,  (.ode 
1884,  §  1251,  Borrowing  money ;  issue 
of  bonds.  Tex.,  Civ.  Stats.  1888,  §  4219, 
Borrowing  money ;  §  4222,  Converting 
bonds  into  stock  ;  §  4154,  Issue  of  bonds 
for  money,  labor,  etc.  Utah,  Comp.  Laws, 
1888,  §  2368,  Issue  of  bonds ;  valid  though 
sold  below  par.  Vt.,  Rev.  Laws  1880, 
§  335,  Bonds  sold  below  par  valid  ;  St. 
1894,  §  3797,  Issue  of  bonds,  interest  not 
to  exceed  seven  per  cent  ;  §  3799,  Sold 
below  par.  Va.,  Code  1887,  Borrowing 
money,  limitations  upon  power.  W.  Va. , 
Code  1891,  ch.  54,  §  50  (11),  Issue  of 
bonds  for  construction  and  operation  ; 
§  52,  Bonds  sold  below  par ;  for  money, 
labor,  etc.    Wis.,  Ann.  Stats.  1889,  §  1828 


(10),  Issue  of  bonds  for  construction  and 
equipment.  Wyo.,  Rev.  St.  1887,  §  549, 
Issue  of  bonds  ;  sale  below  par ;  plea  of 
usury  prohibited. 

1  L.  R.  4  Ch.  748.  Blackmore  v.  Yates, 
36  L.  J.  Exch.  121,  is  a  case  involving  an 
assignment  of  rolling-stock  to  satisfy  a 
Lloyd's  bond.  As  to  the  rights  of  the 
holders  of  a  Lloyd's  bond  against  the  di- 
rectors of  a  company,  see  Rasiidall  v.  Ford, 
35  L.  J.  Ch.  769  ;  Beattie  v.  Lord  Ebury, 
L.  R.  7  Ch.  777  ;  41  L.  J.  Ch.  804  ;  ^yeeks 
V.  Propert,  42  L.  J.  C.  P.  129.  For  a 
review  of  the  cases  involving  "  Lloyd's 
Bonds"  up  to  1870,  see  In  re  Bagnals- 
town  &  Wexford  K.  Co.,  I.  R.  4  Eq.  505. 
For  a  case  showing  the  circumstances 
under  which  such  bonds,  in  the  hands 
of  a  purchaser  for  value  without  notice, 
may  be  good,  see  In  re  South  Essex 
Estuary  Co.,  Ex  parte  Chorley,  L.  R.  11 
Eq.  157. 


42 


RAILWAY  BONDS   AND   MORTGAGES. 


[chap.  II. 


CHAPTER  II. 


RIGHTS    OF   BONDHOLDERS. 


Art.  I.  —  Rights  of  Bondholders  gen- 
erally,   NOT   INVOLVING  THE 

Negotiable   Character    of 
SUCH  Bonds. 
§  22.  Bonds  and  Mortgage  must  be  con- 
strued together. 

23.  Bonds  are  inoperative  as  Obliga- 

gations  until  they  are  issued 
to  Purchasers. 

24.  No  Vendor's  Lieu  in  Favor  of  a 

Seller  of  Bonds. 

25.  The   Relation  of  Bondholders  to 

the  Koad  is  sometimes  substan- 
tially that  of  Proprietors. 

26.  The  Relation  of  Bondholders  to 

each  other  generally. 

27.  Majority    and    Minority    Rights 

generally. 

28.  Powers  of  Majority  under  Express 

Clauses  in  the  Mortgage. 

29.  Subscriptions   for    Bonds,  Rights 

under. 

30.  Bondholders'  Rights  as  affected  by 

Circulars  issued  by  the  Com- 
pany. 

31.  Control  of  the  Proceeds  of  Bonds. 

32.  When  Bondholders  entitled  to  de- 

mand Rej)ayment  of  the  Un- 
spent Portion  of  the  Proceeds 
of  their  Bonds. 

33.  Lien  of  Bondholders  not  lost  by 

Surrender  of  Bonds. 

34.  Bondlioldera'  Right  to  sue  Trus- 

tees in  Possession  for  Money  re- 
ceived by  them. 
Z^>.  Iiiglits  of  Bondholders  to  convert 
Bonds  into  Stock. 

36.  Priorities   where  Old    Bonds   are 

Kxchanged  for  'New. 

37.  Transactions  raising  tlie  Question 

wliether  P.onds  liave  been  paid 
or  are  outstanding. 


§  38.  Effect  of  Fraud  upon   Priorities 
between  Bondholders. 

39.  Priority    of    Holders    of    Bonds 

guaranteed  by  other  Holders. 

40.  Rights  of  Income  Bondholders. 

41.  Bonds,  in  what  payable. 

42.  When  Principal  of  Bonds  becomes 

due. 

43.  Legislature       cannot      accelerate 

Maturity  of  Principal. 

44.  Company  not  entitled  to  pay  off 

Bonds  before  Maturity. 

45.  Acceleration  of  Maturity  of  Prin- 

cipal as  a  Consequence  of  De- 
fault in  Interest. 

46.  Acceleration  of  Maturity  of  Prin- 

cipal  at    Option   of  Individual 
Bondholders  or  Trustees. 

47.  Sale  of  Pledged  Bonds. 

48.  Payment  of  Income  Tax  by  Bond- 

holders. 
Art.  II.  —  Eights  of  Bondholders  in- 
volving Negotiable  Char- 
acter  OF  such   Bonds. 
§  49.  Negotiable  Character  of  Corporate 
Bonds  generally. 

50.  Bonds  not  non-negotiable,  because 

no  Payee  is  named. 

51.  Uncertainty  in  Time  of  Payment 

or  Amount  as  affecting  Negotia- 
bility. 

52.  On    the    Law    that    governs   the 

Question   of  Negotiability. 

53.  Who  arc  Bonn  Fide  Holders   of 

P.onds  generally. 

54.  Boiidliolders  are    entitled    to    as- 

sume that  Statement  in  Bonds 
as  to  Date  of  Issue  is  correct. 

55.  Hdiin  Fide  Holdei-s  not  protected, 

if  Issue  was  i(/fra  vires. 

56.  Itona   Fide    Holders    protected  if 

Issue  was  merely  irregular,  but 


22.] 


RIGHTS   OP   BONDHOLDERS. 


43 


Purchaser  with  Notice  of  Cir- 
cumstauces  qualifying  his  Rights 
not  protected  as  a  Bona  Fide 
Purchaser. 
§  57.  Rights  of  Holders  where  there  is 
an  Over-issue. 

58.  Rights  of  Bona  Fide  Holders  not 

affected  by  Misapplication  of 
Proceeds  of  Bonds,  by  Original 
Holders  or  others. 

59.  No    Recovery    on    Bonds    when 

Trustee's  Certificate  is  forged. 

60.  Amount    recoverable    where   less 

than  the  Face  Value  has  been 
paid  for  Bonds. 
Title  of  Bona  Fide  Purchaser  not 
affected  by  Fraud  of  Person 
intrusted  with  the  Negotia- 
tion of  the  Bonds. 


61. 


§  62.  Purchase  of  Bonds  by  Directors  of 
Company  at  a  Discount. 

63.  Amount    recoverable    on    Bonds 

tainted    with    Fraud    in    their 
Issue. 

64.  Innocent     Purchaser    of    Stolen 

Bonds      entitled      to      recover 
thereon. 

65.  Rights  of  Purchaser  of  Bonds  the 

Coupons  of  which  are  overdue. 

66.  Pledgees  of  Bonds  as  Bona  Fide 

Holders. 

67.  Rights  of  Purchasers  of  Pledged 

Bonds. 

68.  Whether     Benefit    of    Mortgage 

clear  of  Equities  passes  with  a 
Transfer  of  the  Bonds. 

69.  Doctrine  of  Lis  Pendens  does  not 

apply. 


Article  I.  —  Rights  of  Bondholders  generally,  not  involving 
THE  Negotiable  Character  of  such  Bonds. 

S  22.  Bonds  and  Mortgage  must  be  construed  together.  —  The 
bonds  and  mortgage  are  one  obligation,  and  should  be  read  and 
construed  together.^ 

The  mortgage  may  qualify  the  absolute  promise  of  the  bond. 
There  is,  however,  an  apparent  conflict  of  opinion  as  to  the  effect 
of  a  reference  in  the  bonds  to  the  mortgage.  It  has  been  held 
that  a  mere  recital  in  a  bond,  that  it  is  secured  by  a  mortgage, 
docs  not  import  the  terms  of  that  mortgage  into  the  bonds  either 
to  the  advantage  or  disadvantage  of  a  bondholder.  A  default  in 
the  interest  on  such  a  bond  does  not  entitle  the  holder  to  sue  for 
the  principal  of  the  bonds,  independently  of  foreclosure  proceed- 
ings, although  the  mortgage  provides  that,  in  case  of  default,  one- 
tliird  of  the  bondholders  in  amount  may  require  the  trustee  to  sell 
the  property,  and  that  the  bonds  shall  forthwith  become  due  and 
payable.  To  hold  that  a  single  bondholder  could  precipitate  the 
maturity  of  the  bond  by  a  suit  would  be  quite  incompatible  with 
the  requirement  that  a  sale  can  be  procured  only  at  the  instance 
of  a  certain  proportion  of  the  whole  class  to  which  he  belongs.^ 

The  Supreme  Court  of  Minnesota  has  also  held  that  the  holder 

1  Marlor   v.    Texas    &   Pacific  R.    Co.  v.  Winston  (1885),   115  U.  S.  228,  cited 

(1884),    19    Fed.    Rep.    867  ;    Marlor    v.  below. 

Texas  &  Pacific  Ry.  Co.  (1884),  21  Fed.  2  American    Nat.    Bank    v.    American 

Rep.  383  ;  s.  c.  22  Blatch.  464,  affirmed  Wood   Paper  Co.   (R.   I.,    1895),  32  Atl. 

in    Texas   &   Pacific   Ry.    Co.    v.    Marlor  Rep.  305. 
(1SS7),  123  U.  S.  687.    See  also  Van  AVeel 


44 


EAILWAY  BONDS   AND   MORTGAGES. 


[chap.  II. 


of  a  bond  will  not  be  deprived  of  his  rights  as  an  innocent  pur- 
chaser of  an  instrument  prima  facie  negotiable,  because  a  mort- 
gage to  which  it  refers  in  general  terms  contains  provisions  which 
limit  his  personal  right  of  action  on  the  security.^ 

The  Supreme  Court  of  New  York,  however,  has  decided  that  a 
purchaser  of  bonds  which  refer  to  a  mortgage  is  bound  by  any 
statement  contained  therein.^ 

The  report  of  the  New  York  case  does  not  show  the  character 
of  the  reference  to  the  mortgage,  whether  it  was  merely  general 
or  particular.  If  it  was  particular,  it  is  not  inconsistent  with  the 
two  cases  above  cited,  and  harmonizes  with  a  decision  of  the  New 
York  Court  of  Appeals  to  the  effect  that,  where  there  is  an  ex- 
press reference  on  the  face  of  the  bond  to  the  terms  and  conditions 
of  the  mortgage,  and  the  mortgage  authorizes  the  trustees  to  post- 
pone the  payment  of  interest  becoming  due,  coupon-holders  are 
bound  by  their  action,  and  are  not  entitled  to  sue  upon  their 
coupons  in  a  court  of  law.^ 

That  the  provisions  of  the  bonds  are  controlling  as  to  when 
there  has  been  a  default,  see  Chap.  XIX. 


1  Guilford  v.  Minneapolis  S.  Ste.  M.  & 
A.  Ry.  Co.  (1892),  48  Minn.  560;  s.  c. 
51  X.  W.  Rep.  658. 

In  this  case  the  mortgage  provided 
that  the  bondholders  were  not  to  take  any 
proceedings  at  law  or  in  equity  to  enforce 
their  debt,  until  the  trustee  had  been  re- 
quested to  take  action  and  neglected  to  do 
so.  It  was  held  that  as  the  bonds  did 
not  contain  this  restriction,  they  were  not 
rendered  non -negotiable  because  of  the 
general  reference  in  them  to  the  mortgage. 
The  court  said  :  "  Bonds  of  this  charac- 
ter generally  refer  to  the  mortgage  or 
trust  deed  by  which  thej'  are  secured  ; 
and  being  placed  in  the  market  as  negoti- 
able securities,  to  be  sold  to  bona  fide 
purchasers,  the  fair  inference  from  the 
general  recital  in  the  bonds,  that  it  is  one 
of  a  series  secured  by  a  mortgage  deed  to 
a  certain  trust^'e,  upon  the  property  of 
the  railway  company,  whose  absolute  ob- 
ligation it  ])ur|)orts  to  be,  is  that  such 
recital  is  iiitroduceil  into  the  bond  to  in- 
dicate the  nature  of  the  security  and  aild 
to  the  credit  of  the  bond,  and  does  not 
alone  import  into  the  bond  special  pio- 
visions  not  alTecting  the  nature  or  enforce- 
ment of  the  security,  and  at  variance  with 
the  tenor  of  the  bond  itself.     The  policy 


of  the  law  is  to  hold  such  instruments 
negotiable,  unless  there  is  enough  on  the 
face  of  the  bond  to  suggest  inquiry  in  re- 
spect to  the  existence  of  facts  destroying 
their  negotiability." 

2  Cayhis  v.  New  York,  etc.  R.  Co.,  10 
Hun,  295  (1877).  This  New  York  case 
was  distinguished  by  the  Minnesota  court 
in  Guilford  v.  Minneapolis  S.  Ste.  M.  & 
A.  Ry.  Co.,  supra,  on  the  ground  that  the 
bondholder  was  not  a  bona  fide  purchaser. 

3  McClelland  v.  Norfolk  Southern  R. 
Co.  (1888),  110  N.  Y.  469,  473;  s.  c.  18 
N.  E.  Rep.  237.  See  19  Am.  L.  Reg. 
(N.  S.)  725,  report  of  an  English  case  ; 
National  Bolivian  Navigation  ( 'o.  v.  Wil- 
son (1880),  L.  Kep.  5  App.  Cas.  176,  on 
rights  of  bondholders  ;  Smythe  v.  Chicago 
&  S.  R.  Co.  ct  al.  (1879),  8  Kep.  709  ;  s.  c. 
22  Fed.  Cas.  710,  Case  No.  13,135.  For  a 
case  discussing  a  suit  by  bondholders  to 
protect  the  ])roperty  of  the  comjjany  bound 
as  a  security  for  the  bond.s,  see  Newby  v. 
Oregon  Cent.  Ky.  Co.  (1870),  1  Sawy.  63  ; 
s.  c.  18  Fed.  Cas.  42,  Case  No.  10,145. 
For  a  case  discussing  remedies  of  bond- 
holders where  there  have  been  land  grants 
to  railroads,  see  Chamberlain  v.  St.  Paul  & 
Sioux  City  R.  Co.  ctal.  (1873),  1  Cent.  L.J. 
53  ;  8.  c.  5  Fed.  Cas.  417,  Case  No.  2578. 


§  23.]  RIGHTS   OP   BONDHOLDERS.  45 

§  23.  Bonds  inoperative  as  Obligations  until  issued  to  Purchasers. 
—  Bonds  and  a  mortgage  securing  them,  while  in  the  hands  of  a 
trustee,  and  before  they  are  sold,  pledged,  or  used  in  any  way,  are 
subject  to  the  control  of  the  maker,  who  has  the  right  to  have  the 
bonds  cancelled  and  the  mortgage  discharged.^  Hence  they 
cannot  be  levied  upon  before  they  are  delivered.^ 

In  the  case  cited  below,  a  manufacturing  corporation  had  ex- 
ecuted a  mortgage  on  its  plant  and  delivered  it  to  a  trust  company 
as  trustee  to  secure  bonds  which  were  placed  in  the  hands  of  the 
trustee  for  the  purpose  of  being  sold,  and  the  proceeds  to  be 
turned  over  to  the  mortgagor.  A  portion  of  these  bonds  remained 
in  the  possession  of  the  trustee  unsold,  and  the  trustee  had  made  • 
no  advances  upon  them.  A  creditor  of  the  mortgagor  sought  to 
reach  these  unsold  bonds  as  property  of  the  mortgagor,  to  be  ap- 
plied to  the  settlement  of  its  debts.  The  court  held  that  these 
unissued  bonds  of  the  mortgagor  did  not  constitute  a  part  of  its 
property  or  assets.^ 

The  court  further  held  that  the  rights  of  the  mortgagor  to  any 
surplus  which  might  remain  in  the  hands  of  the  trustee,  or  to  a 
release  in  case  the  bonds  were  paid  in  full  by  the  mortgagor,  and 
to  require  a  return  of  the  bonds  in  the  hands  of  the  trustee,  were 
too  contingent  and  conjectural  to  be  reached  as  property  and  ap- 
plied in  payment  of  its  debts.* 

But  the  lien  created  by  a  pledge  of  its  bonds  by  a  corporation 
itself  may  be  waived  by  the  pledgee,  and  he  may  levy  upon  the 
bonds  an  execution  obtained  against  the  corporation  for  the 
debt.5 

The  lien  of  all  the  bonds  of  a  series  issued  by  a  railroad  com- 
pany is  not  affected  by  the  time  at  which  it  was  issued.  All  the 
bonds  of  the  series  outstanding  in  the  hands  of  bona  fide  holders 
for  value  are  equal  in  priority,  the  lien  of  each  bond  dating  from 
the  record  of  the  mortgage  securing  it,  and  not  from  the  time  it 
was  issued.® 

1  Peninsular  Iron  Co.u.  Eells  (C.  C.  A.,  Kailroad  (1877),  12  Hun,  126  ;  Sickles  v. 

1895),  68  Fed.  Rep.  24.  Richardson  (1881),  23  Hun,  559. 

^  Means  v.   Cincinnati  &  Chicago  R.  *  Eastern  Electric  Cable  Co.    v.  Great 

Co.  (1859),  2  Disney  (Ohio),  465  ;  Sickles  Western  Manufacturing  Co.  (1895),  supra, 

V.  Riuliardson,  23  Hun,  559.  citing,  in  support  of  this  ruling,  Pettibone 

»  Eastern  Electric  Cable  Co.   v.  Great  v.  Toledo,  Cin.  &  St.  Louis  Railroad,  148 

Western  Manufacturing  Co.  et  al.  (1895),  Mass.  411  (1889) ;  s.  c.  19  N.  E.  Rep.  337. 
164  Mass.   274  ;  s.  c.  41  N.  E.  Rep.  295,  ^  Sickles    v.    Richardson     (1881),    23 

citing,  in  support  of  the  ruling,  Richard-  Hun,  559. 

son   V.   Green    (1890),    133  U.   S.  30,   47  ;  ^  Pittsburgh,   C.  C.  &  St.  L.  Ry.  Co. 

Coddington  v.   Gilbert   (1858),  17  N.  Y.  v.   Lynde  et  al.   (Ohio,  1896),    44   N.  E. 

489 ;    Barnes   v.   Mobile  &  Northwestern  Rep.  596. 


46  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  II. 

The  mortgage  itself  is  not  operative  until  the  bonds  are  de- 
livered to  the  purchasers.^ 

§  24.  No  Vendor's  Lien  in  Favor  of  Seller  of  Bonds.  —  Corporate 
bonds  being  personal  property,  there  is  no  lien  for  purchase-money 
where  the  title  to  such  bonds  has  passed  from  a  seller,  and  they 
have  been  delivered  to  a  biiyer.^ 

§  25.  The  Relation  of  Bondholders  to  the  Road  is  sometimes  sub- 
stantially that  of  Proprietors.  — Arrangements  have  been  made  in 
one  case  which,  so  far  as  the  management  of  the  property  is  con- 
cerned, place  the  bondholders  in  the  position  of  proprietors,  and 
leave  the  stockholders  a  merely  nominal  interest  in  the  business. 
Such  is  the  result  where  the  value  of  the  road  is  much  less  than 
the  bonded  debt,  and  the  stock  is  issued  not  directly  to  the  stock- 
holders, but  to  trustees  elected  by  the  bondholders,  to  be  voted  on 
by  the  latter.  A  court  of  equity  will  not,  under  these  ch'cum- 
stances,  entertain  a  petition  by  the  stockholders  to  set  aside  a 
lease  made  by  the  company  as  thus  controlled  by  the  bond- 
liolders.^ 

§  26.  The  Relation  of  Bondholders  to  each  other  generally.  —  A 
bondholder  is  in  equity  a  quasi  owner  in  common  with  the  other 
bondholders  of  whatever  rights  the  mortgage  gives.  He  is  not  a 
pai'tner  with  them,  nor  strictly  a  tenant  in  common,  but  the  re- 
lation with  which  he  introduces  himself  by  his  purchase  imposes 
upon  him  some  duties.  Having  a  common  interest  with  others  in 
the  security  of  the  mortgage,  he  is  under  the  duty  of  so  acting  as 
not  to  destroy  its  value.  He  has  a  right  to  make  use  of  the  mort- 
gage to  enforce  the  payment  of  his  bonds,  but  not  to  obtain  an 
advantage  over  the  other  bondholders.  Equity  will  not  permit 
him  to  reap  the  profits  of  a  sale  made  in  pursuance  of  a  scheme 
for  obtaining  possession  of  the  property  in  conjunction  with 
strangers  to  the  security,  and  so  conducted  as  to  result  in  the 
transfer  of  that  property  at  a  totally  inadequate  price.^ 

^  Wade  »>.  Donan  Brewin;^  Co.  (1891),  C.    J.,    referring   to  Canadian    Ry.    Co.'.s 

10  Wash.  284  ;  s.  c.  38  Pac.  Rep.  1009.  scheme,  L.  R.  3  Ch.  294.     The  statutes 

2  Fnrmers'  Loan  &  Trust  Co.  v.  Pine  of  Vermont   make  a  bondholder  who  lias 

Bluff  Ry.  Co.  (Ark.,  1893),  21  S.  W.  Rep.  not  entered  into  a  reorganization  scheme 

652.  a  tenant  in  common  with  the  new  (;orpora- 

'  McHcnry  v.  New  York,   P.  &  0.  R.  tion.     Brooks  v.   Vennont  Cent.    R.   Co. 

Co.  (1884),  22  Fed.   R'-p.  130.      In   Eng-  (1884),  22  Fed.  Rep.  211. 
land  it  would  .seem  that  bondholders  are,  *  Jackson  v.  Ludeling  (1864),  21  Wall. 

in  a  sense,  considered  as  part  pro])rietors  616.     As  to  the  rule   that  any  litigation 

of  the  existing  capital  of    the  comjiany,  instituted  by  a  bondholder   to  enforce  his 

and    dealt   with    by  Parliament   and    the  debt   through    the  mortgage  mu.st  be  for 

ronrts  accordingly.     Canada  So,  R.  Co.  ;;.  the  benefit  of  his  co-bondholders  as  well 

Gebhard  (1883),  109  U.  S.  527,  lierWaite,  as  himself,  see  hereafter.     See  also  §  27, 


§  27.]  RIGHTS   OP   BONDHOLDERS.  47 

§  27.  Majority  and  Minority  Rights.  —  No  majority  of  the  bond- 
holders, however  large,  can,  by  direct  means,  compel  a  minority, 
however  small,  to  enter  into  an  agreement  which  involves  the 
surrender  of  a  portion  of  their  rights.^ 

But  it  is  now  the  accepted  doctrine  that,  in  view  of  the  peculiar 
character  of  corporate  bonds,  each  bondholder  is  deemed  to  have 
entered  by  implication  into  certain  contract  relations  with  his 
co-bondholders,  which,  although  not  identical  with,  are  analogous 
to,  the  relations  existing  between  stockholders ;  and  that,  as  re- 
gards the  determination  of  the  question,  what  is  the  most  desirable 
way  of  safeguarding  and  promoting  the  interests  of  the  whole 
class,  the  will  of  the  majority  must  often  be  allowed  to  prevail, 
even  though  the  indirect  result  of  the  course  adopted  may  be 
seriously  to  impair  the  value  of  the  rights  to  which  individual 
bondholders  are  technically  entitled. 

Thus  the  appointment  of  a  receiver  in  deference  to  mere  tech- 
nical rights  of  a  very  small  minority  of  bondholders  has  been 
refused  where  it  appeared  that  such  action  would  imperil,  if  not 
destroy,  the  interests  of  others  whose  rights  were  entitled  to 
equal  consideration.^ 

So  a  foreclosure  sale  will  not  be  delayed,  at  the  instance  of  a 
few  bondholders,  for  the  purpose  of  ascertaining  and  determining 
the  conflicting  rights  of  lienors,  where  the  various  trustees  and 
much  the  larger  part  of  the  creditors  are  of  opinion  that  the  inter- 
est of  all  concerned  will  be  subserved  by  an  immediate  sale.^ 

But  the  results  of  the  application  of  this  principle  referred  to 
are  most  frequently  illustrated  in  those  cases  where  reorganiza- 
tion schemes  are  carried  through  in  opposition  to  the  wishes  of 
a  minority  of  the  bondholders.  It  is  sufficiently  obvious  that  a 
minority  can  never  have  the  power  to  prevent  the  consummation 
of  such  schemes  through  a  foreclosure  and  a  purchase  by  the  ma- 
jority ;  for  if  there  is  no  limitation  in  the  mortgage  on  the  right  to 
foreclose,  even  a  single  bondholder  may  enforce  his  lien  in  that 
manner,  and  no  mortgage  has  ever  been  drawn  with  any  specific 

below.     Gates  i'.  Boston  &  New  York  Air  large   majoritj'   of    the    bondholders   and 

Line  R.  Co.   (1885),  53  Conn.  333  ;  s.  c.  stockholders  favored  a  funding  plan  which 

24  Am.  &  Eng.  R.   R.  Cas.   143  ;  5  Atl.  was  being  negotiated. 

Rep.  695.  Similar  considerations  have  influenced 

1  Canada  So.  R.  Co.  v.  Gebhard  (1883),  a  court  to  refuse  to  appoint  a  receiver  for 
109  U.  S.  527  ;  see  also  Waldoborough  v.  a  canal  company  on  the  application  of  a 
Knox  &  L.  R.  Co.,  84  Me.  469  ;  s.  c.  24  single  bondholder.  Stewart  v.  Chesapeake 
Atl.  Rep.  942.  &  Ohio  Canal  Co.  (1881),  5  Fed.  Rep.  149, 

2  Tysen  v.  Wabash  Ry.   Co.    (1878),  8  153. 

Biss.  247.     There  was  another  reason  for  ^  First  Nat.  Bank  of  Cleveland  v.  Shedd 

the  court's  action  in  this  case,  viz.,  that  a     (1887),  121  U.  S.  74. 


48  BAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  II. 

restriction  on  this  right  except  in  favor  of  the  majority.  The 
property,  being  thus  exposed  for  sale  to  the  highest  bidder,  must 
inevitably  pass  to  any  person  or  persons  who  satisfy  that  descrip- 
tion ;  and  the  alternative  finally  set  before  the  minority  is  either 
to  see  the  property  acquired  by  others,  or  buy  it  in  themselves. 
Whichever  of  these  alternatives  is  chosen,  the  rights  of  the 
minority  will  evidently  have  been  in  some  measure  sacrificed.^ 

Agreeably  to  the  above  principle,  it  has  been  laid  down  by  the 
highest  authority  that  to  allow  a  small  minority  of  bondholders, 
in  the  absence  of  any  pretence  even  of  fraud  or  unfairness,  to 
defeat  the  wishes  of  a  majority  of  those  associated  with  them  in 
the  benefits  of  their  common  security,  would  be  to  ignore  entirely 
the  relation  which  bondholders  bear  to  each  other.^ 

It  is  scarcely  necessary  to  point  out  that  no  transaction  in  which 
the  exercise  of  this  power  of  the  majority  to  coerce  the  minority 
indirectly  is  tainted  with  fraud  will  be  allowed  to  stand.  For  in- 
stance, a  trustee  who  is  also  a  representative  of  a  committee  or 
syndicate  of  bondholders  cannot,  in  actual  fraud  of  the  rights  of 
the  minority  bondholders,  enter  into  a  scheme  with  such  syndicate 
to  sacrifice  the  property,  so  that  the  syndicate  may  acquire  the 
same  in  a  manner  to  defraud  the  minority.^ 

The  majority  having  the  power  virtually  to  override  the  wishes 
of  the  minority  to  this  extent,  it  follows  that  no  legislation  which 
merely  facilitates  and  regulates  the  exercise  of  this  power  can  be 
objected  to  on  the  ground  of  its  unconstitutionality.  Thus  it  is 
competent  for  the  legislature  to  pass  an  act  requiring  bondhold- 
ers to  take  some  positive  action  when  an  arrangement  for  the  dis- 
position of  the  property  is  proposed  by  the  majority,  and  providing 
that  all  should  be  bound  by  such  arrangement  who  did  not,  in 
some  direct  way,  within  a  reasonable  time  after  notice,  signify 
their  refusal  to  concur.*  So  also  the  legislature  may  authorize 
the  bondholders,  by  a  vote  of   the  majority,  with  equal   oppor- 

1  See  further,  as  to  the  validity  of  such  purchasing  it  to  the  e.xclusion  of  the  other 
proceedings  as  against  the  minority,  Chap,  creditors,  and  the  trustee  also  has  in  his 
XXXVII.  (Reorganization).  possession,  as  agent,  the  evidences  of  dobt 

2  Shaw  V.  Railroad  Company  (1879),  belonging  to  the  creditors  with  whom  he 
100  U.  S.  GOiJ.  has  combined,  and  the  property,  by  the  act 

'  Salilgaard  v.  Kennedy  (1880),  2  Fed.  of  the  trustee,  passes  into  the  ))ossession  of 

Rep.  295.    Nelson,  D.  J.,  said:    "While  those  creditors  at  a  price  much  less  than  its 

there  is  no  df)ubt  that  creditors  may  com-  value,  it  can  hardly  be  claimed  that  a  pur- 

hine    to   purchase   the   property   of    their  chase   thus   consummated    is   not   incqui- 

debtor,  atid  such  action  is  proper  and  will  table." 

besus(uiiie<l,  yet  if  a  trustee,  holding  the  *  Oilfdlnn  v.  Union  Canal  Co.  (1883), 

property  for  the  benefit  of  all  the  credit-  109  U.  S.  401. 
ors,  combine  with  a  part  to  aid  tliem  in 


§28.] 


RIGHTS   OF    BONDHOLDERS. 


49 


tunity  to  all,  to  reorganize  as  a  new  corporation  with  the  rights 
of  the  old.i 

The  extent  of  the  power  of  a  legislature  to  compel  the  minor- 
ity to  submit  to  the  majority  is  of  course  unlimited  in  theory, 
where,  as  in  Canada,  there  is  no  constitutional  restriction  against 
passing  laws  which  impair  the  obligation  of  contracts.^ 

§  28.  Powers  of  Majority  under  Express  Clauses  in  the  Mortgage. 
—  Each  bondholder  holds  his  interest  subject  to  the  controlling 
power  given  to  the  majority  of  the  bondholders  by  an  express  pro- 
vision in  the  mortgage,  as  where  the  trustee  is  empowered  to 
purchase  at  the  foreclosure  sale,  upon  receiving  a  written  request 
from  the  majority,  and  to  organize  a  new  company  for  the  benefit 
of  the  bondholders,  upon  such  terms,  conditions,  and  limitations  as 
the  majority  may  direct.^ 

A  trustee  is  authorized  to  discontinue  a  suit  for  the  collection 
of  the  mortgage  debt,  if  the  majority  of  the  bondholders  so  desire, 
where  the  mortgage  empowers  him  to  commence  such  litigation  at 
the  instance  of  a  majority  of  such  bondholders.* 


1  Gates  V.  Boston  &  New  York  Air 
Line  R.  Co.  (1885),  53  Conn.  333  ;  s.  c.  5 
Atl.  Rep.  695  ;  24  Am.  &  Eng.  R.  R.  Cas. 
143.  The  court  based  its  decision  on  two 
grounds  :  (1)  The  qioasi  public  character 
of  a  railroad  corporation  ;  (2)  the  more 
special  consideration  that,  in  view  of  the 
nature  of  this  class  of  securities,  a  minor- 
ity cannot  obstruct  the  action  of  the 
majority  beyond  a  certain  point. 

Judge  Stoddard  said ;  "  Upon  prin- 
ciple it  would  seem  plain  that  railroad 
property  once  devoted  and  essential  to 
public  use  must  remain  pledged  to  that 
use,  so  as  to  carry  to  full  completion  the 
purpose  of  its  creation  ;  and  that  this  pub- 
lic light,  existing  by  reason  of  the  public 
exigency,  demanded  by  the  occasion,  and 
created  by  the  exercise  by  a  private  person 
of  the  powers  of  a  State,  is  superior  to 
the  property  rights  of  corporations,  stock- 
holders, and  bondholders."  [As  illustrating 
this  general  principle,  see  High  on  Manda- 
mus, §§  315,  316,  317  ;  State  v.  Hartford 
&  N.  H.  R.  Co.  (1861),  29  Conn.  538; 
R.  Commissioners  v.  Portland  &  Oxford 
R.  Co.  (1874),  63  Me.  269,  278  ;  Attorney- 
General  V.  "West  Wisconsin  R.  Co.  (1879), 
36  Wis.  466  ;  People  v.  Albany  &  Vermont 
R.  Co.  (1862),  24  N.  Y.  261;  People  ex  rel. 
V.  Long  Island  R.  Co.  (1883),  31  Hun, 
127  ;  Attorney-General  v.  Southern  Min- 


nesota R.  Co.  (1871),  18  Minn.  40  ;  In  re 
New  Brunswick  &  Canada  Ry.  Co.,  1 
Pugsley  &  Barb.  (N.  B.)  667;  York  & 
North  Midland  Ry.  Co.  v.  The  Queen,  1 
El.  &  Bl.  858.] 

In  a  subsequent  part  of  the  opinion  in 
Gates  V.  Boston  &  New  York  Air  Line  R. 
Co.,  s^ipra,  the  learned  judge  drew  atten- 
tion to  the  provision  in  the  mortgage  that 
"  should  any  of  the  coupons  remain  un- 
paid for  six  months  after  presentation  and 
default,  the  principal  sum  secured  hereby 
shall,  at  the  option  of  the  holder,  become 
due  and  payable,"  and  said  :  "In  relation 
to  the  other  bondholders  it  is  manifest 
that  each  bondholder  enters  into  contract 
relation  with  each  and  all  of  his  co-bond- 
holders. His  right  to  appropriate  the 
security  in  satisfaction  of  his  bond  is 
modified  by  the  same  existent  right  in 
every  other  holder.  His  absolute  right  of 
control  is  limited  not  onl)''  by  the  express 
provisions  of  the  mortgage,  but  also,  in  a 
great  measure,  by  the  nature  and  character 
of  the  security." 

2  Canada  So.  R.  Co.  v.  Gebhard  (1883), 
109  U.  S.  533.  See  further  as  to  this  case, 
Chap.  XXXVII.  (Reorganization). 

3  Sage  r.  Central  Railroad  Co.  (1878), 
99  U.  S.  334. 

*  Elwell  V.  Fosdick  (1889),  134  U.  S. 
500. 


50  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  II. 

Similarly  a  clause  in  a  trust  deed  empowering  a  three- 
fourths  majority  to  "  assent  to  any  modifications  "  of  the  pro- 
visions of  the  deed  justifies  a  court  of  equity  in  sanctioning 
a  scheme  accepted  by  the  requisite  majority,  whereby  persons 
who  agree  to  advance  money  to  the  corporation,  are  to  re- 
ceive a  rent  charge,  which  is  to  stand  in  priority  to  the 
debentures.! 

In  a  recent  case  before  the  U.  S.  Circuit  Court  of  Appeals  of 
the  Second  Circuit,  a  brewery  company  had  issued  bonds  to  the 
amount  of  $1,000,000,  and  secured  them  by  a  trust  deed.     The 
bonds,  by  an  indorsement  upon  them,  could  be  declared  due  after 
a  default  of  three  calendar  months  ;  but  this  right  of  the  bond- 
holders was  subject  to  a  provision  of  the  trust  deed  which  placed 
it  in  the  power  of  three-fourths  in  interest  of  the  bondholders 
to  agree  with  the  company  for  any  modification  or  alteration  of 
the  contract,  including  the  release  of  the  property  charged,  and 
any  postponement  of  the  time  for  the  payment  of  the  moneys  se- 
cured, etc.,  which  was  to  bind  the  minority.     After  the  default  in 
payment  of  interest,  Y.,  the  principal  stockholder  of  the  company, 
induced  B.,  an  outsider,  to  pay  up  such  an  amount  of  the  bonds  as 
would  constitute,  with  those  owned  by  Y.  and  his  relatives,  such  a 
majority  as  provided  in  the  trust  deed.     Y.  having  an  option  to 
purchase  from  B.  the  bonds,  he  might  purchase  and  hold.     Y. 
and  B.,  with  the  others  in  sympathy  with  their  purpose,  entered 
into  an  agreement  with  the  company,  and  evidenced  their  agree- 
ment by  a  consent  that  the  company  and  trustees  should  sign 
an  agreement  to  postpone  the  payment  of  all  interest  coupons  past 
due  and  to  become  due  until  the  year  of  the  maturity  of  the  bonds. 
A.,  holding  some  of  the  bonds,  brought  an  action  upon  them,  and 
the  trial  court  directed  a  verdict  for  the  defendant,  taking  from 
the  jury  the  consideration  of  the  question  of  the  bona  fides  of  this 
consent.     The  Circuit  Court  of  Appeals  held  that  the  evidence 
upon  the  trial  presented  such  a  question  for  the  jury,  and  it  was 
error  to  withdraw  it  from  their  consideration.     Wallace,  Circuit 
Judge, said  :  "We  cannot  doubt  that  a  consent  to  postpone  the  pay- 
ment of  the  demands  of  the  minority  bondholders,  made  collusively 
by  majority  bondholders  for  the  purpose  of  defeating  the  remedy 
of  the  minority,  and  not  in  the  exercise  of  an  honest  discretion 
in  the  general  interest,  is  not  a  consent  within  the  meaning  of 
the  eleventh  condition  ;  oi-  that  a  vote  at  a  meeting  of  bondhold- 
ers, sanctioning  a  modification  of  the  rights  of  the  bondholders, 
passed  by  a  corru[)t  majority  for  the  purpose  of  effectuating  such 

1  In  re  Doiiiinion  of  Canada,  etc.  Co.  (1886),  55  L.  T.  N.  S.  347. 


§28.] 


RIGHTS   OF   BONDHOLDERS. 


51 


a  collusive  consent,  is  not  within  the  power  contemplated  by  the 
provision  in  the  trust  deed."  ^ 

A  mere  general  clause  to  the  effect  that  a  resolution  by  the 
majority  of  the  holders  of  debenture  stock  will  "  bind  all  the 
holders  as  effectually  as  if  all  such  holders  were  competent  to 
consent,  and  had  consented  thereto  in  writing  for  a  valuable  con- 
sideration," will  not  warrant  a  resolution,  sanctioning  the  appli- 
cation of  certain  funds  vested  in  trustees,  and  set  apart  for  the 
payment  to  debenture-holders  of  the  interest  on  their  debentures. 
The  words  of  such  a  clause,  however  wide,  cannot  be  supposed  to 


1  Hackettstown  National  Bank  v.  D, 
G.  Yuengliug  Brewing  Co.  (1896),  74  Fed. 
Rep.  110.  It  was  also  said  in  this  case  : 
' '  Powers  in  trust  deeds,  conferred  on  a 
majority  of  bondholders,  to  bind  the 
ininori1>y,  have  been  the  subject  of  con- 
sideration in  several  cases  in  the  English 
courts,  and  were  given  full  effect.  In 
these  cases  the  power  was  contained  in  a 
provision  similar  to  that  in  the  present 
trust  deed,  by  which  the  bondholders  at  a 
meeting,  by  extraordinary  resolution,  were 
authorized  to  sanction  any  modification  or 
compromise  of  the  rights  of  the  bond- 
holders against  the  company  or  its  prop- 
erty. It  was  assumed  by  the  court  in  all 
of  these  cases  that  the  power  was  only 
called  into  existence  when  required  by  the 
exigencies  of  the  situation,  and  when  ex- 
ercised must  be  exercised  in  good  faith. 
Mercantile  Investment  &  General  Trust 
Co.  V.  International  Co.  of  Mexico  (1893), 
1  Ch.  484,  note ;  Mercantile  Investment 
&  General  Trust  Co.  v.  River  Plate  Co. 
(1894),  1  Ch.  596;  Follit  v.  Eddystone 
Granite  Quarries  (1892),  3  Ch.  75  ;  Sneath 
V.  Gold  Co.  (1893),  1  Ch.  477.  In  the 
above  cases  the  holdings  were  as  follows  : 

A  power  given  to  the  majority  to 
"  sanction  any  modification  or  compro- 
mise of  the  rights  of  debenture-holders 
against  the  company  or  against  its  prop- 
erty "  does  not  justify  the  passage  of  a 
resolution  to  the  effect  that  the  rights  of 
the  debenture-holders  be  compromised  by 
the  acceptance,  in  lieu  of  such  debentures, 
of  preference  shares  in  another  company. 
It  was  remarked  by  Lindley,  L.  J.,  that 
ambiguities  of  language  ought  not  to  be 
taken  advantage  of  to  stretch  powers  given 
to  majorities.  "  The  power  to  compro- 
mise the  rights  of  the  debenture-holders 


presupposes  some  dispute  about  them,  and 
does  not  include  a  power  to  exchange  their 
debentures  in  another  company,  where 
there  is  no  dispute  or  difficulty."  Mer- 
cantile Investment  &  General  Trust  Co.  v. 
International  Co.  of  Mexico  (1893),  1  Ch. 
(C.  A.)  484  n.  ;  s.  c.  7  Times  R.  616;  40 
Am.  &  Eng.  Corp.  Cas.  337. 

A  resolution  of  debenture-holders  sanc- 
tioning a  loan  to  the  debtor  corporation, 
and  providing  that  it  shall  take  j)riority 
over  the  debentures  as  a  cliarge  on  the 
corporate  property,  is  a  "  modification  "  of 
the  rights  of  such  debenture-holders  with- 
in a  condition  in  the  covering  deed  au- 
thorizing a  certain  majority  of  such  holders 
to  "sanction  any  modification  or  com- 
promise of  the  rights  "  of  the  whole  class 
of  lienors,  and  if  such  a  resolution  is  duly 
passed  by  the  i-equisite  majority  it  is  bind- 
ing on  the  dissentient  minority.  Follit 
V.  Eddystone  Granite  Quarries  (1892),  L.  R. 
3  Ch.  75 ;  s.  c.  41  Am.  &  Eng.  Corp.  Cas. 
49. 

An  appropriate  occasion  for  the  opera- 
tion of  such  an  enabling  clause  arises 
where  the  whole  of  the  property  subject 
to  the  charge  will  be  forfeited  unless  a 
sum  of  money  is  paid  by  the  company  at 
a  certain  date,  and  an  arrangement  is  pro- 
posed by  which  a  new  company  is  to  be 
formed  to  supply  the  money  and  carry 
on  the  business.  An  agreement  by  the 
debenture-holders  to  accept  shares  in  that 
company  in  lieu  of  their  debentures  is  a 
"compromise"  of  their  rights,  and  may 
be  entered  into  by  the  majority  so  as  to 
bind  a  dissenting  minority.  Sneath  v. 
Valley  Gold  (1893),  L.  R.  1  Ch.  477,  dis- 
tinguishing Mercantile  Investment  &  Gen- 
eral Trust  Co.  V,  International  Co.  of 
Mexico,    supra. 


52 


RAILWAY   BONDS    AND    MORTGAGES. 


[chap.  II. 


contemplate  the  passage  of  a  resolution  which  would  be  inconsis- 
tent with  the  rights  given  to  the  debenture-holders  under  the  body 
of  the  trust  deed.^ 

§  29.  Subscriptions  for  Bonds^  Rights  under.  —  A  secret  agree- 
ment that  subscribers  for  railroad  bonds  should  be  required  to 
take  and  pay  for  only  part  of  the  bonds  subscribed  for,  is  fraudu- 
lent as  to  other  subscribers  and  void ;  and  the  subscription  is  a 
valid  one  for  the  amount  subscribed.^ 

Where  the  property  mortgaged  to  secure  bonds,  for  the  sub- 
scription price  of  which  a  judgment  has  been  rendered  against  a 
subscriber,  has  already  been  sold,  he  is  entitled  in  equity  to  have 
credited  and  allowed  on  such  judgment  the  proportionate  share 
of  the  bonds  in  the  avails  of  the  property. ^ 

§  30.  Bondholders'  Rights  under  Circulars  issued  by  the  Com- 
pany.—  Bondholders,  although  relying  upon  a  statement  in  a 
prospectus  of  promoters  which  might  be  construed  to  be  a  prom- 
ise that  the  moneys  derived  from  tbe  sale  of  the  bonds  would  be 
used  for  certain  specified  objects,  and  not  otherwise,  cannot,  upon 
the  theory  of  a  trust,  reclaim  the  money,  when  the  promoters  have 
paid  it  out  to  creditors  of  the  company,  disregarding  this  promise, 
and  follow  it  into  the  hands  of  persons  who  received  it  lawfully 
from  the  promoters,  although  with  notice  of  the  promise.^ 


1  Hay  V.  Swedish  &,  Norwegian  Ey. 
Co.,  5  Times  L.  R.  460.  The  rule  as  to  the 
construction  of  such  powers,  they  being  in 
derogation  of  the  rights  of  the  minority, 
is  that  they  must  be  strictly  construed. 

2  Cleveland  Iron  Co.  v.  Ennor  (111.),  2 
West  Rep.  831. 

8  Ibid. 

*  Banque  Franco- Egyptienne  v.  Brown 
(1888),  34  Fed.  Rep.  162  [bill  for  re- 
scission of  the  contract  of  purchase  of 
bonds  on  the  ground  of  fraud  in  false 
representations  in  prospectus  for  the  sale 
of  these  bonds]. 

Wallace,  J.,  in  this  case  stated  some 
rules  which  are  pertinent  to  the  subject  of 
tliis  section,  to  wit :  Misrepresentation 
by  prosj)ectus,  except  as  between  pi'O- 
rnoters  and  sliareholders,  is  to  be  tried  by 
the  orilinary  criterion  of  misrepresentation. 
But  a  reasonable  construction  of  the  lan- 
guage of  a  prf)S[)ectus  may  require  that  a 
future  tense  should  be  given  to  words  in 
the  jiast  or  ])resent  tense.  ^  right  of 
rescission  because  of  misrepresentations  in 
a  prospectus  must  rest  upon  misrepresen- 


tations concerning  material  facts  and  not 
of  mere  matters  of  opinion,  and  must  re- 
late to  existing  facts  and  not  to  matters  of 
future  conduct  or  expectation.  It  cannot 
be  founded  upon  the  breach  of  pure  prom- 
issory statements.  Unless  promissory 
statements  are  such  as  imply  that  a  cer- 
tain condition  of  things  or  state  of  facts 
exists  at  the  time  to  form  the  basis  of  the 
])roniised  future  state  of  things,  they  do 
not  give  birth  to  a  right  of  rescission. 
Fraud  cannot  be  predicated  of  promises  not 
performed  for  the  purpose  of  avoiding  a 
contract.  If  a  i)rospectus  contains  false 
rejjresentations,  those  who  authorize  it  to 
be  issiu^d  cannot  repudiate  them  as  made 
without  their  authority,  while  retaining 
the  fruits  of  the  prospectus.  A  statement 
in  a  prospectus  respecting  the  way  in 
which  the  moneys  to  be  derived  from  the 
sale  of  bonds  are  to  be  applied  is  to  be 
construed  as  a  representation  of  intention, 
or  the  expression  of  the  expectation  and 
]>urpose  of  the  jiromoters,  if  the  language 
falls  short  of  a  distinct  and  unequivocal 
promise. 


§.31.]  RIGHTS   OP   BONDHOLDERS.  53 

A  bona  fide  purchaser  of  bonds  at  less  than  par,  where  a  com- 
pany has  issued  a  circular  which  neither  placed  any  limits  upon 
the  price  nor  mentioned  any  restriction  of  its  charter  as  to  tlie 
price  for  which  its  bonds  might  be  sold,  and  asked  proposals  for 
purchase  of  bonds,  is  not  bound  by  restrictions  in  the  charter, 
and  is  protected  against  a  defence  that  such  a  sale  of  bonds  was 
illegal.^ 

Where  the  president  of  a  company  issues  circulars  signed  by 
him  in  his  official  capacity,  inviting  subscriptions  to  bonds,  the 
representations  therein  will  usually  be  considered  as  the  repre- 
sentations of  the  company,  and  he  cannot  be  made  personally 
liable  to  a  purchaser  of  the  bonds  for  misstatements  as  to  the 
length  of  the  proposed  line.  The  position  of  such  a  purchaser  in 
a  suit  for  relief  on  the  ground  of  misrepresentations  is  still  weaker 
where  a  mortgage  securing  the  bonds  is  subsequently  executed, 
reserving  to  the  company  the  right  to  build  a  shorter  line  if  the 
interests  of  the  company  should  require  it ;  for  the  representations 
in  the  circular  are  superseded  by  the  provisions  of  the  mortgage, 
and  the  purchaser  is  bound  to  look  to  the  mortgage  for  the  descrip- 
tion of  the  mortgaged  property .^ 

§  31.  Control  of  the  Proceeds  of  Bonds.  —  Money  in  the  hands 
of  the  directors  of  a  company  realized  from  a  sale  of  its  bonds, 
where  the  purposes  of  its  use  have  been  set  forth  in  the  mortgage, 
constitutes  a  trust  fund,  to  be  used  in  good  faith  by  the  company 
for  those  purposes.^ 

1  Ellsworth  V.  St.  Louis,  Alton,  &  Terre  of  the  security.  The  Court  of  Appeals  of 
Haute  R.  Co.  (1885),  98  N.  Y.  553,  affirm-  New  York,  on  the  ground  of  his  peculiar 
ing  s.  c.  33  Hun,  7.  The  court  said:  relation  to  the  case  and  his  knowledge, 
"A  (railroad)  corporation  (having)  a  gen-  etc.,  held  that  he  was  not  entitled  to  re- 
eral  power  to  make  contracts  and  to  lief.  Belden  v.  Burke  (1895),  147  N.  Y. 
borrow  money,  .  .  .  persons  dealing  in  542  ;  s.  c.  42  N.  E.  Rep.  261. 
securities  issued  by  it  may,  in  the  absence  The  court,  however,  held  that  subse- 
of  notice  to  the  contrary,  assume  that  qnent  holders  of  these  bonds  in  good  faith 
restrictions  upon  this  power  have  not  been  and  without  notice  would  not  be  pre- 
violated.  eluded  from  relief  on  the  ground  that  the 

2  Van  Weel  v.  Winston  (1885),  115  first  takers  of  the  bonds  from  the  railroad 
U.  o.  2-.8.  company  took  with  notice  of  the  actual 

*  A  purchaser  of  some  of  these  bonds  transaction. 
in  open  market,  with  notice  of  the  facts,  See  Columbus,  Hocking  Valley,  & 
well  known  to  the  bankers  from  whom  he  Toledo  Ry.  Co.  v.  Burke  (1887),  Court  of 
purchased  them,  afterwards  sought,  in  a  Common  Pleas,  Ohio,  3  Ry.  &  Corp.  L.  J. 
court  of  equity  of  the  State  of  New  26,  where  the  use  of  such  a  trust  fund  by 
York,  to  have  the  funds  raised  upon  these  the  directors  of  the  company  in  purchas- 
bonds,  which  he  claimed  were  diverted  ing  from  a  majority  of  themselves  and 
from  the  purpose  stated  in  the  covenant  others  the  entire  capital  stock  of  a  mining 
embraced  in  the  mortgage,  restored  by  the  coiporation  was  held  prima  facie  a  viola- 
defendants  and  applied  to  the  betterment  tion  of  the  rights  of  the  owners  and  hold- 


54  RAILWAY  BONDS   AND   MORTGAGES.  [CHAP.  II. 

But  there  is  no  privity  or  trust  relation  between  the  president 
of  a  company  and  the  bondholders  as  to  the  use  of  the  money 
borrowed.  The  right  to  redress  for  any  improper  use  of  the 
money  by  the  president  is  not  in  the  bondholders,  but  in  the  com- 
pany or  its  stockholders,^  who  may  maintain  suit  against  directors 
illegally  diverting  such  funds  for  an  accounting  as  to  the  funds 
received  by  them.  If,  for  instance,  a  majority  of  the  directors 
have  made  an  illegal  purchase  of  property  from  themselves  with 
such  a  trust  fund,  the  company  would  not  be  estopped  from  an 
action  by  the  fact  that  a  minority  of  its  directors  had  no  interest 
as  sellers,  nor  by  the  fact  that  at  the  time  of  such  a  purchase  and 
misuser  of  the  funds  the  directors  owned  all  of  its  capital  stock, 
and  as  stockholders  unanimously  ratified  what  they  as  directors 
had  done.^ 

The  agents  for  the  negotiation  of  bonds  of  a  railroad  company 
sold  its  bonds  and  became  accountable  for  the  price,  but  after- 
wards bought  them  back  in  their  own  interest,  and  led  the  com- 
pany to  suppose  that  they  had  not  been  negotiated.  Afterwards 
they  made  a  loan  to  the  company  upou  these  bonds  as  collateral 
security,  at  the  same  time  entering  into  an  agreement  that  the 
trustees  (who  had  the  equitable  title  to  the  proceeds)  would  treat 
the  loaned  money  as  a  trust  fund,  and  disburse  it  for  certain  speci- 
fied objects.  The  survivor  of  this  firm,  which  was  the  agent  of  the 
company,  brought  suit  to  enforce  the  agreement,  alleging  an  ap- 
propriation by  the  trustees  of  this  firm  to  foreign  purposes.  It 
aj)peared  that  the  company  was  in  ignorance  tliat  there  had  ever 
been  a  negotiation  of  these  bonds,  and  that  this  firm  had  then  in 
its  hands  moneys  unaccounted  for.  It  was  held  that  a  court  of 
equity  W(juld  not  assist  the  com])lainant,  as  he  did  not  come  into 
court  with  clean  hands,  and  that  the  trustees  could  invoke  the 
principles  of  equitable  set-off  to  defeat  the  action.^ 

As  to  the  right  of  the  bondholders  to  reclaim  the  unspent  pro- 
ceeds of  th(!  bonds,  see  the  preceding  and  the  following  sections. 

§  32.  When  Bondholders  are  entitled  to  demand  Repayment  of 
the  Unspent  Portion  of  the  Proceeds  of  their  Bonds.  —  Where  money 
lias  l)C'en  sul).scril)cd  by  bondhohlers  for  a  particular  purpose,  such 
as  tlie  construction  of  a  raih-oad,  and  a  part  of  that  money  has 

ers  of  tlic,  lioiids  jukI  an  injury  to  tlicm,  ^  Columbus,  Hocking  Valley,  &  Toledo 

wlii<h     equity,    upon    their    application,  Ry.    Co.    v.    Burke    (Court   of    C'oninion 

coiilil   prevent   by  injunetion.     Tliis  case  Pleas,  Ohio,  1887),  3  Ry.  &  Corp.  L.  J. 

was  settletl   V)V  arbitration  finally,   and  a  20. 

judgment  entered  in  favor  of  defendants.  "  jjigchoffsheim   v.    Brown    (1888),  34 

1  Van    Weel    v.   Winston    (188r>),   115  Fed.  Kep.  156. 
U.  S.  228. 


§§  33,  34.]  EIGHTS   OP   BONDHOLDEES.  55 

been  placed  in  the  hands  of  trustees,  —  the  duty  of  such  trustees 
being  to  pay  portions  of  the  money  as  portions  of  the  road  are 
constructed, —  if  no  such  railroad  nor  any  portion  of  it  is  con- 
structed, and  its  construction  becomes  impracticable,  the  bond- 
holders are  entitled  to  demand  from  the  trustees  repayment  of 
what  remains  in  their  hands.  The  practicability  of  completing 
the  work  is  not  to  be  determined  solely  by  physical  or  finan- 
cial reasons,  but  conditions  previously  stipulated  must  also  be 
considered.! 

§  33.  Lien  of  Bondholder  not  lost  by  Surrender  of  Bonds.  —  A 
bondholder  who  surrenders  his  bonds  for  the  mere  purpose  of 
having  the  indebtedness  scaled  down,  and  receives  new  bonds, 
leaving  a  fraction  over  for  which  no  bond  was  issued,  will 
be  entitled,  to  the  extent  of  such  fraction,  to  come  in  on 
the  same  footing  with  other  bondholders  in  respect  to  his 
lien.2 

§  34.  Bondholders'  Right  to  sue  Trustees  in  Possession  for 
Money  received  by  them.  —  Where  trustees  in  possession  of  the 
mortgaged  property  have  received  money  applicable  to  the  bonds, 
and,  instead  of  paying  it  over  to  the  bondholders,  have  diverted  it 
to  their  own  uses  and  otherwise,  a  suit  in  equity  will  lie  against 
such  trustees  by  and  on  behalf  of  all  the  bondholders  for  the 
recovery  of  such  moneys  and  the  removal  of  the  trustees.  In 
such  a  suit  bondholders  who  have  acquired  their  bonds  since  the 
moneys  accrued  are  entitled  to  share  in  the  recovery,  for  the 

1  National  Bolivian  Nav.  Co.  v.  Wilson  (1893),  L.  R.  2  Ch.  96,  54  Am.  &  Eng.  R.  R. 

(1880),  L.  R.   5  App.  Gas.  176.     In  this  Gas.    623,  involved    very  similar  circum- 

case  a  loan  was  raised  to  construct  a  rail-  stances,  the  completion  of  the  road  having 

road  in  Bolivia,  the  loan  being  raised  on  become    impossible,    owing    to    litigation 

the  faith  of  a  prospectus  which  set  forth,  which  delayed  the  realization  of  the  bonds. 

as  a  security  to  the  bondholders,  the  grant  The  unspent  portion  of  the  proceeds  was 

of    a    concession    by    the    government   of  administered  on  the   principle  that  such 

Bolivia,    in   virtue   of    which    the    bond-  funds  ought   to   be  applied,   in  the  first 

holders   would   have   the   benefit    of    the  place,  in  saving  and  realizing  the  property 

customs   duties  imposed  by  that  govern-  charged,  and  then  distributed  among  the 

ment  on  goods  passing  along  the  railroad,  bondholders. 

The  government  revoked  the  concession,  2  Blair  v.  St.   Louis,  H.  &  K.  R.  Co. 

and   it   was   held   that    the    loss    of    the  (1885),   23  Fed.   Rep.   524.     An  arrange- 

security  which  the  concession  had  afforded  ment  for  surrender  of  old  mortgage  bonds 

to  the  bondholders  entitled  them  to  treat  and  the  scaling  of  the  indebtedness  and  an 

the  scheme  as  a  failure,  and  to  demand  the  issue  of  new  bonds  was  entered  into.     No 

return   of  their   subscriptions.     Whether  bonds  were  issued  for  so  small  an  amount 

the   revocation   was   rightful   or  not  was  as  A. 's  fraction  amounted  to.    His  equitable 

declared  to  be  a  question  which  could  not  lien  for  this  fraction  was   recognized   as 

be  considered  by  the  courts  of  any  other  equal  to  that  of  those  who  had  received 

country.  the  bonds. 

A  subsequent  case,  Collingham  v.  Sloper 


56  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  II. 

reason  that  such  moneys  are  a  part  of  the  security  for  the  debt 
which  passed  with  it,  unless  a  contrary  intention  appears.^ 

§  35.  Conversion  of  Bonds  into  stock.'^^  —  Bonds  convertible  into 
stock  are  not  as  common  as  formerly,  although  there  are  some 
recent  instances  of  loans  on  this  basis.  Where  a  bond  is  made 
"  convertible  into  capital  stock  at  the  pleasure  of  the  holder,  upon 
the  surrender  thereof,  with  the  unpaid  interest-coupons,  to  the 
secretary  of  the  company,"  the  convertible  clause  inures  to  the 
advantage  only  of  an  actual  holder.  A  petition,  therefore,  which 
does  not  aver  that  the  plaintiffs  were  at  the  commencement 
of  their  action  the  owners  and  holders  of  any  of  the  convertible 
bonds  is  fatally  defective  and  demurrable.^ 

A  bondholder  who  has  the  option  of  converting  his  bonds  into 
stock  at  any  time  has  no  right  to  share  in  stock  issued  in  lieu  of 
dividends  to  the  persons  holding  stock  prior  to  the  conversion  of 
his  bonds.  To  allow  him  to  do  so  would  amount  to  giving  him 
interest  not  only  on  his  bonds,  but  also  on  the  stock  for  which 
he  is  entitled  to  exchange  them,  and  would  entail  the  conse- 
quence that  the  longer  he  delays  his  election  the  more  stock  he 
would  receive.* 

On  the  other  hand,  a  charter  providing  that  semi-annual  divi- 
dends shall  be  paid  on  certain  days  of  so  much  of  the  profits  as 
the  corporation  may  deem  expedient,  contemplates  that  the  divi- 
dends sliall  be  payable  to  those  parties  who  are  stockholders  at  the 
time  of  making  them.  Hence  a  holder  of  bonds  which  he  con- 
verts into  stock  before  the  declaration  of  a  dividend  is  entitled  to 
a  proportionate  share  of  such  dividend,  and  the  directors  have  no 
right  to  discriminate  between  him  and  his  associate  stockholders. 
The  circumstance  that  the  directors  have  adopted  some  particu- 
lar day  as  the  close  of  the  fiscal  year,  or  selected  special  days  for 
declaring  dividends,  or  closed  the  transfer  books  for  any  purpose, 
does  not,  in  any  way,  impair  the  legal  rights  of  stockholders  to 
share  in  dividends  subsequently  declared.^ 

1  Dwight  V.  Smith  (1882),  13  Fed.  com i)ly  with  a  demand  for  the  conversion 
Rep.  50.  of  tlieir  bonds  into  stock.     It  was  declared 

Sec,  as  to  distinction  between  a  bond-  that  the  holder  of  such  bonds  could  not 

holder's   right  in  an  action  on  the  bond  assign  to  another  the  right  of  action  for  a 

itsi'lf  and  his  right  against  a  trustee  of  the  breach  of  the  stipulation   for  conversion, 

mortgage,    Dwight    v.    Smith    (1881),    9  and  yet  retain  the  bond  for  the  benefit  of 

Fed.  llcf).  795.  himself  and  his  future  assignees. 

2  Sec  also  §  30,  ante  (circulars).  *  Sutlilf    v.    Cleveland,    etc.    R.    Co. 
»  I).-nney  'v.    Cleveland,   etc.    R.    Co.  (1873),  24  Ohio  St.  147. 

(1875),  28  Ohio  St.    108.      In  this  case  *  Jones  v.   Tcrre   Haute,   etc.    R.    Co. 

several   owners  of  convertible  bonds  liad  (1874),   57   N.    Y.    197,   Earl   and  Gray, 

assigned   U)  the  plaintiff  their   rights   of  C.  C,  dissenting, 
action  for  the  refusal  of  the  company  to 


§,35.]  RIGHTS   OF   BONDHOLDERS.  67 

The  right  to  convert  bonds  into  stock  at  the  option  of  the 
holder  is  forfeited,  if  not  exercised  within  the  specified  period, 
unless  some  agreement  to  the  contrary  is  shown.  A  simple 
acceptance  by  the  bondholder  of  the  terms  of  a  circular,  in  which 
he  is  asked  to  assent  to  an  extension  of  the  time  for  the  payment 
of  the  bonds,  would  possibly  be  treated  as  such  an  agreement ;  but 
where  the  bondholder,  in  giving  his  assent,  fixes  his  own  terms  of 
acceptance  without  any  reference  to  the  circular,  the  riglit  of 
conversion  will  be  deemed  to  have  expired  at  the  date  originally 
named.  ^ 

Where  a  bondholder,  having  the  privilege  of  presenting  his 
bonds  at  or  before  maturity  for  conversion  into  stock  of  the  cor- 
poration, fails  to  present  the  bonds  and  demand  conversion  until 
after  maturity,  his  right  to  receive  the  stock  is  forfeited.^ 

Where  bondholders  have  a  right  under  their  contract  to  con- 
vert their  bonds  into  stock  at  any  time  before  maturity,  they 
cannot,  upon  the  consolidation  of  the  company  issuing  the  bonds 
with  another,  be  deprived  of  this  privilege,  and  thrown  upon  the 
rights  conferred  upon  them  by  the  articles  of  consolidation, 
unless,  after  having  received  reasonable  notice  of  the  proposed 
consolidation,  they  have  elected  to  retain  their  bonds  instead  of 
taking  the  stock  they  were  entitled  to.^ 

So  a  bondholder  who  is  also  a  stockholder  of  the  company 
which  issued  his  bonds,  and  who,  as  such,  takes  part  in  proceed- 
ings by  which  a  consolidation  with  another  company  is  effected,  and 
assents  thereto,  is  bound  by  all  the  legal  consequences  of  the  con- 
solidation, among  which  is  the  inability  of  the  obligor  company 
to  create  and  issue  any  fresh  stock.  Any  right  which  he  may 
have  up  to  the  time  of  the  consolidation  to  convert  his  bonds  into 
stock  expires  when  the  consolidation  is  thus  completed  with  his 
acquiescence,  especially  where  the  statute  authorizing  the  consoli- 
dation expressly  provides  that  the  consolidated  company  is  to 
assume  the  existing  contracts  and  liabilities  of  the  constituent 
companies,  "  in  such  manner  as  shall  be  satisfactory  to  all  parties 
having  an  interest  in  the  same."  Under  such  circumstances  his 
own  assent  to  what  was  done  precludes  him  from  relying  on  the 
principle  that  the  successor  to  the  liabilities  of  the  obligor  com- 

1  Muhlenberg  v.  Phila.,  etc.  R.  Co.  146  Mass.  224  ;  s.  c.  16  N.  E.  Rep. 
(1864),  47  Pa.  St.  16;    where  an  election     34. 

must  be  made,  see  Landis  v.  West  Pa.  R.  ^  Rosenkrans  v.  Lafayette,  etc.  R.  Co. 

Co.,   133  Pa.  St.  579  ;  s.  c,  19  Atl.  Rep.  (1883),  18  Fed.  Rep.  513.     See  Caley  v. 

656.  Cobourg,  P.  &  M.  R.  &  M.  Co.,  14  Grant 

2  Chaffee  v.  Middlesex  R.  Co.  (18SS),  Ch.  (Can.)  571. 


58  EAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  II. 

pany  ought  to  respond  in  damages  for  the  breach  of  the  contract 
to  deliver  stock,  for  tiie  reason  that  the  impossibility  of  doing  so 
arises  from  the  acts  of  the  obligor  company.^ 

§  36.  Priorities  where  Old  Bonds  are  exchanged  for  Nevr.^  — 
There  is  no  principle  which  forbids  a  corporation  that  has  issued 
a  series  of  bonds  from  purchasing  a  part  of  them  back  and  reissu- 
ing them  again  before  their  maturity,  when  the  financial  interests 
of  the  corporation  will  be  thereby  promoted,  unless  the  organic 
law  of  the  corporation  prohibits  the  exercise  of  such  a  power.  It 
is  wholly  immaterial  whether  it  pays  money  upon  such  a  pur- 
chase, or  exchanges  other  bonds  instead.  Nor,  if  it  should 
destroy  the  bonds  purchased  and  issue  duplicates,  not  intending 
to  extinguish  the  debt  evidenced  by  the  bonds,  will  the  lien  of 
the  mortgage  be  affected  by  the  substitution  of  the  new  bonds.^ 

The  contract  with  the  individual  bondholder  is  no  more  than 
that  he  shall  have  his  due  proportion  of  the  security  implied  on 
the  face  of  the  mortgage.* 

Hence  where  a  company  first  executes  a  mortgage  to  secure  a 
limited  number  of  bonds,  and  then  another  mortgage  to  secure 
a  larger  number,  the  second  mortgage  reciting  that  the  holders  of 
bonds  secured  by  the  first  mortgage  had  agreed  to  surrender  the 
same,  and  receive  in  substitution  therefor  new  bonds  to  be  secured 
by  the  first  mortgage,  as  modified  by  the  second,  and  all  the 
bonds  secured  by  the  first  mortgage  except  twenty  are  exchanged 
in  pursuance  of  this  agreement,  the  holders  of  these  twenty  bonds 
are  not  entitled  to  receive  any  larger  share  of  the  proceeds  of  a 
subsequent  foreclosure  sale  than  they  would  have  been  entitled  to 
had  the  new  bonds  not  been  issued.^ 

So  a  holder  of  income  bonds  who  does  not  surrender  his  bonds 
in  pursuance  of  an  agreement  by  which  they  were  to  be  exchanged 
for  bonds  of  a  new  issue,  will  be  restricted  in  a  suit  for  an  account- 
ing to  a  recovery  of  the  sum  wliich  would  have  been  due  to  him  if 
no  bonds  had  been  surrendered.^ 

Tlie  State  of  South  Carolina  guarantied  the  payment  of  certain 
bonds  of  a  railroad  company,  to  be  issued  in  exchange  for  out- 
standing bonds  secured  by  mortgages.  The  statute  authorizing 
the  guai-anty  provided  that  the  State  should  take  and  retain  pos- 

1  Tiigrrart  V.  Northern  Central,  etc.  R.  *  Claflin  v.  Railroad  Co.  (1880),  4 
Co.  (1808),  29  M(l.  r,r)7.  HuRhos,  12  ;  s.  c.  8  Fed.  Rep.  118. 

2  As    to    tlie    exchange    of    bonds    in  *  Ames  v.  New  Orleans,  Mob.   &  Tex. 
reor^rmization     proceedings,     see     Chap.  R.  Co.  (1876),  2  Woods,  206. 
XXXVII.  0  Harry  u.  Missouri,  etc.  Ry.  Co.  (1888), 

8  r.jirry  v.  Missouri,  etc.  Ry.  Co.  (1888),     34  Fed.  Rep.  829. 
84  Fed.  R.-p.  827. 


§  36.]  RIGHTS  OP   BONDHOLDERS.  59 

session  of  the  bonds  surrendered  and  exchanged  "  as  security  to 
the  State,"  the  State  thereby  to  be  given  the  lien  of  the  mortgages 
until  the  bonds  should  all  be  retired.  Some  bonds  were  not  sur- 
rendered and  exchanged.  It  was  held  that  the  State  could  assert 
her  lien  for  such  bonds  as  she  held,  together  with  the  coupons 
thereto  attached,  with  equal  rank  with  the  bonds  secured  by  the 
prior  mortgages,  but  never  surrendered  and  exchanged.^ 

The  State  of  Alabama,  as  authorized  by  the  legislature,  in- 
dorsed an  issue  of  bonds  of  the  Alabama  &  Chattanooga  Rail- 
road Company.  The  strict  letter  of  these  statutes  not  having 
been  conformed  to,  there  proved  to  be  an  over-issue  of  these  bonds 
by  the  company.  The  bonds,  however,  went  to  bona  fide  pur- 
chasers in  the  markets  of  the  country.  An  adjustment  of  the 
liability  of  the  State  to  these  bondholders  was  provided  for  after- 
wards, and  an  act  passed  by  the  legislature  providing  for  an  issue 
of  State  bonds  to  a  certain  amount,  to  be  exchanged  for  these 
old  indorsed  bonds,  the  latter  to  be  retired  and  extinguished. 
A  question  was  made  on  the  relation  of  a  bondholder  as  to 
whether  or  not  under  this  act  the  holders  of  the  over-issue  of 
the  indorsed  bonds,  if  they  could  be  ascertained,  were  entitled 
to  have  their  bonds  allowed  a  benefit  in  this  adjustment  of  the 
State's  liability.  It  was  held  that  the  holders  of  the  whole  issue 
of  bonds,  whether  or  not,  shown  by  the  numbering  or  otherwise, 
any  of  them  held  the  over-issue,  were  entitled  to  have  their  bonds 
retired  and  extinguished,  and  to  receive  the  State  bonds  in  ex- 
change for  them.2 

A  bondholder  who  signs  an  agreement  for  the  purchase  of  the 
property  of  a  railroad  company  by  the  bondholders  and  a  re- 
organization, the  new  company  to  execute  a  mortgage  and  issue 
bonds  to  be  exchanged  for  the  bonds  of  the  old  company,  and 
receives  a  notice  to  surrender  his  bonds  for  exchange,  but  fails 
to  do  so  until  after  the  purchase  of  the  road  and  the  formation  of 
the  new  company,  notwithstanding  the  agreement  bound  him  to 
surrender  when  requested  to  do  so,  will  have  no  right  to  claim 
any  benefits  under  the  agreement,  or  to  insist  on  the  delivery  of 
new  bonds.^ 

An  intervener  in  a  foreclosure  suit  claimed  that  as  he  had  a 
separate  agreement  in  the  matter  of  a  purchase  and  reorganiza- 
tion of  a  company,  and  the  exchange  of  bonds  of  the  old  for  bonds 

1  Gibbes  v.  Greenville  &  Columbia  R.  Ala.  127  ;  s.  c.  7  Am.  &  Eng.  R.  R.  Cas. 
Co.  (1880),  13  S.  C.  (N.  S.)  228  ;  s.  c.  4     147. 

Am.  &  Eng.  R.  R.  Cas.  459.  3  Carpenter  v.  Catline  et  al.   (1865), 

2  State  cxrel.  Plock  v.  Cobb  (1879),  64     44  Barb.  75, 


60  RAILWAY  BONDS  AND   MORTGAGES.  [CHAP.  II. 

of  the  new,  if  all  the  old  bondholders  did  not  come  into  the 
arrangement,  his  bonds  which  had  been  surrendered  should  be 
returned  to  him,  and  himself  restored  to  all  the  rights  he  origi- 
nally held,  and  prayed  that  his  old  bonds  be  restored  to  him,  and 
that  he  be  paid  out  of  the  proceeds  of  the  sale  as  a  creditor  under 
the  original  mortgages.  It  was  held  that  he  was  not  entitled  to 
the  relief  he  asked  as  against  purchasers  of  the  bonds  who  had 
no  notice  of  his  equity.-^ 

A  railroad  company  which  builds  an  extension  of  its  line  exe- 
cuted a  mortgage  on  such  extension  which  provided  that  the 
"  trustee  may  issue  bonds  secured  by  these  presents,  and  ex- 
change for  an  equal  amount  of  the  existing  outstanding  bonds  of 
the  [company],  which  bonds  so  received  in  exchange  shall  be 
held  by  said  trustee  as  collateral  for  the  bonds  issued  under  this 
mortgage  until  all  of  said  bonds  issued  by  the  [company]  shall 
have  been  surrendered ;  and  when  all  of  said  bonds  shall  have 
been  surrendered,  they  shall  be  forthwith  cancelled  by  said 
trustee." 

This  provision  has  been  construed  by  a  federal  judge  to  mean 
that  a  bondholder  exchanging  old  bonds  for  new  would  not 
have  the  right,  in  case  all  the  old  bonds  were  not  surrendered  and 
cancelled,  to  have  his  old  bonds  returned  to  him  by  the  trustee 
upon  his  surrender  of  the  new  ;  that  the  trustee  would  hold  the 
old  bonds  as  a  collateral  for  such  bondholder  and  other  holders ; 
that  those  who  had  made  the  exchange  would  have  the  benefit  of 
the  new  bonds  on  the  extended  line  of  the  road  not  covered  by 
the  old  bonds,  and  also  the  benefit  of  the  old  bonds  as  a  collateral 
for  their  new  bonds.^ 

The  surrender  of  bonds  secured  by  a  first  mortgage  by  bond- 
holders, under  a  reorganization  agreement,  to  their  committee,  to 
be  held  as  additional  security  for  them,  to  be  exchanged  for  bonds 
of  a  consolidated  mortgage  to  be  delivered  to  them  on  a  certain 
contingency  which  has  never  happened,  is  not  a  transaction  pro- 
hibited by  a  statute  providing  that  "  no  corporation  shall  issue 
any  bonds  or  other  evidences  of  indebtedness  except  for  money, 
labor,  or  property  estimated  at  its  true  money  value  actually 
received  by  it,  equal  to  seventy-five  per  cent  of  the  par  value 
thereof."  3 

Holders  of  bonds  secured  by  deed  of  trust  upon  property  which, 

^  Jcsup  V.  Wilmington  &  Manchester  (Morse,   Intervener),    73    Fed.    Rep.    589 

R.  Co.  (1871),  2  S.  C.  (N.  S.)  469.  (18!H)). 

2  Central  Trust  Co.   of  New  York  v.  *  Mowry   v.    Farmers'  Loan   &   Trust 

Marietta    k    North   Ga.   Ry.    Co.   et  al.  Co.  (1896),  76  Fed.  Rep.  38,  45. 


§  37.]  RIGHTS   OP  BONDHOLDERS.  61 

together  with  other  property  not  included  in  such  deed,  was  after- 
wards mortgaged  to  secure  a  subsequent  series  of  bonds,  some  of 
which  were  placed  in  the  hands  of  a  special  trustee,  "  tu  be  applied 
exclusively  for  the  purpose  of  discharging  the  property  conveyed 
from  prior  liens,"  are  not  entitled  to  have  the  fund  for  the  pay- 
ment of  their  claims  increased  by  means  of  these  bonds  in  the 
hands  of  said  special  trustee,  it  being  the  evident  purpose  of  the 
deposit  of  the  bonds  to  put  all  the  debts  of  the  company  upon  an 
equal  footing,  retiring  the  old  and  substituting  the  new  bonds,  and 
not  to  furnish  additional  security  for  those  already  provided  for.^ 

Where  a  railroad  company  enters  into  an  agreement  with  the 
holders  of  first-mortgage  bonds  that  they  are  to  surrender  those 
bonds  and  receive  in  lieu  thereof  second-mortgage  bonds,  which 
are  by  express  stipulation  to  be  subject  to  a  new  issue  of  first- 
mortgage  bonds,  the  subsequent  rights  of  the  parties  surrendering 
the  bonds  depend  upon  the  agreement;  and  notwithstanding  the 
failure  of  the  company  to  perform  the  agreement  to  deliver  the 
second-mortgage  bonds,  they  are  not  entitled  to  claim  the  benefit 
of  the  lien  held  by  them,  prior  to  the  agreement,  as  assignees  of 
the  original  issue  of  first-mortgage  bonds.  The  measure  of  the 
compensation  for  the  failure  to  perform  the  agreement  is  the  face 
value  of  the  bonds  called  for  therein.^ 

A  bondholder  who  may  have  surrendered  his  bonds  under  a 
separate  agreement  that,  if  an  arrangement  for  the  exchange  of 
old  bonds  for  new  is  not  adopted  by  all  the  bondholders,  his  old 
bonds  should  be  returned  to  him,  and  he  be  restored  to  all  his 
rights  thereunder,  would  have  no  equity,  as  against  purchasers 
of  the  new  bonds  without  notice  of  such  agreement,  to  be  restored 
to  his  original  rights.^ 

§  87.  Transactions  raising  the  Question  -whether  Bonds  have  been 
paid  or  are  still  outstanding."*  —  When  a  bond  is  surrendered,  and 
a  new  bond  taken  in  its  place,  the  new  bond  will  be  secured  by 
the  mortgage,  unless  it  appears  that  an  extinguishment  of  the 
debt  was  intended.^ 

Where  debentures  are  exchanged  for  mortgage  bonds,  the  ques- 

1  Meyer  v.  Johnston  (1875),  53  Ala.  rence  Mfg.  Co.,  96  N.  C.  298,  under  §  37, 
237  ;  s.  c.  15  Am.  Ry.  Rep.  467.  below,  and  cases  generally  cited  under  that 

2  Fidelity  Ins.  Trust  &  Safe  Deposit  Co.     section. 

V.  Shenandoah  Valley  R.  Co.  (1890),  33  *  Compare   similar    discussion   in   the 

W.  Ya.  761  ;  s.  c.   11   S.  E.  Rep.  58  ;  43  case  of  coupons,  Chap.  III.,  below. 
Am.  &  Eng.  R.  R.  Cas.  356.  5  Traders'    Nat.     Bank    v.    Lawrence 

8  Ex  parte  ^Yhite,  Lire  Jesup  v.  Wil-  Mfg.   Co.    (1887),   96  N.    C.    298;    s.  C. 

mington  &  Manchester  R.   Co.  (1873),    2  3  S.  E.  Rep.  363. 
S.  C.  461.   See  also  Traders'  Bank  v.  Law- 


62  RAILWAY   BONDS   AND    MORTGAGES.  [CHAP.  II. 

tion  whether  the  former  securities  are  extinguished  by  the  accept- 
ance of  the  latter  depends  upon  the  intention  of  the  parties,  as 
manifested  by  the  agreement  in  virtue  of  which  the  exchange  is 
effected,  the  stipulations  of  the  bonds,  and  the  provisions  of  the 
general  mortgage.  The  conclusion  that  they  are  intended  to  be 
extinguished  is  not  warranted  where  the  agreement  declares  "  that 
the  lien  of  the  debentures  deposited  with  the  trustee  of  the  new 
mortgage  shall  be  maintained  for  the  security  and  benefit  of  the 
bonds  issued  under  said  new  mortgage,"  and  several  other  provi- 
sions are  inserted  which  cannot  be  carried  out  if  the  debentures 
are  extinguished.^ 

Where  a  receiver,  in  the  exercise  of  the  discretion  allowed  him 
in  the  financial  manipulation  of  the  assets,  takes  up  bonds  and 
then  reissues  them,  for  the  purpose  of  saving  interest  and  meeting 
the  current  expenses  on  the  most  economical  footing,  it  cannot  be 
assumed  that  the  lien  of  the  bond  thereby  taken  up  is  destroyed. 
In  the  first  place,  the  receiver,  as  the  mere  "  hand  "  of  the  court, 
is  not  vested  with  any  such  extensive  authority  to  pay  a  bond, 
cancel,  and  then  reissue  it,  deprived  of  the  protection  of  the 
original  mortgage  by  which  it  was  made  valuable  and  negotiable. 
In  the  second  place,  it  would  be  extravagant  to  suppose  that  a 
man  of  ordinary  business  capacity  would  advance  his  money  to 
a  corporation  the  property  of  which  is  being  administered  by  a 
receiver  unless  he  believed  himself  to  be  protected  by  the  mort- 
gage. Especially  will  the  court  decline  to  view  such  bonds  as 
having  been  retired  if  the  receiver  describes  them  in  several 
annual  reports  as  "  first-mortgage  bonds  then  outstanding,"  and 
in  some  of  his  promissory  notes  as  "  first-mortgage  bonds  past 
due."  Under  such  circumstances,  the  actual  intent  of  the  receiver 
is  clear,  that  the  purchasers  are  to  take  them,  upon  the  reissue, 
clothed  with  all  the  protection  to  which  they  were  entitled  when 
they  were  first  issued.^ 

Similarly  where  an  embarrassed  railroad  company,  unable  to 
meet  its  bonded  obligations,  resorted  to  funding  them  in  new 
bonds,  and,  for  amounts  under  £1,000,  issued  to  the  holders  of 
the  original  bonds  certificates  of  indebtedness  for  coupons  past 
due,  not  requiring  those  receiving  them  to  waive  the  mortgage 

1  Mobile  &  Ohio  R.  Co.  v.  Nicliolas  ct  2  S.  C.  461.     For  a  case  where  bonds  wero 

al.  (1893),  98  Ala.  92  ;  s.    o.   12  So.  Rep.  held  not  extinguished,  see  Mowry  v.  Farm- 

723.    For  a  case  where  old  bonds  exchaiirjcd  ers'  L.  &  T.  Co.  (1896),  76  Fed.  Rep.  43. 
for  new  iind(!r  an  agreement  were  treated  ^  Oibbes   v.    Greenville,    etc.    R.    Co. 

as  extlDKuished  by  the  surrender  and  ex-  (1880),  15  S.  C.  304  ;  s.  c.  9  Am,  &  Eng. 

change,  see  Er,  parte  White,  Jure  Jesnp".  R.  R.  Cas.  739. 
■VVihiiington  &  Manchester  K.  Co.  (1873), 


§  38.]  EIGHTS   OP   BONDHOLDERS.  63 

lien,  nor  to  accept  those  last-mentioned  certificates  as  payment  of 
the  coupons  for  interest  past  due,  upon  the  question  of  tlie  rights 
of  the  holders  a  federal  court  held  that  these  certificates  must  be 
regarded  as  substituted  for  the  original  secured  obligations,  and 
not  as  a  novation  of  the  contract,  and  their  holders  were  entitled 
to  avail  themselves  of  the  lien  to  which  the  original  obligations 
were  entitled.^ 

But  the  rule  that  the  obligee  in  the  new  bond  is  entitled  to  the 
benefit  of  the  mortgage  by  which  the  first  one  was  secured  is  not 
applicable  to  a  case  where  the  mortgage  is  actually  cancelled  and 
discharged  of  record,  and  the  adverse  claimant  is  a  creditor  to 
whom  a  debt  has  been  contracted  between  the  time  of  such  can- 
cellation and  the  execution  of  a  mortgage  to  secure  the  new 
bond.2 

§  38.  Efifect  of  Fraud  upon  Priorities  between  Bondholders.^  —  The 
superior  legal  title  of  the  holders  of  first-mortgage  bonds  will  be 
postponed  to  that  of  the  holder  of  second-mortgage  bonds,  where 
the  latter  was  induced  to  accept  the  position  of  a  subordinate 
lienor  by  the  fraudulent  representation  of  the  former.* 

Where  coupons  of  outstanding  bonds  have  been  dishonored 
before  the  bonds  came  into  the  hands  of  one  who  holds  such  a 
large  portion  of  the  stock  that,  in  a  business  point  of  view,  he  is 
himself  substantially  the  company,  and  therefore  interested  in 
floating  the  residue  of  the  bonds  at  as  high  a  price  as  possible, 
and  it  is  evident  that  he  purchased  the  bonds  with  a  view  to 
bringing  about  that  result,  equity  will  neither  allow  him  a  prefer- 
ence over  the  purchasers  of  any  bonds  thereafter  negotiated  nor 
coequal  rights  with  them.^ 

But  where  the  holders  of  bonds,  in  placing  a  portion  of  them 
upon  the  market,  and  their  agent  in  selling  the  same  have  not 
made  any  representations,  or  done  anything  which  would  be  likely 
to  deceive  or  defraud  the  persons  purchasing  bonds  of  them,  they 
will  not  be  postponed  in  the  payment  of  the  interest  on  their 
remaining  bonds  until  the  payment  in  full  of  the  bonds  sold  by 
them ;  nor  will  they  be  so  postponed  because  of  their  having  neg- 

1  Skiddyv.  Atlantic,  Miss.  &  Ohio  R.  In  this  case  the  vendor  of  land  was  induced 
Co.,  3  Hughes,  320  ;  s.  c.  Case  No.  12,922,  to  relinquish  his  lien  as  such  by  an  assur- 
22  Fed.  Cas.  274.  ance  made  in  behalf  of  the  purchasers  that 

2  Traders'  National  Bank  v.  Lawrence  they  had  sufficient  funds  to  pay  for  certain 
Mfg.  Co.  (1887),  96  N.  C.  298;  s.  c.  3  S.  betterments  which  were  to  be  placed  on 
E.  Rep.  363.  the  laud,  and  took  second-mortgage  bonds 

8  Compare  §§  78,  79,  post.  in  part  payment  of  the  price. 

*  Hooper  et  al.   v.   Central  Trust  Co.  6  Wood  v.  Guarantee   T.    Co.    (1888), 

(1895),  81  Md.  559  ;  s.  c.  32  Atl.  Rep.  505.     128  U.  S.  416. 


64  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  II. 

lected  to  inform  such  purchasers  of  the  fact  that  the  mortgagor 
had  failed  to  keep  the  interest  paid  on  their  bonds. ^ 

§  39.  Priority  of  Holders  of  Bonds  guarantied  by  other  Holders. — 
The  priority  of  a  bondhokler  wliose  bonds  have  been  guarantied 
by  his  co-bondholders  cannot  be  in  any  way  impaired  without  his 
consent.  A  court  has  therefore  no  authority  to  make  a  decree 
over  an  objection  of  such  bondholder  directing  the  trustee  to  bid 
in  the  property  on  foreclosure  for  the  full  amount  of  the  bonded 
security,  inasmuch  as  the  effect  of  such  action  would  be  that  he 
would  be  deprived  of  the  benefit  of  his  guaranty,  and  instead 
thereof  would  be  invested  with  only  his  pro  rata  share  of  the 
property.'^ 

§   40.    Rights  of  Income  Bondholders.^ 

(a)  G-enerally.  —  "  Income  bonds  "  are  a  well-known  class  of 
securities,  deriving  their  name  from  the  pledge  of  the  income  of 
the  corporations  issuing  them,  set  out  upon  their  face  as  the  secu- 
rity, and  the  only  security,  offered  for  their  payment  over  and 
above  the  general  liability  of  the  corporation. 

In  income  bonds  the  rate  of  interest  is  stated,  as  also  the  par- 
ticular income,  usually  net  income  out  of  which  they  are  paid ; 
this  is  sometimes  more  specifically  stated,  and  the  mode  of  ascer- 
taining the  net  income  appears  on  the  bond.  If  cumulative,  or 
payable  out  of  future  incomes,  in  case  of  deficiency  during  inter- 
est periods,  this  also  must  particularly  appear  on  the  face  of  the 
bond. 

It  is  within  the  power  of  a  railroad  company  to  mortgage  its 
future  net  earnings  to  secure  the  prompt  payment  of  interest  on 
its  construction  bonds.'* 

A  scheme  of  reorganization  is  not  fraudulent  as  against  the 
unsecured  creditors,  when  it  provides  for  giving  them,  in  lieu  of 
their  evidence  of  debt  against  the  old  company,  preferred  income 
bonds,  equal  to  the  amount  of  their  claims,  with  interest  thereon.^ 

1  Humphreys  v.  Morton  (1881),  100  111.  ^  Hancock  v.  Toledo,  etc.  R.  Co.  (1882), 
592.  9  Fed.  Rep.  738  ;  s.  c.  11  Biss.  148.      In 

2  Sanxey  v.  Iowa  City  Glass  Co.  (1883),  sustaining  the  agreement  for  reorganization 
63  Iowa,  707;  s.  c.  17  N.  E.  Rep.  Judge  Blodgett  said :  "  This  income  bond 
429.  is,  by  the  tenns  of  agreement,   a  higher 

»  See  generally,  on  this  subject,  2  Redf.  grade  of  security  than  the  stock  of  the  old 

Ey.    L;tw,    528.     An  interesting  article  on  company  ;  that  is,  the  stockholders  get  no 

Income  Bonds  and  Mortgages,  by  G.    W.  dividends  until  the  interest  on  these  bonds 

Field,   is  to  be  found  in  25  Am.  L.   Reg.  is  all  paid.      The  stockholders  are  ^daced 

(N.  S. )  555  (1886).  behind  the  holders  of  these  bonds,  and  the 

♦  Jessu])  et  al.  Trustees  v.  Bridge  d  nl.  plan  seems  to  fairly  contemplate  the  pro- 

(1861),    11   Iowa,  572;  Dunham  v.  Isett  tection  of  all  classes  of  creditors  of  the  old 

et  al.  (1863),  15  Iowa,  284.  company  in  the  equitable  order  of  their 


§  40.]  RIGHTS   OP   BONDHOLDERS.  65 

(b)  Unsecured  Income  Bondholders,  when  entitled  to  a  Lien.  — 
The  holders  of  unsecured  income  bonds  acquire  a  right  enforceable 
in  equity  against  tlie  property  of  a  company  which  passes  into  the 
hands  of  a  purchaser  under  the  authority  of  a  statute  providing 
for  the  surrender  of  the  corporate  charter  when  the  sale  is  con- 
summated, and  dechiring  that  the  purchase  "  sliall  in  no  way  affect 
the  rights  of  the  creditors  of  the  company,"  the  presumption  from 
such  a  clause  being  that  it  was  introduced  for  the  benefit  of  un- 
secured rather  than  of  secured  creditors,  the  latter  being  already 
possessed  of  vested  rights  of  which  the  legislature  could  not 
have  deprived  them,  even  if  it  had  undertaken  to  do  so.  Under 
such  circumstances  the  familiar  principle  is  applicable,  that,  if  a 
corporation  is  dissolved,  or  has  become  so  disorganized  that  it 
cannot  be  made  answerable  at  law,  a  court  of  equity  will  follow 
and  lay  hold  of  its  property  for  the  satisfaction  of  its  debts,  unless 
that  property  has  passed  into  the  hands  of  a  I  ana  fide  transferee. ^ 

(c)  Rights  of  Income  Bondholders  when  Purchaser  at  Foreclos- 
ure Sale  fails  to  complete  his  Purchase.  —  The  utmost  right  that  in- 
come bondholders  are  entitled  to  when  a  company  purchasing  at 
a  sale  under  foreclosure  of  mortgages  prior  to  the  income  mort- 
gage fails  to  pay  the  amount  found  due  to  these  income  bond- 
holders, is  the  right  to  redeem  from  the  sale  already  had,  and  on 
failure  to  redeem  within  the  time  limited  in  the  decree  their  right 
would  be  forever  barred.^ 

(d)  Suits  hy  Income  Bondholders  for  an  accounting .^  tvhen  they 
lie.  —  Under  a  mortgage  to  a  trustee  by  a  railroad  company  to 
secure  income  bonds  by  the  payment  of  interest  on  those  bonds 
at  stated  periods,  out  of  the  surplus  earnings  of  the  company,  the 
mortgagor  owes  a  duty  to  the  bondholder  to  keep  such  an  ac- 
count of  its  earnings  as  will  show  the  net  results  of  each  interest 
period,  and  the  trustee  owes  an  active  duty  to  the  bondholders  in 
the  supervision  of  the  account.^ 

So,  where  the  interest  payable  is  dependent  upon  the  amount 
of  net  earnings  as  ascertained  by  the  directors,  a  bondholder  can 
maintain  a  bill  to  have  the  amount  justly  due  for  interest  ascer- 
tained and  paid.* 

priority.    It  was  tlie  evident  purpose  of  the  ^  Montgomery   &  West   Point  R.   Co. 

parties  to  this  agreement  to  place  these     v.  Branch  (1877),  59  Ala.  139. 
floating  debt-holders  in  at  least  as  good  a  ^  Simmons  v.  Taylor  (1889),  38  Fed. 

relation  to  the  new  company  as  they  bore     Rep.  682. 

to  the  old  company.      They  got  for  their  ^  Barry  v.  Missouri,  K.   &  T.   Ry.  Co. 

unsecured  indebtedness  something  which     (1886),  27  Fed.  Eep.  1. 
at  least  bears  the  semblance  of  a  security.  *  Spies  v.  Chicago,  etc.  Ry.  Co.  (1887), 

30  Fed.  Rep.  397,  per  Wheeler,  J. 
5 


66  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  II. 

(e)  Scope  of  Suits  for  accounting.  —  Where  the  holder  of  in- 
come bonds,  the  coupons  of  which  are  payable  from  the  "  net  earn- 
ings "  and  "  cumulative,"  brings  suit  for  an  accounting  of  the  net 
earnings  accrued  during  an  interest  period  for  which  the  com- 
pany is  in  default,  and  brings  actions  at  law  for  the  amount  of 
coupons  falling  due  six  and  twelve  months  afterwards,  the  law 
suits  may  be  stayed  without  prejudicing  the  plaintiff,  since  he  is 
entitled  to  an  account  in  the  equity  suit  not  merely  for  net  earn- 
ings prior  to  its  institution,  but  also  for  net  earnings  received 
during  its  progress  up  to  the  time  the  accounts  are  stated,  and  all 
his  rights  can  be  protected  in  that  suit.^ 

(f )  Comjjutation  of  Amount  due  to  Income  BondJioldei'S  in  Suits 
for  an  accounting.  —  Special  amounts  chargeable  in  any  one  year, 
as  against  holders  of  income  bonds  drawing  non-cumulative  in- 
terest, must  be  regulated  by  what  is  fair  in  the  interest  of  all 
concerned."'^ 

The  cost  of  issuing  income  bonds  cannot  be  charged  against 
income  to  the  prejudice  of  the  holders  of  the  bonds.^ 

Where  a  plan  has  been  arranged  for  retiring  income  bonds  by 
giving  in  exchange  for  them  other  bonds,  the  bonds  surrendered 
to  be  held  uncancelled  until  all  are  retired,  a  bondholder  who  did 
not  consent  to  surrender  his  bonds  could  only  claim  from  the  in- 
come, in  an  accounting  under  the  mortgage,  the  share  to  which 
he  would  have  been  entitled  had  no  bonds  been  surrendered.* 

Trustees  for  bondholders,  though  the  mortgage  securing  their 
bonds  may  cover  the  income  of  the  road  when  in  possession, 
through  a  receiver  appointed  at  their  instance,  with  a  condition  at- 
tached that  he  pay  from  the  income  certain  claims  for  labor,  etc, 
will  not  be  allowed  to  have  appropriated  to  their  bonds  out  of  the 
earnings  in  preference  to  the  holders  of  such  labor  claims,  etc., 
any  of  the  income,  on  the  ground  that  the  income  had  been  di- 
verted by  the  receiver  for  the  improvement  of  the  property.^ 

The  courts  have  in  many  cases  treated  the  mortgaging  of  the 


1  Morgan  v.  Union  Pac.  Ry.  Co.  (1882),  taken  as  if  there  were  to  be  a  periodical 
11  Fed.  Rep.  G92,  per  Blatchford,  J.  stoppaf,'e  of  the  business  and  a  recurring 

2  Jamaica     Ry.     Co.     v.    Atty.-Gen.  winding  up. 

(1893),    L.    R.    0.    A.    127.       The   court  »  Janmica    Ry.    Co.    v.  Atty.-Gen.    of 

adopted  a  view  intermediate  between  the  Janiaiea  (1893),  L.  E.  C.  A.  127. 

extreme  doctrine  that,  as  tlie  directors  of  *  Barry  v.  Missouri,  Kansas,  &  Texas 

the  comyiany  were  placed  in  tlie  manage-  Ry.  Co.   (1888),  34   Fed.  Rep.  829;  s.  c. 

ment  of  its  affairs,  the  court  ought  not  to  4  Ry.  &  Corp.  L.  J.  198. 

interfere  with  their  discretion  when  they  ^  Union  Trust  Co.  v.   Souther  (1882), 

are  acting  hima  fide,  and  tlie  eciually  ex-  107  U.  S.  591. 
treme  doctrine  that  the  account  should  ho 


§  40.]  RIGHTS   OP   BONDHOLDERS.  67 

income,  net  earnings,  etc.,  of  a  railroad  company  as  an  appro- 
priation of  those  revenues  to  the  payment  of  the  particular 
interest  on  the  bonds  secured  by  it,  and  enforceable  as  an  equi- 
table charge  in  favor  of  the  bondholders  as  against  all  others,  such 
as  creditors,  for  instance,  attaching  to  reach  it  by  process  of  the 
courts  to  the  exclusion  of  the  income  bondholders. 

A  railroad  company  may  appropriate  its  earnings  or  income  to 
the  payment  of  interest  on  its  bonds,  and  where  this  has  been 
done,  a  court  of  equity  will  enforce  the  lien  of  the  bondholder  as 
an  equitable  charge  upon  the  earnings  or  income.^ 

The  rule  has,  however,  been  different  in  cases  of  general 
mortgages  upon  the  property  of  all  kinds  of  a  railroad  company, 
including  the  tolls,  income,  etc.,  for  the  security  of  the  general 
bondholders.  In  these  cases,  as  long  as  the  mortgagor  remains 
in  possession,  the  claims  of  judgment  creditors  or  attaching 
creditors  upon  such  income  have  been  regarded  as  having  a 
preference. 

Where  by  the  terms  of  a  mortgage  or  trust  deed  which  covers 
the  income  of  a  railroad  company  until  default  in  the  payment  of 
interest  on  its  bonds,  the  mortgagor  is  to  retain  possession  of  its 
road  and  property,  and  receive  the  profits  and  income  arising  from 
such  use,  the  income  of  the  company,  before  possession  is  taken 

1  Ketchum   v.    St.   Louis   (1879),  101  been  consolidated   with  other  companies 

U.  S.  306,  a  case  where  the  State  of  Mis-  into  the  defendant  company  was  secured, 

souri   had  a  statutory  lien,   and  through  so  far  as  the  interest  on  the  bonds  was 

its    Fund    Commissioner   controlled    the  concerned,  by  the  income  of  that  company 

earnings   of    the    Pacific    Railroad    Com-  from  the  sale  of  its  land.     The  bondholder 

pany,  to  secure  it  against  loss  by  reason  of  was  treated  as  a  creditor,  having  a  specific 

bonds  of  the  State  having  been  issued  to  aid  lieu  upon  the  income  from  the  sale  of  those 

in  its  construction.      To  enable  the  com-  lands  which  had  gone  into  the  hands  of  the 

pany  to  complete  its  road  by  a  loan  of  the  consolidated  company,  and  allowed  to  file 

bonds  of  the  county  of  St.  Louis  to  a  cer-  a  bill  in  equity  to  enforce  his  lien  after 

tain  extent  to  the  company,  a  special  act  default  in  the  payment  of  interest  on  his 

was  passed  by  which  the  State  relinquished  bonds.     In  Galena  &   Chicago  Union  R. 

its  lien  to  that  extent  upon  the  earnings  of  Co.,  Garnishee,  etc.  v.  llenzies  (1861),  26 

the  road,  and  provided  for  the  payment  by  111.    122,- judgment    creditors    sought   by 

the  Fund  Commissioner,  or  whatever  other  garnishee    process    to    reach   certain    in- 

person  might  have  charge  of  the  earnings  come  of  a  railroad  company  from  a  con- 

of  the  company,  for  the  purpose  of  meeting  tract   for   transportation  of  freights,   etc. 

the  interest  upon  the  county's  bonds.    The  This  company  had  executed  a  mortgage  to 

act   was  accepted,    and  this  was  held   to  trustees  for  its  bondholders,  which  covered 

have  amounted  to  an  appropriation  of  the  in  terms  its  tolls,  incomes,  etc.  The  Illinois 

earnings  to  this  purpose,  and  to  constitute  Supreme   Court  held  that  these  revenues 

a  lien  therefor  upon  those  earnings.      In  were  pledged  by  the  trust  deed  for  the 

Rutten  V.    Union   Pacific   Ry.   Co.  et  al.  payment  of  the  interest  and  principal  of 

(1S83),  17  Fed.  Rep.   480  ;  s.   c.   16  Rep.  the  bonds,  and  that  the  trustees  were  en- 

199,  the  holder  of  certain  bonds  of  a  rail-  titled  to  the  money, 
road  and  telegraph   company  which  had 


68  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  II, 

by  the  trustee  or  mortgagee,  will  be  subject  to  garnishee  process, 
at  the  motion  of  its  other  creditors.^ 

Though  a  mortgage  may  embrace,  as  part  of  the  security,  "  in- 
come, earnings,  moneys,"  etc.,  of  a  mortgagor  company,  it  has 
been  held  that  the  mortgagor,  notwitlistanding  the  use  of  the 
word  "  moneys,"  would  not  be  required  to  account  for  moneys 
received  as  earnings  while  in  possession,  to  a  mortgagee  coming 
into  possession  under  the  mortgage  or  trust  deed.^ 

In  holding  that  the  receiver  of  an  insolvent  railroad  company 
would  not  be  ordered  to  pay  the  interest  on  certain  income  bonds 
which  had  been  issued  by  an  after  agreement  among  the  secured 
and  general  creditors  of  the  company,  the  Chancellor  of  New 
Jersey  thus  referred  to  the  bonds  :  "  The  exchange  of  income 
bonds  for  stock  surrendered  was  (though  that  was  not  the  form 
of  the  transaction)  in  effect  creating  preferred  stock  to  the  ex- 
tent of  the  surrender."  Again :  "  The  floating  debt  is  a  prior 
claim.  Had  tlie  usual  form  of  preferring  the  stock  been  adopted, 
the  stock  would  of  course  have  been  entitled  to  no  dividends  until 
the  debts  should  have  been  paid  or  provided  for.  The  obligation 
to  pay  dividends  is  necessarily  subject  to  the  paramount  obliga- 
tion to  pay  the  debts.  It  is  not  to  be  supposed  that  the  parties  to 
the  agreement  intended  to  give  to  holders  of  the  income  bonds, 
for  which  nothing  was  paid  or  to  be  paid,  but  which  merely  repre- 
sented so  much  of  the  stock  of  the  insolvent  corporation,  a  lien 

1  Mississippi  Valley  &  "Western  Ry.  Trustee  (1877),  124  Mass.  154;  Ellis  v. 
Co.  r.  United  States  Express  Co.  (1876^  Boston,  Hartford,  &  Erie  R.  (1871), 
81  111.  534.  The  court  distinguished  107  Mass.  1.  In  Clay  v.  East  Tennessee 
Galena  &  Chicago  Union  R.  Co.,  supra,  &  Virginia  R.  Co.  ct  a/s.  (1871),  6  Heisk. 
in  that  the  income  in  that  case  came  to  (Tenn.)  421,  the  court  held  that  an  attach- 
the  trustees  while  they  were  in  pos-  ment  of  the  tolls,  etc.,  of  the  company  while 
session.  It  was  insisted  in  Mississippi  the  road  remained  in  its  possession  gave 
Valley  &  Western  R.  Co.  v.  United  States  the  attaching  creditor  a  preference  over  the 
E.xpress  Co.,  .wpra,  that  as  the  road  of  the  trustees  named  in  the  deed  of  trust.  In 
company  passed  also  through  the  State  of  the  deed  the  trustees  were  given  the  right 
Iowa,  the  Illinois  court  should,  by  comit}',  to  enter  into  possession  in  case  of  default 
be  controlled  by  what  it  was  claimed  was  and  control  the  tolls,  income,  etc.,  for  the 
a  different  ruling  in  that  State.  The  Illi-  payment  of  the  bonds, 
nois  Supreme  Court  said  :  "  The  ruling  in  ^  Po^  y.  Memphis  &  Little  Rock  R. 
Dunham  v.  Isett  el  al.  (1863),  15  Iowa,  Co.  (1884),  20  Fed.  Rep.  768,  upon  the 
284,  seems  to  go  to  the  extent  claimed,  authoi'ity  of  Galveston  Railroad  v.  Cow- 
although  the  distin(!tion  between  income  drey  (1870),  11  Wall.  459,  482,  483  ;  Gil- 
received  by  trustees  in  possession  and  man  et  al.  v.  Illinois  &  Mississippi  Tele- 
income  received  by  the  mortgagor  be-  graph  Co.  (1875),  HI  U.  S.  603,  617  ; 
fore  possession  tal<en  by  the  trustees,  American  Bridge  Co.  v.  Heidelbaeh  (1876), 
does  not  appear  to  have  been  discussed  iu  04  U.  S.  798  ;  Noyes  v.  Rich  (1861),  52 
argument  or  considered  by  the  court."  Jle.  115. 
See  also  Smith  v.  Eastern  Railroad  ('».   & 


§  40.]  RIGHTS  OF   BONDHOLDERS.  69 

on  the  annual  income  for  their  interest,  after  paying  claims  fall- 
ing due  within  the  year,  whatever  the  amount  of  other  indebted- 
ness of  the  company  might  be.  On  the  contrary,  it  is  evident 
that  it  was  the  intention  merely  to  make  the  interest  payable  out 
of  money  which  otherwise  would  be  applicable  to  the  payment  of 
the  dividend  on  the  stock  at  large."  ^ 

(a)  Out  of  what  Income  Interest  on  Income  Bonds  is  payable.  — 
Primarily,  but  not  solely,  interest  is  payable  out  of  income  of  a  six 
months'  period.  Under  a  certain  mortgage  the  court  laid  down  the 
following  as  the  rights  of  the  income  bondholders  :*  Unless  within 
some  one  of  the  six  months'  periods  between  the  date  and  the 
maturity  of  the  bonds  net  income  should  be  realized,  the  company 
is  not  in  default,  and  is  under  no  present  obligation  to  pay 
interest. 

This  was  based  upon  the  promise  to  pay  interest  provided  the 
net  or  surplus  earnings  should  be  sufficient  therefor.^ 

(b)  Principal  secured  by  Mortgage  and  not  Income.  —  It  was 
contended  by  complainants  in  this  case  that  the  company  had  no 
power  to  lease  another  road,  that  the  terms  of  the  lease  were  such 
that  it  would  absorb  the  "  net  earnings  "  of  the  company  to  which 
they  claimed  to  be  entitled  by  the  terms  of  certain  income  bonds 
in  the  way  of  interest  upon  the  same,  and  the  bill  praying  that 
the  company  be  restrained,  etc.,  the  court  held  that  the  plaintiffs 
were  simply  contract  creditors,  having  no  lien  or  right  other  than 
to  have  their  interest  paid  out  of  the  proper  fund,  i.  e.  "  net  earn- 
ings ; "  that  the  power  of  the  company  to  change  the  condition  of 
the  road  by  additions,  extensions,  or  improvements  consistent 
with  the  purposes  of  its  incorporation  was  not  restricted  by  the 
provisions   of   the    bonds   referred  to ;  that  the  parties   contem- 

1  Lehigh    Coal   &    Navigation    Co.    v.  pons    of    the    insolvent    company.      The 

Central  R.  Co.  of  New  Jersey  (1881),   34  holders    of    these   income   bonds,    former 

N.  J.  Eq.  88.     In  this  case  the   "  income  stockholders,  had  asked  an  order  from  the 

bonds "  had  been  used   under   the  agree-  chancellor  for   payment   of  their  interest 

ment  for  a  compromise  and  settlement  of  on  their  income  bonds,  and   the  receiver 

all   claims    against   the   company   in   the  had  objected   on   the   ground   that   there 

hands  of  a  receiver  in  insolvency  proceed-  were    floating  indebtedness   coupons   still 

ings,    including  bonds,  coupons,    floating  unpaid. 

indebtedness,  etc.,  as  well  as  the  claims  of  ^  j)ay  j,_  Ogdensburgh  &  Lake  Cham- 

tbe  stockholders  on  their  stock  and  a  res-  plain  R.  Co.  (1887),  107  N.  Y.  129  ;  s.  c. 

toration  of  the  property  to  the  company,  13  N.  E.  Rep.  765,  approved  in  Thomas  v. 

and  given  in  exchange  to  the  stockholders  N.  Y.  &  G.  L.  R.  Co.,  139  N.  Y.  163.     As 

for  their  stock  which  was  to  be  surrendered,  to  what  amounts  to  an  irrevocable  assign- 

and  to  the  holders  of  floating  indebtedness  ment  to  bondholders  of  the  net  earnings 

of  the  insolvent   company.      New   bonds  of  a  railroad  company,  see  Grand  Trunk 

secured  by  a  regular  mortgage  were  given  Ry.  v.  Central  Vt.  R.  Co.  (1897),  78  Fed. 

in  exchange  to  holders  of  bonds  and  cou-  Rep.  690. 


70  RAILWAY  BONDS   AND   MORTGAGES.  [CHAP.  II. 

plated  a  line  of  active  and  efficient  railroad  managed  in  the  usual 
manner  according  to  the  discretion  of  defendant's  directors,  not 
one  in  suspense  or  liquidation ;  and  that,  therefore,  the  directors 
had  the  right  to  use  the  earnings  of  the  corporation  for  such 
improvements,  or  other  lawful  purposes  in  its  business,  as  they 
might  think  best.^ 

In  an  equity  cause,  in  which  the  holders  of  certain  income  bonds 
sought  to  restrain  by  injunction  the  holders  of  "  third-mortgage  " 
bonds  which  were  placed  with  them  by  the  company  to  secure 
advances  of  money  and  loans,  on  the  ground  that  the  complain- 
ants had  an  agreement  as  to  further  securing  their  income 
bonds,  the  Maryland  Court  of  Appeals  saw  "  nothing  in  the 
stipulations  of  the  'income  bonds'  which  in  any  way  precluded 
the  railroad  company  from  executing  other  obligations  to  obtain 
means  to  complete  their  road,"  and  reversed  the  order  granting 
an  injunction.  The  court  evidently  viewed  the  bonds  as  counsel 
for  the  respondents  did,  who,  in  his  brief,  said :  "  What  is  the 
nature  of  this  bond,  and  what  rights  and  security  does  it  give  ? 
The  word  income  here  means  net  income  from  the  road  and  its 
appurtenances.  The  holder  is  thus  made  only  a  preferred 
stockholder."  ^ 

The  New  Jersey  Midland  Railroad  Company  was  a  consolidated 
company ;  its  property  and  franchises  were  afterwards  sold  at 
foreclosure  sale,  and  purchased  by  a  committee  of  bondholders  for 
the  benefit  of  the  bondholders,  and  such  general  creditors  and 
stockholders  as  might  choose  to  unite  in  a  reorganization  of  the 
company  upon  a  proposed  plan.  A  part  of  this  proposed  plan 
was  to  issue  "  income  bonds  "  to  stockholders  and  holders  of  cer- 
tain junior  mortgage  bonds  for  tlieir  stock  and  bonds  surrendered. 
T.  surrendered  certain  of  these  bonds  and  his  stock,  and  received 
the  new  obligations  of  the  Midland  Raih-oad  Company  of  New 
Jersey,  the  name  of  the  reorganized  corporation.  This  new  com- 
pany under  the  general  laws  of  New  Jersey  effected  a  consolida- 
tion of  itself  and  several  other  companies,  corporations  of  that  and 
neighboring  States,  under  a  new  name.  T.,  as  the  holder  of  income 
bonds  of  Midland  Railroad  Company  of  New  Jersey,  applied  to  the 
Supreme  Court  for  leave  to  file  an  information  in  the  nature  of 

1  D.'iy  ct  al.  V.  Of^doislmrj^'li  &  Lake  the  dividends  on  the  capital  stock  "  of  the 
riiaiiiiilain  11.  Co.  (1887),  107  N.  Y.  129;  company  issuinf,'  them,  of  "the  income 
8.  c.  13  N.  E.  Hi:]).  76.'j.  arising   from   their  road  and    its  appurte- 

2  Garrett  et  al.  v.  May  ci  al.  (1862),  19  nances."  On  the  buck  of  tlicni  these  bonds 
Md.  177.  The  "income  bonds"  in  tliis  were  declared  to  be  couvertible  into  stock 
case    were    secured    on    their    face    by    a  of  the  com[)any. 

pledge  "  in  preference  to  the  payment  of 


§  41.]  RIGHTS   OP   BONDHOLDERS.  71 

a  writ  of  quo  warranto  to  determine  the  validity  of  this  last  con- 
solidation. The  court,  on  the  idea  that  such  a  writ  would  not  lie 
at  the  instance  of  a  private  relator,  denied  the  leave  to  T.,  the 
holder  of  the  income  bonds.^ 

If  bonds  contain  simply  a  promise  to  pay  interest  out  of  income 
earned,  such  a  promise  would  be  merely  conditional,  and  in  an 
action  on  his  bond  the  burden  would  be  upon  the  holder  to  show 
that  sufficient  income  had  been  earned  to  warrant  the  payment 
of  the  interest,^ 

An  income  bondholder  may  recover  in  money  in  an  action  on 
his  coupons  for  interest,  notwithstanding  a  provision  in  the  bonds 
that  the  company  issuing  them  may,  at  its  option  in  a  certain 
contingency,  issue  scrip  in  payment  at  the  maturity  of  the 
coupons,  provided  the  day  passes  without  an  election  on  the  part 
of  the  company. 2 

§  41.  Bonds,  in  what  payable.  —  A  tender  of  legal-tender  notes 
in  payment  of  coupons  attached  to  bonds  made  before  the  Legal 
Tender  Act  has  been  held  good.  It  was  claimed  that  the  tender 
should  have  been  made  in  gold  and  silver  coin.^ 

It  has  been  held  in  a  particular  case  that  it  was  the  intention 
of  the  railroad  company  that  the  principal  of  its  bonds  should  be 

1  In  the  matter  of  Tei-hune,  Applicants,  scrip.  This  case  was  approved  by  the 
etc.  V.  Potts  et  al.  (1885),  47  N.  J.  L.  Supreme  Court  of  Judicature  of  Massachu- 
218  ;  s.  c.  23  Am.  &  Eug.  R.  R.  Cas.  setts  when  it  held  that,  iu  au  action  to  re- 
754.  cover  interest  on  a  bond  of  a  corporation 

2  Corcoran  v.  Chesapeake  &  Ohio  Canal  which  contained  an  absolute  promise  to 
Co.  (1874),  1  MacArthur  (D.  C),  358.  pay  interest  on  certain  specified  days,  the 

3  Marlor  v.  Texas  &  Pacific  R.  Co.  burden  of  proof  was  not  ujion  the  holder 
(1884),  21  Fed.  Rep.  383  ;  s.  c.  22  Blatch.  of  the  bond  to  show  that  income  had  been 
464,  affirmed  in  Texas  &  Pacific  R.  Co.  v.  earned  to  warrant  the  payment  of  interest. 
Marlor  (1887),  123  U.  S.  687.  The  bonds  Strauss  v.  United  Telegram  Co.  (1895), 
on  which  this  action  was  brought  were  164  Mass.  130,  132,  133;  s.  c.  41  N.  E. 
secured  by  mortgage  on  lands  granted  to  Rep.  57. 

the  company  and  the  income  of  the  road.  *  Railroad  Company  v.  Johnson  (1873), 

There  was  a  provision  in  them  that  in  case  15  Wall.  195  ;    s.  c.  21  L.  ed.  178.     See 

the  net  earnings  were  not  sufficient  to  pay  Cheever  v.  Rutland  &  Burlington  R.  Co. 

the  interest  coupons  as  they  became  due,  (Vt.,  1869),  4  Am.  Ry.  Rep.  291,  311,  de- 

the  company  might,  at  its  option,   issue  dining  to  make  a  decree  for  payment  of 

scrip,    which    was    to    be    receivable    for  railroad  bonds  in  gold,  the  court  adhering 

purchase-money  of  any   of  the   lands   at  to  its  opinion   of  the  constitutionality  of 

the  ordinary  schedule  price,  in  payment  of  the  Legal  Tender  Act.     On  contracts  to 

the  interest  on  the  bonds.     This  provision  pay  iu  gold  coin,  see  30  Am.   Lav?  Rev. 

was  construed  and  a  judgment  in  money  907,  950  ;  15   N.   Y.   Law  Journal,   508, 

rendered  for  the  interest  due  and  unpaid,  May  18,  1896  ;  Woodruff  v.  State  of  Mis- 

as  appeared  by  the  coupons,  it  being  shown  sissippi,  162  U.  S.  281  ;  53  Alb.  L.  J.  292, 

that  the  company  had  allowed  the  day  of  May  9,  1896  ;  N.  Y.  L.  J.,  Feb.  13,  1896  ; 

the   maturity   of    these   coupons    to   pass  2  Woods,  614.     See  also  Castle  i>.  Kupena, 

without  exercising  their  option  to  pay  in  5  Hawaiian  Rep.  27. 


72  RAILWAY   BONDS   AND   MORTGAGES.    •  [CHAP.  II. 

paid  in  lawful  money  instead  of  Confederate  notes,  and  that  the 
interest  must  follow  the  character  of  the  principal.^ 

The  Supreme  Court  of  North  Carolina  have,  however,  held  a 
railroad  bond  executed  in  North  Carolina  in  1862  to  come  within 
the  provisions  of  an  ordinance  of  the  Convention  of  1865,  and 
presumably  to  be  solvable  in  money  of  the  value  of  Confed- 
erate currency,  subject  to  evidence  of  a  different  intent  by  the 
parties.^ 

But  a  different  intent  would  not  be  implied  from  a  provision  in 
the  charter  that  the  company  may  make  contracts  for  building 
the  road,  and  may  pay  contractors  in  bonds  at  par  value. 

It  has  also  been  held  that  a  claim  that  payment  of  bonds  should 
be  made  in  gold  coin  must  rest  upon  a  contract  to  that  effect.^ 

Where  bonds,  as  prepared  and  issued,  promise  payment  in 
lawful  money,  a  stipulation  afterwards  indorsed  by  the  corpora- 
tion upon  them  that  they  shall  be  paid  in  coin,  this  being  required 
of  it  by  the  purchasers  of  the  bonds,  would  bind  the  corporation 
only,  and  not  a  State  which  had  guarantied  the  payment  of  those 
bonds  previous  to  this  indorsement.* 

The  Missouri  Supreme  Court  has  held  that  railroad  State 
bonds  issued  for  the  construction  of  railroads  payable  on  their 
face  "  in  gold  and  silver  "  were  obligations  for  payment  in  coin, 
but  that  as  the  legislature  had  ordered  the  State  agents  to  pay 
the  same  in  legal-tender  notes,  and  it  was  competent  for  it  so  to 
do,  no  writ  of  mandam^us  could  be  issued  to  compel  a  payment 
in  coin.^ 

In  Johnson  v.  Norwich  &  Worcester  R.  R,  Co.,^  a  case  reserved 
for  advice,  tiie  Supreme  Court  of  Connecticut  advised  (1)  That, 
upon  the  authority  of  the  U.  S.  Supreme  Court's  decision  as  to 
the  unconstitutionality  of  the  Legal  Tender  Act,  a  petitioner  for 
foreclosure  on  bonds  issued  before  the  Legal  Tender  Act  was 
passed,  was  entitled  to  payment  of  the  bonds  and  coupons  in 
coin  ;  (2)  That  he  was  entitled  to  have  such  proportion  of  the 
stock  of  another  corporation  held  in  trust  for  the  security  of 
these  bonds,  as  the  amount  of  his  bonds  bore  to  the  whole  amount 
secured,  sold,  and  the  net  avails  converted  into  coin  and  paid 
over  to  him,  to  be  applied  upon  the  coupons  and  bonds  ;  (3)  That 

1  Atlantic,  Tf-nnc'ssoi-,  &  Oliio  R.   Co.  (1871),   22    Wall.  105;    s.  c.   22  L.   ed. 

rt.  al.  V.  Carolina  National  P.ank  (1874),  19  715. 
Wall.  548  ;  fi.  c.  22  L.  ed.  196.  *  Wallace^;.  Loomis(1877),  97  U.S.  146. 

"  Alexander  v.  Atlantio,  Tennessee,   &         ^  State  cz  rcZ.  v.  Mays  et  al.  (1872),  50 

Ohio  R.  Co.  (1872),  67  N.  C.  198.  Mo.  34. 

8  Maryland     v.     Railroad      Company         c  37  Conn.  433  (1870). 


.§§  42-44.]  RIGHTS    OF   BONDHOLDERS.  73 

for  any  balance  remaining  unsatisfied  a  decree  should  be  passed 
foreclosing  the  mortgage  unless  such  balance  should  be  paid  in 
coin  ;  (4)  That  there  was  no  principle  upon  which  the  payment  of 
the  bonds  and  coupons  could  be  decreed  to  be  made  in  currency 
to  an  amount  equal  to  the  currency  value  of  the  gold  on  the  day 
when  the  bonds  fell  due,  but  that  payment  must  be  decreed  in 
coin  itself. 

§  42.  When  Principal  of  Bonds  becomes  due.  —  Bonds  not  becom- 
ing due  till  Original  Bate  of  Maturity.  —  A  clause  in  a  mort- 
gage providing  that  in  no  case  should  the  principal  of  any  bond 
be  considered  due  until  twenty  years  after  its  date,  has  been 
held  to  have  been  inserted  merely  to  exclude  any  possible  in- 
ference that  a  bondholder,  under  any  circumstances,  might  bring 
an  action  for  the  principal  of  a  bond  before  it  became  due  by  its 
terms.  The  same  mortgage  provided  that  in  case  of  default  in 
payment  of  interest  or  principal  of  any  bond,  and  a  sale  or  other 
proceedings  to  coerce  the  same,  all  bonds  which  should  be  a  lien 
in  common  therewith,  and  the  interest  accrued  thereon,  sliould 
be  considered,  and  should  in  fact  be  equally  due  and  payable  and 
entitled  to  a  pro  rata  dividend  of  the  proceeds  of  such  sale  or 
other  proceedings.  The  court  below  had  provided  for  payment 
of  overdue  interest-Warrants  to  the  exclusion  of  the  principal  of 
the  bonds.i 

Where  there  is  no  stipulation  that  the  principal  shall  become 
due  by  the  non-payment  of  the  interest,  the  lien  cannot  be  so 
enforced  as  to  compel  the  payment  of  the  principal,  on  default  in 
the  payment  of  the  interest.^ 

§  43.  Legislature  cannot  accelerate  Maturity  of  Principal. — Where 
trustees  who  can  elect  that  the  principal  should  become  im- 
mediately due  upon  default  of  principal  or  interest  have  not 
exercised  the  right  of  election,  a  legislature  cannot,  by  an  act 
subsequently  passed,  authorize  the  sale  of  the  railroad  property 
free  from  the  mortgage,  for  the  reason  that  the  effect  would  be  to 
make  a  loan  of  money  become  due  before  the  time  fixed  in  the 
contract,  and  it  could  not  be  enforced.^ 

§  44.  Contract  held  not  to  entitle  Company  to  pay  ofif  Bonds  before 
Maturity.  —  A  tralhc  contract  indorsed  upon  the  bonds,  whereby 
the  mortgagor  stipulates  that  another  railroad  shall  retain  com- 
plainant's share  of  the  earnings  under  the  contract,  and  pay  them 

1  Dunham  v.  Cincinnati,  Peru,  etc.  Ry.  '  Randolph  etal..  Trustees, r.  Middleton 
Co.  (1864),  1  Wall.  254.  (1875),  26  N.  J.  Eq.  543.     A  proceeding 

2  State  of  Florida  v.  Anderson  et  al.  against  the  railroad  company  under  the 
(1875),  91  U.  S.  667.  New  Jersey  act  as  an  insolvent  corporation. 


74  EAILWAY    BONDS   AND   MORTGAGES.  [CHAP.  II. 

over  semi-annually  to  a  trustee  to  be  applied  to  the  "  ultimate  re- 
demption "  of  the  bonds,  such  contract  to  continue  in  force  for 
thirty  years,  or  "  for  so  long  a  time  as  will  be  sufficient  to  provide 
a  fund  large  enough  to  redeem  all  of  the  bonds,"  does  not  give  the 
railroad  company  the  right  to  pay  off  the  bonds  as  soon  as  a  fund 
sufficient  for  that  purpose  has  accumulated.  The  mere  fact  that 
the  parties  have  agreed  in  this  manner,  that  a  fund  shall  be 
created  for  the  payment  and  redemption  of  the  bonds,  does  not 
involve  the  inference  that  they  necessarily  contemplate  that  the 
fund  shall  be  applied  to  that  purpose  as  soon  as  it  is  of  sufficient 
amount  to  discharge  the  debt.^ 

§  45.  Acceleration  of  Maturity  as  Result  of  Default  in  Payment  of 
Interest.  —  It  is  usual  for  the  bonds  and  mortgage  to  provide  that 
a  default  in  payment  of  interest  shall  cause  the  principal  to  be- 
come due  and  payable.^ 

An  indirect  result  of  such  a  provision  is  illustrated  by  a  case 
in  Illinois,  which,  in  an  action  to  recover  the  price  of  three  bonds 
of  the  company  under  a  contract  by  which  defendant  agreed  to 
take  five  of  those  bonds  at  a  fixed  sum  per  bond,  and  had  already 
accepted  and  paid  for  two,  held  that  the  payment  of  the  interest 
upon  those  two  bonds  was  a  vital  part  of  the  contract  with  de- 
fendant, and  that  under  the  provision  in  the  mortgage  that,  upon 
default  of  the  interest  upon  those  bonds  for  ninety  days  after  be- 
coming due,  the  entire  principal  and  interest  coupons  should 
become  immediately  due,  the  effect  of  failure  to  pay  the  interest 
on  those  bonds  for  ninety  days  was  that  the  bonds  became  due  to 
defendant.  He  was  therefore  allowed  to  recoup  for  the  sum  due 
upon  them  against  the  damages  claimed  of  him  for  his  refusal  to 
accept  and  pay  for  the  others.^ 

The  provision  for  a  sale  under  a  power  for  default  in  payment 
of  interest,  and  application  of  proceeds  of  sale,  after  payment  of 
overdue  interest,  to  payment  of  principal,  though  not  yet  due, 
does  not  accelerate  time  of  payment  of  ])rinci])al.  The  mortgagor 
can  prevent  a  sale  by  payment  of  interest  only.* 

§  46.  Acceleration  of  Maturity  of  Principal  at  Option  of  Individual 
Bondholders  or  Trustees.  —  The  provision  most  commonly  found 
in  inf)rtgag(.'S  with  regard  to  the  acceleration  of  the  maturity  of 
the  principal  is  that  in  case  of  default  of  interest  for  six  months 

1  Chicago,  E.  I.,  etc.  R.  Co.  v.  Pyno  ^  Galena  &  Southeni  Wisconsin  R.  Co. 
(1887),  30  Fed.  Rep.  86.  v.  Barrett  (1880),  9.5  111.  467  ;  s.  c.  2  Am. 

2  Cases  <lealiiif,'  witli  such  a  provision    &  Kng.  R.  R.  Cas.  .520. 

are  reviewed  in  tlie  chapter  on  Foreclosure,  *  Chicago,  etc.  R.  Co.  v.  Fosdick 
post.  (1881),  106  U.  S.  47. 


§  46.]  RIGHTS   OF   BONDHOLDERS.  75 

after  demand  the  principal  shall  become  due  at  the  option  of 
the  holders  of  a  majority  in  interest.-^ 

A  provision  that  default  of  interest  for  sixty  days  after  demand 
makes  the  principal  "  subject  to  become  due  and  payable "  has 
been  construed  to  mean  subject  to  become  so  at  the  option  of  the 
holder.  The  bill  must  show  that  the  petitioner  has  elected  to 
have  the  bonds  become  due.^ 

In  foreclosure  proceedings  of  a  junior  mortgage,  the  bond- 
holders having  elected  to  treat  the  default  in  the  payment  of 
interest  as  a  forfeiture  of  the  contracts  so  far  as  they  prescribed 
the  length  of  time  for  which  the  bonds  were  to  run,  this  election 
on  their  part  operates  prima  facie  to  cancel  all  coupons  represent- 
ing interest  not  then  due;  and,  unless  the  mortgaged  property 
shall  be  sold  subject  to  one  or  more  of  the  elder  mortgages,  this 
election  should  be  regarded  as  having  precipitated  the  payment  of 
the  principal  sums,  and  they  would  bear  interest  at  the  agreed 
rate  per  annum.^ 

In  an  action  to  recover  railroad  bonds  which  had  been  stolen 
and  sold  to  defendant,  the  question  arose  as  to  whether  these 
bonds  were  overdue  when  purchased.  Construing  a  provision  in 
the  bonds,  that,  in  case  of  the  continuance  for  six  months  of  a 
default  in  the  payment  of  interest,  or  in  contributing  to  a  sinking 
fund,  "  the  principal  shall,  without  further  demand  or  notice,  be- 
come due  or  payable  from  and  after  the  expiration  of  six  months 
from  the  date  of  such  default,"  the  court  held  that  (1)  as  the  de- 
fault had  occurred,  proceedings  to  foreclose  the  mortgage  showed 
an  election  to  have  the  bonds  become  due,  if  such  an  election  was 
necessary,  and  the  bonds  were  overdue  when  stolen  ;  (2)  that  there 
was  no  evidence  of  a  waiver  of  the  election  to  have  them  become 
due,  as,  although  some  portion  of  past-due  coupons  was  paid  to 
this  plaintiff,  the  bondholder,  pending  the  foreclosure  of  the  mort- 
gage, it  was  in  accordance  with  some  provision  of  the  mortgage, 
and  was  not  a  waiver  of  such  election.* 

As  to  the  effect  upon  the  contract  of  apparently  vai'iant  pro- 
visions in  a  mortgage  that  the  bonds  were  payable  in  twenty 
years  from  date,  and  that  bondholders  might  elect  to  have 
them  mature  upon  default  as  to  interest  for  a  fixed  period,  the 

1  See,  for  example,  the  mortgages  con-  ^  Newport  &  Cincinnati  Bridge  Co.  v. 
strued  in  Union  Trust  Co.  of  New  York  Douglass  (1877),  12  Bush  (Ky.),  673  ; 
V.  Missouri,  etc.  Ry.  Co.  (1880),  26  Fed.     s.  c.  18  Am.  Ry.  Rep.  221. 

Rep.  485,  and  in  the  cases  cited  post,  in  the  *  Northampton  Bank  v.    Kidder  et  al. 

chapter  on  Foreclosure.  (1887),  106  N.  Y.  221,  distinguishing  Rail- 

2  Ruttenr.  Union  Pac.Ry.  Co.  (1883),  way  Co.  v.  S[>rague,  103  U.  S.  756,  and 
17  Fed.  Rep.  480.  Morgan  v.  United  States,  113  U.  S.  476. 


76  RAILWAY   BONDS   AND    MORTGAGES.  [CHAP.  II. 

Supreme  Court  of  Connecticut  has  expressed  its  opinion  as  fol- 
lows :  "  The  provision  that  the  bond  should  continue  for  twenty 
years  an  outstanding  subsisting  security,  if  any  existed,  was  with 
reference  to  the  corporation.  The  provision  that  the  bonds  by  the 
action  of  the  bondholders  might  mature  before  that  time  was  in 
reference  to  the  co-bondholders.  And  while  it  would  impair  tlie 
obligation  of  a  contract,  if  such  contract  existed,  so  far  as  the 
corporation  is  concerned,  to  change  the  time  of  maturity,  it  docs 
not  have  that  effect  when  the  co-bondholders  proceed  upon  their 
common  and  undisputed  right  to  cause  the  bonds  to  mature,  and 
by  foreclosure  to  discharge  the  bonds  by  taking  the  property  in  a 
legal  way."  ^ 

Exercise  of  Option  to  become  due,  accompanied  hy  Restriction  on 
Right  to  foreclose.  —  In  a  case  where  the  provision  was  that,  after 
the  principal  of  the  bonds  had  been  declared  by  the  trustees  to 
have  become  due  by  reason  of  the  default,  and  the  mortgagor  noti- 
fied thereof,  the  trustees,  "  upon  the  written  request  of  the  holders 
of  a  majority  of  the  said  bonds  then  outstanding,  shall  proceed  to 
collect  both  principal  and  interest  of  all  said  bonds  outstanding  by 
foreclosure  and  sale  of  said  property,  or  otherwise  as  herein  pro- 
vided," it  was  held  that,  "  even  had  the  trustees  rightfully  declared 
the  principal  sum  of  the  mortgage  debt  due,  and  given  the  proper 
notice  thereof,  nevertheless  the  foundation  of  a  proceeding  to  fore- 
close for  that  cause  and  of  the  decree  requiring  payment  of  that 
amount  would  fail,  without  proof  that  the  bill  had  been  filed  for  that 
purpose,  upon  the  written  request  of  the  holders  of  a  majority  of 
the  bonds  then  outstanding."  In  thus  construing  the  mortgage 
the  court  says  :  "  In  declaring  the  principal  sum  due  before  the 
date  fixed  by  the  credit  upon  a  default  in  the  payment  of  interest, 
the  trustee  is  acting  for  the  whole  number  of  bondholders,  and  the 
provision  that  subjects  his  action,  in  enforcing  the  stipulation,  to 
the  wishes  of  a  majority,  is  meant,  as  we  think,  for  the  protection 
of  the  class.  Many  cases  may  be  mentioned  to  illustrate  the  im- 
portance in  their  interests  of  such  a  control,  rather  than  to  put  it 
in  the  jjower  of  one  or  a  minority  to  require  all  to  accept  what 
the  majority  might  consider  to  be  a  premature  and  less  valuable 
satisfaction  for  their  existing  security.  The  larger  number  might 
think  it  to  their  advantage  even  to  defer  the  collection  of  their 
overdue  interest,  much  less  not  to  anticipate  the  payment  of  the 
principal,  even  when  the  security  was  ample  to  meet  both,  for 
they  might  esteem  the  ultimate  investment  higher  than  present 

1  Gains  V.  Boston  &  N.  Y.  Air  Lino  R.  Co.  (1885),  53  Conn.  333  ;  s.  c.  24  Am.  & 
En<'.  R.  R.  Cas.  143. 


§§  47,  48.]  RIGHTS    OF    BONUHOLDERS.  77 

payment,  and  while  they  could  not  and  ought  not  to  prevent  others, 
even  a  single  individual,  from  exacting  the  promptest  payment  of 
what  is  due,  and  may  be  important  as  current  income,  by  legal 
process,  they  may  nevertheless  rightfully  object  to  an  anticipation 
of  payment  that  may  in  their  opinion  prove  to  be  a  sacrifice  ;  and 
this  becomes  especially  important  when  the  present  value  of  the 
security  is  insufficient  to  prepay  the  incumbrance,  but  contains 
the  solid  promise  of  future  indemnity  or  an  investment.  It  is  that 
interest,  we  think,  that  dictated  the  clause  in  question,  and  can 
be  satisfied  only  by  the  construction  which  secures  to  the  major- 
ity of  the  bondholders  the  right  to  veto  the  proceeding  of  the 
trustees."  ^ 

§  47.  Sales  of  pledged  Bonds.^  —  Where  by  the  contract  a  defi- 
nite time  is  fixed  for  the  payment  of  the  debt,  a  sale  of  the  pledge 
may  be  made  without  notice  or  demand ;  and  where  bonds  are 
pledged  as  security  for  the  payment  of  acceptances,  the  time  when 
the  pledgee  may  sell  the  bonds  is  determined  by  the  maturity  of 
the  note,  and  not  of  the  acceptances.  And  while,  as  a  general 
rule,  the  pledgee  cannot  buy  the  pledged  property  at  his  own  sale, 
this  rule  may  be  waived  by  express  agreement  of  the  parties.^ 

Where  the  pledgee  of  bonds  assigns  them  as  collateral  security 
for  a  debt  of  his  own,  and  the  assignee  forecloses  against  the 
original  pledgor,  and  buys  in  the  bonds  himself,  he  must  account 
to  the  assignor  for  the  bonds  or  their  value,  and  not  merely  for 
the  amount  paid  by  him  at  the  foreclosure  sale.* 

A  bill  in  equity  may  be  maintained  to  redeem  bonds  pledged,  if 
an  accounting  is  wanted,  or  if  there  has  been  an  assignment  of 
the  pledge.  This  right  is  not  cut  off  by  the  foreclosure  of  the 
mortgages  executed  to  secure  these  bonds.^ 

§  48.  Payment  of  Income  Tax  by  Bondholders.  —  A  provision  in 
the  mortgage  that  the  debt  and  interest  shall  be  paid  "  without 
any  deduction,  defalcation,  or  abatement  to  be  made  of  anything 
for  or  in  respect  of  any  taxes,  charges,  or  assessments  whatsoever," 
docs  not  oblige  the  company  to  pay  the  interest  on  its  bonds 
which,  by  section  122  of  the  Revenue  Act  of  1864,  such  companies 
"  are  authorized  to  deduct  and  withhold  from  all  payments  on 
account  of  any  interest  or  coupons  due  and  payable."      Such  a 

1  Chicago,  etc.  R.  Co.  v.  Fosdick  (1881),  3  Chouteau  v.  Allen  (1879),  70  Mo.  290. 

106  U.  S.  47.  *  First  Nat.    Bank  v.   Ohio  Falls  Car 

*  As  to   the   statu-s   of    purchasers   at  &  Locomotive  Works  (1884),  20  Fed.  Rep. 

sales   of  pledged    bonds,   see   §  67,  post.  65. 

This  section  is  inserted  here,  though  its  5  White    Mountains    R.    Co.    v.    Bay 

subject  is  not  within  the  general  scope  of  State  Iron  Co.  (1870),  50  N.  H.  57  ;  s.  c. 

the  book.  1  Am.  Ry.  Rep.  158. 


78 


RAILWAY   BONDS   AND    MORTGAGES. 


[chap.  II. 


provision  is  inserted  to  secure  the  mortgagee,  who  may  not  be 
in  possession,  from  a  demand  for  taxes  incurred  while  the  mort- 
gagor is  in  possession,  and  has  no  application  to  the  income  tax 
of  bondholders.^ 


Article  II,  —  Rights  of  Bondholders  involving  the 
Negotiable  Character  of  such  Bonds. 

§  49.  Negotiable  Character  of  Corporate  Bonds  generally.  —  It  is 
now  well  settled  by  the  overwhelming  weight  of  authority  in  this 
country  that  a  corporate  bond  in  the  usual  form  is,  though  under 
seal,  a  negotiable  instrument  entitled  to  all  the  privileges  of  com- 
mercial paper.^ 

In  Jackson  v.  York  &  Cumberland  R.  Co.^  the  court  adhered 


1  Haightu.  Railroad  Co.  (1867),  6  Wall. 
15.  See  also  Cleveland,  etc.  R.  Co.  v. 
Penn.,  15  Wall.  300  ;  s.  c.  4  Am.  Ry.  Rep. 
868;  Jackson  v.  Northern  Central  Ry. 
(1868),  Chase's  Dec.  268  ;  Haight  v.  Pitts- 
burg, etc.  Ry.  Co.  (1867),  1  Abb.  81  ; 
United  States  v.  Erie  Co.  (1877),  9  Ben. 
67. 

2  White  V.  Vermont  &  Massachusetts 
R.  Co.  (1858),  21  How.  575  ;  Zabriskie 
V.  Cleveland,  Col.  etc.  R.  Co.  (1859),  23 
How.  381  ;  Kneeland  v.  Lawrence  (1891), 
140  U.  S.  209  ;  Chicago  Ry.  Equipment 
Co.  I'.  Merchants'  Bank  (1890),  136  U.  S. 
268  ;  Gelpcke  v.  Dubuque  (1863),  1  Wall. 
175  ;  Clark  v.  Iowa  City  (1874),  20  Wall. 
583;  Aurora  City  v.  West  (1868),  7 
Wall.  82  ;  Mercer  Co.  v.  Hacket  (1863),  1 
Wall.  83  ;  Knox  Co.  v.  Aspinwall  (1858), 
21  How.  539  ;  Reid  v.  Bank  of  Mobile 
(1881),  70  Ala.  199  ;  Blackman  v.  Leh- 
man (1879),  63  Ala.  547;  Lehman  v. 
Tallassee  Mfg.  Co.  (1879),  64  Ala.  567; 
Town  of  Eagle  v.  Kohn  (1876),  84  111. 
292 ;  .Junction  Railroad  Co.  v.  Cleneay 
(1859),  13  Ind.  161  ;  New  Albany,  etc. 
Plank  Road  Co.  (1864),  23  Ind.  353; 
Griflith  v.  Burden  et  al.  (1872),  35  Iowa, 
138  ;  State  of  Virginia  v.  State  of  Mary- 
land (1870),  32  Md.  501  ;  Haven  v. 
Grand  .Junction  Railroad  &  Depot  Co. 
(1871),  109  Mass.  88  ;  Chapin  v.  Vcr- 
iriont  &  Mas.saohu.setts  R.  Co.  (1857),  8 
Gray  (Mass.),  575  ;  Craig?;.  City  ofVicks- 
bnrg  (1856),  31  Miss.  216;  Hackensack 
Wfitor  Co.  V.  Do  Kay  (1SS3),  36  N.  J.  Eq. 
548  ;  Mon-ia  Canal  &  Bkg.   Co.  v.  Lewis 


(1858),  12  N.  J.  Eq.  323  ;  Boyd  v.  Ken- 
nedy  (1875),  38  N.J.  L.  146  ;  Morris  Canal 
&  Bkg.  Co.  V.  Fisher  (1855),  9  N.  J.  Eq. 
667  ;  Hubbard  v.  New  York,  etc.  R.  Co. 
(1862),  36  Barb.  286  ;  Brainerd  v.  New 
York,  etc.  R.  Co.  (1862),  25  N.  Y.  496  ; 
Dinsmore  v.  Duncan  (1862),  57  N.  Y. 
573  ;  Connecticut,  etc.  Ins.  Co.  r.  Cleve- 
land, etc.  R.  Co.,  41  Barb.  9  ;  Blake  v. 
Board  of  Commrs.  of  Livingston  Co.  (1871), 
61  Barb.  149  ;  Welch  v.  Sage  (1872),  47 
N.  Y.  143  ;  Hodges  v.  Shuler  (1860),  22 
N.  Y.  114  ;  National  Exch.  Bank  v. 
Hartford,  etc.  R.  Co.  (1866),  8  R.  I.  375; 
American  Nat.  Bank  v.  American,  etc.  Co. 
(1895),  32  Atl.  Rep.  305;  Langstou  v. 
South  Carolina  R.  Co.  (1870),  2  S.  C.  248  ; 
Ex  parte  Williams  (1882),  18  S.  C.  299. 
Even  a  writing  which  does  not  contain  a 
direct  promise  to  pay  money,  but  only  a 
promise  to  give  security  for  money,  such 
as  the  scrip  issued  by  European  govern- 
ments, entitling  the  holders  to  an  equal 
amount  of  bonds  to  be  afterwards  issued, 
will  be  treated  as  negotiable  jiaper,  if  the 
usage  of  the  monetary  world  has  given  it 
that  character.  Goodwin  v.  Roberts  (1875), 
L.  R.  10  Exch.  337.  This  case  combats 
with  great  force  of  reasoning,  and  an 
imposing  array  of  authorities,  the  nar- 
row view  that  the  law  merchant  is  fixed 
and  stereotyped,  and  incapable  of  being 
enlarged  so  as  to  meet  the  wants  and 
requirements  of  trade  in  the  varying 
circumstances  of  commerce. 
8  48  Me.  147  (1858). 


§  49.]  RIGHTS   OP   BONDHOLDERS.  79 

to  the  strict  common-law  rule  that  bonds,  being  specialties, 
were  not  legally  assignable,  so  that  a  suit  could  be  sustained 
in  the  name  of  an  assignee.  But  this  case  and  the  somewhat 
similar  one  of  Myers  v.  York  &  Cumberland  R.  Co.^  cannot  be 
regarded  as  authority  outside  the  State.  Apparently  they  have  not 
been  overruled  in  that  State. 

A  clear  and  authoritative  statement  of  this  rule  will  be  found 
in  the  opinion  of  the  court  in  White  v.  Vermont,  etc.  R.  Co., 
quoted  below. 

The  cautious  doctrine  of  some  cases  is  that  these  bonds  are  not 
strictly  negotiable  under  the  law  merchant,  as  are  promissory 
notes  and  bills  of  exchange,  and  the  rights  of  the  holders  are  based 
upon  the  theory  that  they  are  instruments  of  a  peculiar  character, 
and  being  expressly  designed  to  be  passed  from  hand  to  hand,  and 
by  common  usage  actually  so  transferred,  are  capable  of  passing 
by  delivery,  so  as  to  enable  the  holder  to  maintain  an  action  on 
them  in  his  own  name.^ 

But  this  seems  to  be  an  unnecessary  refinement.  A  simpler 
and  more  accurate  view  is  that  the  necessities  of  commerce  and 
the  customs  of  the  financial  world  have  imparted  to  these  instru- 
ments the  quality  of  negotiability,  in  spite  of  technical  rules  of 
law,  and  that  the  law  merchant  has  taken  them  under  its  protec- 
tion in  deference  to  precisely  the  same  conditions  as  those  which 
have,  from  a  much  more  remote  period,  secured  for  ordinary  bills 
and  notes  the  well-known  and  distinctive  privileges  which  place 
them  in  a  class  apart  from  choses  in  action  generally.  As  was  well 
said  by  Nelson,  J,,  pronouncing  the  decision  of  the  Supreme  Court 
of  the  United  States  to  this  effect  in  White  v.  Vt.  &  Mass.  R.  Co., 
supra  :  "  We  think  the  usage  and  practice  of  the  companies  them- 
selves, and  of  the  capitalists  and  business  men  of  the  country 
dealing  in  them,  as  well  as  the  repeated  decisions  or  recognition 
of  the  principle  by  courts  and  judges  of  the  highest  respectability, 
have  settled  the  question.    Indeed,  without  conceding  to  them  the 

1  43  Me.  232  (1857).  made   under  the   hand   and   seal   of   the 

2  Carr  v.  LeFevre  (1856),  27  Pa.  St.  assignor  before  two  or  more  credible  wit- 
413,  cited  with  approval  in  the  later  case  nesses.  The  negotiability  of  bonds  is  also 
of  Bunting's  Admr.  v.  Camden,  etc.  R.  Co.  accounted  for  in  the  same  way  in  two 
(1876),  81  Pa.  St.  254 ;  s.  c.  15  Am.  Ey.  early  New  Jersey  cases.  Morris  Canal, 
Rep.  570,  where  it  was  held  that  bonds  etc.  Co.  v.  Fisher  (1855),  9  X.  J,  Eq.  667  ; 
payable  to  A.  or  his  assigns  were  within  Morris  Canal,  etc.  Co.  v.  Lewis  (1858),  12 
the  act  of  May  28,  1715,  and  that  a  N.  J.  Eq.  323.  See  Williams  v.  Sidmouth 
holder  other  than  the  obligee  could  not  Ry.  &  Harbour  Co.,  L.  R.  2  Exch.  284, 
sue  thereon  in  his  own  name  without  suit  in  the  name  of  obligee  on  an  assigned 
proving    that    the  assignment  had  been  "Lloyd's  bond." 


80 


RAILWAY   BONDS    AND    MORTGAGES. 


[chap.  II. 


quality  of  negotiability,  much  of  the  value  of  these  securities  in 
the  market,  and  as  a  means  of  furnishing  the  funds  for  the  accom- 
plishment of  many  of  the  greatest  and  most  useful  enterprises  of 
the  day,  would  be  impaired.  Within  the  last  few  years  large 
masses  of  them  have  gone  into  general  circulation,  and  in  which 
capitalists  have  invested  their  money  ;  and  it  is  not  too  much  to 
say  that  a  great  share  of  the  confidence  they  have  acquired,  as  a 
desirable  security  for  investment,  is  attributable  to  this  negoti- 
able quality,  as  well  on  account  of  the  facility  of  passing  from  hand 
to  hand,  as  the  protection  afforded  to  the  bona  fide  holder."  ^ 

In  England  it  has  been  held  that  debenture  bonds  payable  to 
bearer,  whether  they  should  properly  be  called  promissory  notes 
or  not,  are  at  all  events  negotiable  instruments,  because  the  con- 
tents of  such  an  instrument  amount  to  a  representation  by  the 
company  to  all  the  world  that  it  will,  at  the  expiration  of  the 
period  for  which  they  are  to  run,  pay  the  sum  for  which  they  are 
given  to  the  holder,  together  with  interest  half-yearly  in  the  mean 
time.^ 

The  feature  common  to  these  and  all  other  instruments  that 
have  been  adjudged  to  be  negotiable  is  that  they  are  in  some  form 

1  So  also  the  same  court,  through  Mr.  plishment  of  the  useful  enterprises  of  the 

Justice  Grier,  in  Mercer  County  v.  Hacket,  day,   it  cannot   be   allowed  to  evade  the 

1   "Wall.    83,    95,    has    said,    speaking   of  payment  by  parading  some  obsolete  judi- 

municipal  bonds  :  "This  species  of  bonds  cial  decision  that  a  bond  for  some  techni- 

is  a  modern  invention,  intended  to  pass  cal   reason   cannot    be   made    payable   to 

by  manual    delivery,    and    to    have   the  bearer."     See  also  Guilford  v.  Minneapo- 

qualities  of  negotiable   paper,    and    their  lis,  St.  Marie,  &  A.  R.  Co.,  48  Minn.  561  ; 

value  depends  mainly  upon  this  character,  s.  c.  51  N.  W.  Rep.  658  ;  51  Am.  k  Eng. 

Being  issued  by  States  and  corporations,  R.  R.  Cas.  98. 

they  are  necessarily  under  seal.    But  there  ^  In  re  Imperial  Land  Co.  of  Marseilles 

is  nothing   immoral  or   contrary  to  good  (1870),  L.   R.   11  Eq.  478;  Ex  parte  Citj 

policy  in  making  them  negotiable,  if  the  Bank,    L.    R.    3    Ch.    758.      The    Eng- 

necessities  of  commerce  require  that  they  lish  debenture-bonds  vary  considerably  in 


should  be  so.  A  mere  technical  dogma 
of  the  courts  on  the  common  law  cannot 
prohibit  the  commercial  world  from  in- 
venting or  using  any  sy)ecies  of  security 
not  known  in  the  last  century.  U.sages 
of  trade  and  commerce  are  acknowledged 
by  courts  .as  part  of  the  common  law,  al- 
though they  may  have  been  unknown  to 
Bracton  or  Blackstone.  AtuI  this  mallea- 
bility to  suit  the  necessities  and  usages  of 
the  mercantile  and  commercial  world  is 
one  of  the  most  valuable  characteristics 
of  the  common  law.  When  a  cor])oration 
covenants  to  ]iay  to  bearer,  and  gives  a 
bond  with  negotial)le  qualities,  and  by 
tills  means  obtains  funds  for  the  accom- 


form,  and  the  decisions  bearing  on  their 
negotiability  are  for  this  reason  less  valu- 
able as  precedents  to  the  American  lawyer. 
It  has  been  considered  advisable  to  ab- 
stain from  noticing  in  the  present  work 
the  English  cases  turning  upon  language 
not  found  in  the  corporate  securities  of 
this  country,  and  not  illustrating  gen- 
eral jirinciples.  Debentures  subject  to  a 
condition,  as  that  a  certain  number  of 
them  are  to  be  drawn  and  paid  off  every 
half-year,  are  not  promissory  notes. 
Cro)U',Ii  V.  Credit  Foncier  of  England, 
Lim.  (1873),  L.  R.  8  Q.  B.  374.  See 
Young  V.  McNider  (1895),  25  Sup.  Ct. 
(Can.)  Rep.  272. 


§§  50,  51.] 


RIGHTS    OF   BONDHOLDERS. 


81 


the  representative  of  money,  and  may  be  satisfied  by  payment  in 
money  at  a  time  specified.^ 

S  50.  Bonds  not  non-negotiable,  because  no  Payee  is  named.  — 
The  fact  that  a  bond  is  issued  with  a  blank  for  the  name  of  the 
payee  docs  not  make  it  any  the  less  a  negotiable  instrument.  The 
authority  of  a  subsequent  bona  fide  holder  writing  his  own  name 
in  the  blank  space,  and  making  the  instrument  complete,  is  im- 
plied from  the  act  of  the  obligors  in  putting  it  in  circulation  in 
that  condition.^ 

In  putting  such  an  instrument  on  the  same  footing,  as  regards 
negotiability,  with  ordinary  commercial  paper,  the  courts  of  this 
country  have,  for  reasons  of  public  policy,  departed  from  the  tech- 
nical rule  of  common  law  that  a  bond  executed  with  a  blank  for 
the  name  of  the  payee  is  void,  and  that  the  authority  of  an  agent 
to  fill  a  blank  in  an  instrument,  and  thus  make  it  the  valid  deed 
of  his  principal,  must  be  conferred  by  deed.^ 

§  51.  Uncertainty  in  Time  of  Payment  or  Amount  as  affecting 
Negotiability.  —  (a)  What  is  not  an  Uncertainty  in  the  Time  of 
Payment  destructive  of  Negotiability.  —  Provided  a  bond  is  pay- 
able at  a  fixed  date,  its  negotiability  is  not  destroyed  by  the 
insertion  of  a  clause  reserving  to  the  obligor  the  option  of 
discharging   the    obligation  at    any  time    prior  to    that  date;* 


1  ilechanics'  Bank  v.  New  York  & 
New  Haven  E.  Co.  (1856),  13  N.  Y.  599, 
denying  negotiabilitj'  on  this  ground  to 
shares  of  stock.  Similar  language  may 
be  found  in  Craig  v.  City  of  Vicksburg 
(1856),  31  ^liss.  216.  Compare  also  the 
opinion  of  Lord  Tenterden  in  Wookey  v. 
Pole,  4  B.  &  Aid.  1.  "Abstracted  from 
authoiity,  I  think  this  instrument  (an 
exchequer  bill)  is  of  the  same  nature  as 
notes  and  bills  of  exchange.  Like  them 
it  is  neither  valuable  nor  useful  in  itself 
as  goods  and  chattels,  such  as  a  horse,  a 
book,  a  picture,  or  a  pipe  of  wine  are. 
It  is  valuable  only  as  entitling  the  holder 
to  receive,  at  some  future  time,  a  certain 
sum  of  money,  which  is  a  value  precisely 
of  the  same  nature  as  the  value  of  a  note 
or  bill."  The  same  judge,  speaking  of 
bonds  issued  by  the  King  of  Prussia,  said  : 
"  This  instrument,  in  its  foim,  is  an  ac- 
knowledgment by  the  King  of  Prussia  that 
the  sum  mentioned  in  the  bond  is  due 
to  every  person  who  shall,  for  the  time 
being,  be  the  holder  of  it.  And  the  prin- 
cipal and  interest    is  payable  in  a  certain 


mode,  and  at  certain  periods,  mentioned 
in  the  bond.  It  is,  therefore,  in  its  na- 
ture precisely  analogous  to  a  bank-note 
payable  to  bearer,  or  to  a  bill  of  ex- 
change, indorsed  in  blank."  Georgier  v. 
Mieville  (1824),  3  B.  &  C.  45.  See  also 
Evertson  v.  National  Bank  (1876),  66 
N.  Y.  14,  and  the  elaborate  judgment  of 
Chief  Justice  Cockburn  in  Goodwin  v. 
Robarts  (1875,)  L.  R.  10  Q.  B.  337. 

2  Boyd  V.  Kennedy  (1875),  38  N.  J.  L. 
146,  citing  White  v.  Vermont  &  Massa- 
chusetts R.  Co.  (1858),  21  How.  575  ; 
Brain  erd  v.  New  York  &  New  Haven 
E.  Co.  (1862),  5  N.  Y.  496;  Hubbard 
i;.  New  York  &  Harlem  R.  Co.  (1862),  36 
Barb.  286  ;  Chapin  v.  Vermont  &  Massa- 
chusetts E.  Co.  (1857),  8  Gray,  575,  as 
illustrations  of  the  same  doctrine. 

3  Cases  asserting  this  common-law  rule 
are  Hibblewhite  v.  McMorine,  6  M.  &  W. 
200;  Enthoven  v.  Hoyle,  13  C.  B.  373; 
Squire  v.  Wilton,  1  H."  L.  C.  333. 

4  Union  L.  &  T.  Co.  v.  Southern  Cal. 
l\Iotor  Road  Co.  (1892),  51  Fed.  Eep.  840. 
This  case  was  decided  with  special  refer- 


6 


82  EAILWAT   BONDS   AND   MORTGAGES.  [CHAP.  II. 

nor  by  the  fact  that  the  bond  is  made  subject  to  the  condi- 
tion of  an  agreement  between  the  obligor  and  a  trust  company, 
whereby  it  is  provided  that  a  sinking  fund  of  not  less  than 
850,000  nor  more  than  $100,000  in  each  year  shall  be  applied 
to  the  purchase  or  drawing  at  par  of  said  bonds,  and  that  the 
whole  issue  may  be  drawn  at  par  on  "a  given  date,  or  any  coupon 
day  thereafter ; "  ^  nor  by  a  provision  that,  if  any  of  the  payments 
of  interest  cannot  be  made  at  the  dates  named,  all  interest  due 
shall  be  paid  as  soon  thereafter  as  sufficient  money  has  been 
earned  to  enable  the  company  to  do  so.^ 

(b)  When  the  Amount  is  uncertain  so  as  to  render  the  Bond 
non-negotiable.  —  Where  by  the  terms  of  the  bond  the  amount 
payable  remains  uncertain  until  the  place  of  payment  is  fixed  by 
the  indorsement  of  the  president  of  the  obligor  company,  the 
bond  is  not  a  negotiable  instrument  until  the  requisite  indorse- 
ment is  made.^ 

§  52.  On  the  Ija-vr  that  governs  the  Question  of  Negotiability.  — 
The  mere  fact  that  an  instrument  is  negotiable  by  the  law  of  one 
country  will  not  invest  it  with  the  quality  of  negotiability  in 
another  country.  The  question  of  its  negotiability  must  be  de- 
termined with  reference  to  the  law  or  custom  of  the  country  in 
■which  the  action  on  the  instrument  is  brought.* 

Foreign  bonds,  however,  will  be  treated  by  the  courts  as  nego- 
tiable instruments,  if  it  is  shown  that  they  are  customarily  circu- 
lated as  such  among  merchants  and  men  of  business.^ 

§  53.  Who  are  Bona  Fide  Holders  of  Bonds  generally.  —  For  a 
general  discussion  of  the  question  what  constitutes  a  botia  fide 
holder,  reference  will,  of  course,  be  had  to  treatises  on  negotiable 
instruments.  The  cases  cited  in  this  and  the  following  sections 
are  inserted  men^ly  to  illustrate  the  application  of  principles  of 
negotiability  to  transfers  of  corporate  securities. 

A  bondholder  who  testifies  that  he  purchased  his  bonds  for  a 
price  named  in  good  faith  in  the  oj)cn  market,  supposing  them  to 
be  the  valid  ol)ligations  of  the  com))any,  and  being  told  that  they 
were,  will  bo  held  a  bona  fide  holder  for  valuc.^ 

ence    to    the   Civil   Code    of   California,  2  gtraussi;.  United  Telegraph  Co.  (1895), 

§§  3087-3089,  3093  ;  but  those  provisions  164  Mass.  130  ;  s.  c.  41  N.  E.  Rep.  57. 

are   inerely   declaratory   of    the   rules    of  ^  Parsons  v.   Jackson  (1878),  99  U.  S. 

common  law.  434. 

1  Union    Cattle    Co.    v.    International  *  Rieker    v.     London,    pte.     Bkg.    Co. 

TruHtCo.  (1889),  149  Mass.  492;  a.  C  21  (1887),    L.   R.   18  Q.   B.   D.   515. 

N.    E.   Rep.    962.      The   court   held   the  ^  Vcnal.les  v.   Baring  (1892),   L.   R.    3 

bond    negotiaVdo   both  under  the  statute  Ch.  Div.  527. 

(Pub.    St.,   c.   77,   §   4)    as    well    as    by  "  C.alveston,    etc.    R.    Co.    v.   Cowdrey 

custom.  (1870),  11  Wall.  459. 


§  53.]  RIGHTS   OF   BONDHOLDERS.  83 

The  rule  is  not  disputed  that  bonds  in  the  hands  of  a  holder 
acquiring  theni  for  value,  before  due,  without  notice,  are  not  sub- 
ject to  the  equities  with  which  they  were  affected  as  between  the 
original  parties  or  while  in  the  hands  of  a  party  holding  thcin.^ 

The  transferee  of  a  coupon  bond  is  presumed  to  be  a  bona  fide 
holder  for  value,^  and  the  transferee  of  a  bona  fide  purchaser  of 
bonds,  even  if  lie  has  notice  of  equities  between  the  obligor  and 
the  obligor's  original  assignee,  is  himself  protected  as  a  bona  fide 
purchaser.^ 

And  the  possession  of  a  negotiable  bond,  being  strong  prima 
facie  evidence  of  just  title  in  ordinary  cases,  throws  upon  the 
party  questioning  it  the  burden  to  show  that  the  holder  had 
notice  of  some  vice  or  defect  which  would  vitiate  his  title.^ 

As  the  mortgage  security  is  a  continuing  one,  and  the  bonds 
are  negotiable  by  the  company  in  such  a  sense  as  to  carry  the 
mortgage  security  until  they  have  become  commercially  dishon- 
ored, or  something  else  has  been  done  to  deprive  the  company  of 
the  power  of  putting  them  out,  a  dealer  who  finds  bonds  of  a  given 
series  in  the  hands  of  a  company,  with  the  certificate  of  the  trus- 
tee upon  them,  may  buy  in  good  faith  with  safety.  The  execution 
of  a  junior  mortgage  is  not  sufficient  to  deprive  one  who  there- 
after purchases  from  the  company  bonds  secured  by  a  prior 
mortgage  of  his  privileges  as  a  bona  fide  holder,  unless  the 
junior  mortgage  in  terms  limits  the  lien  of  the  prior  mortgage 
to  bonds  actually  disposed  of,  and  probably  not  even  then.  It 
might  fairly  be  held  that  the  junior  mortgagee  is  guilty  of  a  com- 
mercial wrong  in  not  protecting  himself  and  the  public  by  refusing 
to  accept  his  security  until  the  remaining  bonds  of  the  earlier 
series  are  cancelled,  and  should  be  made  to  suffer  accordingly.^ 

Persons  doing  work  for,  or  furnishing  material  to,  a  railroad 
company  receiving  its  bonds  therefor  are  boyia  fide  holders  of  the 
same  as  much  as  if  they  had  paid  cash  for  them.^ 

1  Reidv.  Bank  of  Mobile  (1881),  70  Ala.  L.  R.  Co.,  7  Mo.  Ap.  294  ;  Galveston  Rail- 
199;  s.  c.  14  Am.  &  Eng.  R.  R.  Cas.  554.  road  v.  Cowdrey,  11  Wall.  459  ;  who  are 

2  Gibson  v.  Lenhart  (1882),  101  Pa.  not:  Garrard  v.  P.  &  C.  R.  Co.,  29  Pa.  St. 
St.  522.  See  also  Morris  Canal  &  Bkg.  Co.  154  ;  Am.  L.  &  T.  Co.  v.  St.  L.  &  C.  R. 
V.  Fisher  (1855),  9  N.  J.  Eq.  667  ;  Same  Co.,  42  Fed.  Rep.  819  ;  Smith  v.  Fla.,  C. 
V.  Lewis  (1858),  12  N.  J.  Eq.  323  ;  Car-  &  W.  R.  Co.,  43  Fed.  Rep.  741. 

penter   v.    Rommel    (1862),    5    Phil.    34  ;  *  Schutte    v.    Florida    Cent.    R.    Co. 

Gilbough  V.  Norfolk  &  P.   R.   Co.    (1877),  (1879),  3  Woods,  692.     See  also  Butler  v. 

1  Hughes,  410.  Rahm  (1877),  46  Md.  541;  s.  c.  18  Am. 

8  Morris  Canal,  etc.  Co.  v.  Lewis  (1858),  Ry.  Rep.  86. 
12  N.  J.   Eq.  323;  Union  L.  &  T.  Co.  v.  &  Claflin    v.    South    Carolina   R.    Co. 

Southern  Cal.  Motor  Road  Co.   (1892),  51  (1880),  8  Fed.  Rep.  118,  per  Waite,  C.  J. 
Fed.  Rep.  840.     Cases  illustrating  who  are  "^  Hodder  v.  Kentucky  &  Great  East.  R. 

bona  fide  purchasers:  Tyrell  v.  Cairo  &  St.  Co.  (1881),  7  Fed.  Rep.  793. 


84  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  II. 

As  between  the  bondholders  and  persons  acquiring  liens  on  the 
mortgaged  property  subsequent  to  the  i-ecording  of  the  mortgage, 
the  rights  of  bona  fide  holders  of  bonds  are  to  be  determined  as  if 
they  were  acquired  at  the  date  of  the  recording  of  the  mortgage.^ 

§  54.  Bondholders  are  entitled  to  assume  that  Statement  in  Bonds 
as  to  Date  of  Issue  is  correct.  —  Purchasers  of  bonds  issued  under 
a  mortgage  purporting  to  be  of  even  date  with  the  bonds  are  not 
put  on  their  inquiry  as  to  whether  the  bonds  and  mortgage  were, 
in  fact,  issued  simultaneously,  or  whether  in  the  meantime  liens 
of  material-men  have  attached.'-^ 

§  55.  Bona  Fide  Holders  of  Bonds  not  protected,  if  Issue  •was  ultra 
vires.  —  Persons  dealing  with  the  negotiable  securities  of  a  cor- 
poration are  chargeable  with  knowledge  of  the  extent  of  the  power 
to  make  them,  as  conferred  by  the  charter  or  the  general  statute 
by  virtue  of  which  the  incorporation  was  effected.  This  principle 
is  elementary,  and  its  existence  is  assumed  in  all  the  statements 
of  the  rights  of  bona  fide  holders  of  bonds  irregularly  issued.  The 
most  difficult  cases  are  those  in  which  it  becomes  necessary  to 
determine  whether  the  legislative  direction  which  the  company 
has  failed  to  observe  is  in  the  nature  of  a  mandatory  condition 
precedent,  or  of  a  merely  directory  formality.  In  regard  to  cor- 
porate securities,  the  New  Jersey  Court  of  Appeals  has  formulated 
a  general  rule  on  the  following  terms :  "  If  the  power  granted  by 
the  charter  is  subject  to  a  condition  relating  either  to  the  form  in 
which  the  security  shall  be  made  in  order  to  be  valid,  or  to  some 
preliminary  proceeding  extraneous  to  the  acts  of  the  corporation 
or  its  officers,  securities  not  in  the  prescribed  form,  or  issued 
without  the  preliminary  proceedings  had,  are  subject  to  defences 
in  consequence  thereof  even  in  the  hands  of  bona  fide  holders.^ 

Where  bonds  are  shown  to  have  been  illegally  issued,  the  bur- 
den is  thrown  on  the  holder  of  showing  that  he  paid  value  for 
them,  and  had  no  notice  of  their  illegality  ;  and  bonds  issued  in 
violation  of  a  statute  limiting  the  issue  to  the  amount  of  stock 
actually  paid  in  at  the  time  are  void  as  between  the  parties  to  the 
transaction.^ 

The  defect  of  power  will,  it  seems,  be  more  fatal  in  proportion 
as  the  contract  is  of  a  usual  or  unusual  character.  Thus,  on  the 
ground  that  a  contract  of  guaranty  is  outside  the  ordinary  busi- 

1  Hd.lf'n  V.  Burke  (1894),  72  Ihiii,  m.     Eq.  1895),  31  Atl.  Rep.  174,  citing  State 

2  Nfilsoii  V.  Iowa  Kastern  Ry.  Co,  v.  Board  of  Chosen  Freeholders  (1877),  39 
(Iowa,  187.'.),  8  Am.  Ry.  Rep.  82.  N.    J.   L.    632;    Crampton    v.    Zabriskie 

8  Hn.keiisaek  Water  Co.  v.  DeKay  (1879),  101  U.  S.  601;  Atlantic  City 
(1883),  36  N.  J.  Ki|.  r)48.  Waterworks  Co.  v.  Read  (1888),  50  N.  J. 

*  Baker  v.  Guarantee  Trust  Co.  (N.  J.     L.  665  ;  s.  c.  15  Atl.  Rep.  10. 


§  56.]  RIGHTS   0?   BONDHOLDERS.  85 

ness  of  a  railroad  company,  it  has  been  held  that  the  purchaser  of 
bonds  of  one  company  guarantied  by  another  is  bound  to  inquire 
into  the  corporate  powers  of  the  guarantor  company.  In  other 
words,  the  commercial  character  of  the  bond  and  guaranty  do  not 
relieve  a  purchaser  from  the  risk  of  the  want  of  corporate  au- 
thority to  execute  the  bonds ;  and  although  a  purchaser  for  value 
and  without  actual  notice  of  the  want  of  authority,  he  will  not  be 
accorded  the  rights  of  an  innocent  purchaser  as  regards  tlic  obli- 
gation of  the  guaranty,-^ 

§  50.  Bona  Fide  Holders  of  Corporate  Bonds  protected  if  Issue  -was 
merely  irregular.  —  In  the  courts  of  this  country  and  of  England 
the  law  is  settled  that,  where  the  corporation  has  power  under 
any  circumstances  to  issue  negotiable  securities,  a  bona  fide  holder 
has  a  right  to  ])resume  that  they  were  issued  under  the  circum- 
stances which  give  the  requisite  authority .^ 

The  distinction  is  between  limitations  and  conditions  in  the 
statute  from  which  the  corporation  derives  its  powers  —  external 
matters  of  which  the  public  had  notice  by  the  public  record  —  and 
acts  to  be  done  by  the  corporation  or  its  officers,  as  conditions 
precedent  to  the  making  of  such  securities,  in  the  internal  affairs 
of  the  company .2 

The  most  common  example  of  the  rule  that  a  lona  fide  holder 
is  not  obliged  to  take  notice  of  the  "  indoor  management  of  the 
company"  is  found  in  that  class  of  cases  where  certain  formalities 
in  the  making  of  corporate  contracts  are  prescribed  for  the  secu- 
rity of  the  stockholders.    It  is  well  settled  that  the  non-observance 

1  Louisville,  etc.  R.  Co.  v.  Ohio  Valley  capital  was  subscribed  and  paid  up  to  the 
Improvement,  etc.  Co.  (ISQ-l),  69  Fed.  Rep.  extent  demanded  by  the  charter.  The 
431.  The  Indiana  statute,  under  which  bonds  were  secured  by  a  mortgage,  exe- 
this  case  was  decided,  provided  that  the  cuted  with  all  due  formalities,  and  having 
directors  of  a  railroad  company  might,  on  its  face  every  appearance  of  having 
upon  the  petition  of  the  holders  of  a  been  made  in  strict  pursuance  of  the 
majority  of  the  stock  of  the  company,  power  of  the  company.  It  was  held  that, 
direct  the  execution  of  a  guaranty  of  the  as  against  a  bona  fide  hoMer  of  these 
bonds  of  another  company.  The  guaranty  bonds,  who  had  taken  them  upon  the 
held  to  be  invalid  was  executed  without  faith  that  the  mortgage  was  what  it 
any  such  [)etition,  and  promptly  disavowed  appeared  to  be,  the  company  could  not  de- 
hy  the  stockholders.  fend  on  the  ground  of  imperfections  due 

2  Hackensack  Water  Co.  v.  DeKay  solely  to  the  omission  of  acts  which  the 
(1883),  36  N.  J.  Eq.  548,  citing  a  large  directors  should  have  done  in  the  man- 
number  of  cases.  In  that  case  a  company  agement  of  the  private  business  of  the 
was    authorized    to    issue    bonds    to    an  company. 

amount  not  exceeding  two-tliirds   of  its  ^  Hackensack    Water    Co.    v.   DeKay 

paid-up  capital.      The  directors  violated  (1883),  36  N.  J.  Eq.  548  ;  s.  p.  Baker  v. 

their  duty  by  issuing  bonds  of  an  amount  Guarantee  T.    Co.    (X.  J.   Eq.   1895),  31 

within  the  limits  allowed,  but  before  the  Atl.  Rep.  174. 


86 


RAILWAY   BONDS   AND   MORTGAGES. 


[chap.  II. 


of  these  formalities  in  issuing  bonds  will  not  invalidate  them  in 
the  hands  of  a  horia  fide  holder.^ 

Another  application  of  the  general  principle  is  that  the  fact  of 
a  bond  having  been  issued  for  a  purpose  not  authorized  by  the 
company's  charter  will  not  prevent  a  bona  fide  holder  from  re- 
covering thereon,  provided  there  is  nothing  on  the  face  of  the 
instrument  to  show  that  it  has  not  been  duly  issued  in  conformity 
with  the  provisions  of  the  charter.^ 

Thus,  where  the  doctrine  is  held  that  it  is  within  the  corporate 
power  of  a  railroad  company  to  sell  and  guaranty  bonds  held  in 
the  usual  course  of  business,^  a  bona  fide  holder  may  hold  the  com- 
pany on  such  a  guaranty,  though  it  was  given  for  the  purpose  of 
enabling  the  obligor  company  to  raise  money  for  the  construction 
of  a  road,  and  such  construction  was  foreign  to  the  objects  for 
which  the  guarantor  company  was  incorporated.* 


1  Mahoney  v.  East  Holyford  Mining 
Co.,  L.  R.  7  H.  L.  893,  where  Lord 
Hatherley  drew  a  distinction  between 
acts  done  in  reference  to  the  indoor  man- 
agement of  the  company,  and  acts  which 
must  be  sustained,  if  at  all,  by  a  consid- 
eration of  the  contents  of  the  enabling 
statute  and  the  articles  of  association.  In 
another  case  the  same  eminent  judge  re- 
marked that  if  the  party  contracting  with 
the  directors  finds  the  acts  to  be  within 
the  scope  of  their  power  under  the  deed 
of  settlement,  he  has  a  right  to  assume 
that  all  conditions  precedent  to  its  exer- 
cise have  been  complied  with.  In  re 
Athenteum  Society,  4  K.  &  J.  549. 

In  the  registered  deed  of  settlement  of 
a  joint-stock  company  the  directors  were 
authorized  to  borrow  on  bonds  such  sums 
as  should  from  time  to  time  be  authorized 
by  a  general  resolution  of  the  company. 
A  bond,  sealed  with  the  common  seal,  was 
given  by  tlie  directors  to  a  banker,  with- 
out a  resolution  of  the  company  authoriz- 
ing it,.  It  was  adjudged  that,  under  the 
cinMinistanees,  the  obligee  had  a  right  to 
presume  that  there  had  been  a  resolution 
at  a  getif-ral  meeting,  as  the  deed  of  .settle- 
ment prescribt!(l.  (Jhief  Justice  Jervis,  in 
delivering  the  o]>inion  of  the  Court  of 
Exchequer  Chamber,  said  :  "  The  i)aity 
here,  on  ffading  the  deed  of  .settlement, 
wouhl  fiml,  not  a  prohibition  from  borrow- 
ing, but  a  jjcrmission  to  ilo  so  on  certain 
conditions.  Fiinling  the  authority  might 
be    made   complete    by    a   resolutidn,    ho 


would  have  the  right  to  infer  the  fact  of  a 
resolution,  authorizing  that  which  on  the 
face  of  the  document  appeared  to  be 
legitimately  done."  Royal  British  Bank 
V.  Turquand,  6  El.  &  Bl.  327. 

"  A  citizen  who  deals  directly  with  a 
corporation,  or  who  takes  its  negotiable 
paper,  is  presumed  to  know  the  extent  of 
its  corporate  power.  But  when  the  paper 
is,  upon  its  face,  in  all  respects  such  as 
the  corporation  has  authority  to  issue, 
and  its  only  defect  consists  in  some  ex- 
trin.sic  fact,  such  as  the  purpose  or  object 
for  which  it  was  issued,  to  hold  that  the 
person  taking  the  paper  must  inquire  as 
to  such  extraneous  fact,  of  the  existence 
of  which  he  is  in  no  way  apprised,  would 
obviously  conflict  with  the  whole  policy 
of  the  law  in  regard  to  negotiable  paper." 
Farmers'  &  Mechanics'  Bank  v.  The  Butch- 
ers' &  Drovers'  Bank,  16  N.  Y.  125. 

Bonds  cannot  be  invalidated  in  the 
hands  of  bona  fide  holders  by  tlie  fact  that 
they  were  not  submitted  by  the  directors 
to  the  vote  of  the  stockholders.  Phinizy 
V.  Augusta,  etc.  R.  Co.  (1894),  62  Fed. 
Rep.  (578. 

-  Rule  as  to  all  kinds  of  negotiable 
se(;urities  of  corporation  so  stated  by 
Walworth,  Ch.,  in  Stoney  v.  American  L. 
Ins.  Co.  (1845),  11  Paige  Ch.  635. 

3  Some  courts  deny  this.  See  next 
section  and  Chapter  IV. 

*  iMiidison,  etc.  R.  Co.  v.  Norwich  Sav. 
Soc.  (1865),  24  Ind.  457. 


§  56.]  EIGHTS   OF   BONDHOLDERS.  87 

The  operation  of  the  same  principle  is  also  seen  in  those  cases 
which  lay  down  the  rule  that,  as  a  railroad  company  has  a  general 
power  to  make  contracts  and  borrow  money,  persons  dealing  in 
securities  issued  by  it  may,  in  the  absence  of  notice  to  the  con- 
trary, assume  that  restrictions  upon  this  power,  for  example,  in 
regard  to  the  price  at  which  bonds  may  be  sold,  have  not  been 
violated.^ 

The  reasons  for  applying  the  principle  are  of  course  much 
stronger  where  the  bonds  expressly  recite  that  they  were  issued 
in  accordance  with  the  enabling  statute.  Such  a  recital  is  usually 
found  in  debentures  issued  by  English  joint-stock  companies. 
As  to  these,  the  rule  is  now  axiomatic  that,  whc]"e  they  purport 
to  have  been  issued  pursuant  to  powers  conferred  by  statute,  the 
company  is  estopped  from  alleging  against  innocent  assignees  for 
value  that  the  debentures  were  issued  illegally,  and  in  contraven- 
tion of  the  corporate  powers.^ 

In  this  country  an  express  recital  of  this  kind  in  the  bonds 
themselves  is  not  very  common.  But  it  has  been  held  in  a  New 
Jersey  case  that  purchasers  of  bonds  which  profess  to  have  been 
issued  in  accordance  with  a  law  limiting  the  amount  of  the  issue 
to  the  amount  of  the  capital  paid  in  have  a  right  to  rely  on  the 
statement  so  made.  Whether  there  has  been  a  violation  of  such 
a  law  necessarily  depends  upon  facts  within  the  knowledge  of  the 
corporate  officers  only.^ 

A  similar  rule  has  been  applied  in  the  case  of  State-indorsed 
bonds,  in  regard  to  which  it  has  been  held  that  where  the  statute 
authorizing  the  indorsement  refers  to  them  as  first-mortgage 
bonds,  bona  fide  holders  have  a  right  to  presume  that  all  pre- 
cedent requirements  had  been  complied  with,  and  that  there  were 
no  prior  liens  upon  the  railroad.     So  far  as  they  were  concerned 

1  P^llswortli's  Admrs.  v.  St.  Lonis,  same  principle  has  frequently  been  ap[)lied 
Terre  Haute,  &  Alton  R.  Co.   (1885),   98     in  cases  relating  to  municipal  bonds. 

N.  Y.  553.  The  general  rule  is  tliat  where  bonds 

2  Webb  v.  Commissioners,  L.  R.  5  Q.  B.  import  a  compliance  with  the  law  under 
642.  Other  expositions  of  this  principle  which  they  are  issued,  bona  fide  purchasers 
will  be  found  in  Agar  v.  Life  Assn.  Co.,  are  not  bound  to  look  further  for  evidence 
3  C.  B.  N.  S.  725;  Prince  of  Wales  Assn.  of  a  compliance'  with  the  conditions  of 
Co.  V.  Harding,  El.,  Bl.  &  El.  183;  In  re  the  grant  of  power.  Commissioners  v. 
Land  Credit  Co.,  L.  R.  4.  Ch.  App.  460;  Aspinwall,  21  How.  539.  The  only  mat- 
In  re  Gen.  Prov.  Assn.  Co.,  L.  R.  14  Eq.  ters  open  to  inquiry  are  the  bmia  fides  of 
507;  In  re  Gen.  South  Amer.  Co.,  L.  R.  2  the  purchase,  and  the  statutory  authority 
Ch.  Div.  337;  In  re  Int.  Pulp  Co.  L.  R.  to  issue  the  bonds.  Rouede  v.  Mayor,  etc. 
6  Ch.  Div.  556.  of  Jersey  City  (1883),  18  Fed.  Rep.  719.    As 

3  Baker  v.  Guarantee  Trust  Co.  (N.  J.  to  what  will  put  a  purchaser  upon  iiK^uiry, 
Eq.  1895),  31  AtL  174.  See  also  on  effect  see  Riggs  v.  Penn.  &  New  Engl.  R.  Co.. 
of  recitals   in   this   section,  below.      The  16  Fed.  Rep.  804. 


88  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  II. 

in  the  case  cited  below,  it  was  held  that  this  presumption  could 
not  be  rebutted.^ 

Where  railroad  bonds  are  valid  on  their  face,  the  burden  is  not 
upon  the  holder  to  show  that  the  provisions  of  law  authorizing 
their  issue  have  been  complied  with,  but  upon  the  party  claiming 
them  to  be  invalid  to  show  their  invalidity .^ 

But  a  Purchaser  with  Notice  of  Circumstances  qualifying  his 
nights  is  not  protected  as  a  Bona  Fide  Purchaser.  —  The  doctrine 
which  validates  securities  within  the  apparent  powers  of  the  cor- 
poration, but  improperly  and  therefore  illegally  issued,  aj)plies  only 
in  favor  of  boria  fide  holders  for  value.  A  person  who  takes  such 
a  security  with  knowledge  that  the  conditions  on  which  alone  the 
security  was  authorized  were  not  fulfilled  is  not  protected,  and 
in  his  hands  the  security  is  invalid,  though  the  imperfection  is  in 
some  matter  relating  to  the  internal  affairs  of  the  corporation, 
which  would  be  unavailable  against  a  bona  fide  holder  of  the 
same  security.^ 

The  special  relations  of  the  purchasers  to  the  company  and  to 
each  other  will  occasionally  justify  a  court  in  denying  them  the 
rights  of  bona  fide  holders.'* 

The  recitals  of  the  bonds  may  sometimes  be  such  as  to  operate 
as  implied  notice  of  circumstances  qualifying  the  purchasers' 
rights.     Thus  they  are  put  upon  inquiry  as  to  the  validity  of  the 

1  Young  V.  Montgomery  &  Eufaula  R.  *  Sillinian  v.  Fredericksburg,  etc.  R. 
Co.  (1875),  2  Woods,  606,  where  .such  Co.  (1876),  27  Gratt.  119;  17  Am.  Ry. 
holders  were  held  to  be  entitled  to  be  sub-  Rep.  157.  There  a  part  of  the  bonds  were 
rogated  to  the  rights  of  the  State  in  the  held  by  the  president  of  the  company,  an- 
security  taken  as  indemnity  for  its  in-  other  part  jointly  by  the  president  and  A., 
dorsement  of  the  company's  bonds.  another  part  jointly  by  A.  and  a  certain 

2  Nichols  V.  Mase  (1883),  94  N.  Y.  bank.  Under  such  a  showing  it  was  held 
160  ;  s.  c.  17  Am.  &  Eng.  R.  R.  Cas.  230,  that  they  must  be  held  to  have  taken 
affirming  Nichols  v.  Mase  (1881),  25  Hun,  their  bonds  with  knowledge  of  the  State's 
640.  See  also  Heinsheimer  v.  Dayton  R.  right  to  forfeit  the  property  and  franchises 
Co.  (1888),  3  Ry.  &  Corp.  L.  J.  268.  of  the  company  if  the  road  was  not  com- 

8  Hackensack    Water    Co.     v.     DeKay  pleted  at  a  specilled  date. 
(1883),  36  N.  J.  Eq.  .'')48,  citing /?i  re  Mag-  In  Chambers  v.  M.  &  M.  Ry.  Co.,  5  B. 

dalciia  Steam  Nav.  Co.,  6  Jur.  N.  S.  975  ;  &  S.  588,  a  railway  company  was  empow- 

Woo<lhams  v.  Anglo- Australian  Co.,  8  Jur.  ered  by  its  special  act  to  raise  a  sum  in 

N.  S.  148;  Tn  re  South  Essex  Gas  Light  addition  to  its    original    capital,    but   not 

Co.,  8  Jnr.  N.  S.  357  ;  Li  re  Patent  liriiad  until  the  whole   of  the    capital  had  been 

Machine  Co.,  7  Cli.  App.  289  ;  In  re  Gen.  subscribed  for  and  one-half  paid  up.     The 

Provident  Ass.  Co.,  L.  R.  14  Ei|.  507  ;  In  co\irt  held  tliat   no  action   could    be  sus- 

re  Hercules  Ins.   Co.,    L.    R.    19   Ei|.    302,  taincd  on  a  bond  held  by  the  chairman  of 

310;  /7i /•«  International  Pulp  Co.,  L.  R.  6  the  company,  who  had  knowledge  of  the 

'■')\.  Div.  550.  560  ;  In  re  Native  Iron  Ore  jjurposc  for  which  the  bond  was  executed 

C.I.,  I,.  Tl.  2Cli.  Div.  315  ;  Li,  re  S.  Auicr.  and  was  a  party  to  the  resolutions  by  which 

Co.    L.  R.  2  Ch.  Div.  337.  the  secretary  was  authorized  to  seal  them. 


§  57.]  EIGHTS   OP   BONDHOLDERS,  89 

issue  of  bonds,  where  they  declare  that  they  are  to  be  payable  at 
the  place  which  shall  be  determined  by  the  president's  indorse- 
ment, and  that  the  sum  payable  shall  depend  on  that  indorsement, 
and  yet  no  indorsement  appears  upon  them.  Especially  will  it 
be  impossible  for  the  purchasers  of  such  bonds  to  claim  the  rights 
of  bona  fide  purchasers,  if  the  price  at  which  they  were  offered 
for  sale  was  a  suspiciously  small  one,  and  there  are  several  years 
of  unpaid  coupons  still  attached  to  them.^ 

(As  to  imputed  notice  of  statutory  provisions  which  render  an 
issue  of  bonds  ultra  vires,  see  ante.) 

The  purchaser  of  bonds  expressly  reciting  that  they  are  for  the 
principal  and  interest  of  other  bonds  which  are  held  as  collateral 
security,  is  chargeable  with  notice  of  the  fact  that  the  indebted- 
ness secured  was  overdue,  and  he  is  thereby  subject  to  all  in- 
firmities attaching  to  it,  although  the  date  of  payment  named 
in  the  original  bonds  held  as  collateral  was  later  than  the  time  of 
the  purchase. 2 

§  57.  Rights  of  Holders  where  there  is  an  Over-issue.  —  Where  a 
corporation  agrees  that  the  amount  of  bonds  issued  shall  be 
limited  to  a  fixed  number  per  mile,  whoever  purchases  any  of 
the  bonds  upon  the  faith  of  such  contract  is  as  much  entitled 
to  the  benefit  of  such  a  contract  as  though  it  had  been  made 
with  him,  and  bonds  issued  in  excess  are  to  be  postponed  in 
payment  to  those  within  the  limit.^ 

Where  a  mortgage  of  property  is  made  to  secure  bonds  of 
certain  descriptions,  not  exceeding  a  certain  sum  in  the  aggre- 
gate, and  recites  other  bonded  indebtedness   covered   by   prior 

^  Parsons  v.  Jackson  (1878),  99  U.  S.  nal  agreement  with  the  contractor  as   to 

434.  the    limitation   upon   the   issue   of    tliese 

2  Higgins  V.  Lansingh  (1895),  154  111.  bonds,  recognized   such   agreement.     The 

301  ;  s,  c.  40  N".  E.  Rep.  362.  court  said,  in  giving  judgment  in  favor  of 

2  Union  Trust  Co.  v.  Nevada  &  0.   R.  such    bondholders'  lien,    in    preference   to 

Co.  (1884),  20  Fed.  Rep.  80,  modified  in  that   claimed   by   persons   to    whom,    for 

McMurray  v.  Moran  (1889),  134  U.  S.  159.  various  debts  due  to  them,  the  company 

In  this  last  case  the  comi)any  had  con-  had    paid  bonds  which   were,   in    view  of 

tracted  to  build  a  portion  of  its  road,  and  this  agreement,  an  over-issue:  "  The  limi- 

agreed   that  the  contract  should  be  paid  tation    upon   the    issue    of    first-mortgage 

partly  in  bonds  to  the  amount  of  a  fixed  bonds  is  the  sole  condition  which  gave  the 

sum   per  mile  of  the  road,  and   that  this  bonds  value  and  made  it  possible  to  nego- 

was  to  be  the  limit  of  bonds  issued  upon  tiate  them,  and  whoever  purchased  any  of 

that   part   of    the   line.      Afterwards   the  these  first-mortgage  bonds  upon  the  faith 

company  settled  with  the  contractor,  and  of  this  railroad    company,  as   pledged  in 

made    an   agreement   by   which   it   could  these  contracts  with  Moore,  limiting  the 

draw  money  due  as  a  balance  on  certain  of  amount  of  issue,  is   as  much   entitled  to 

these  bonds  in  the  hands  of  a  purchaser  the   benefit  of  those  contracts  in  this  re- 

from  the  contractor ;  and  in  this  and  all  spect  as  though  they  had  been  made  with 

other  negotiations  subsetiuent  to  the  origi-  the  purchaser  himself." 


90  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  II. 

liens,  and  that  the  new  bonds  were  to  be  substituted  for  the  old, 
the  lien  of  the  new  mortgage  is  confined  to  an  amount  which, 
added  to  the  prior  specified  incumbrances,  shall  not  exceed  the 
limit  fixed.  But  this  is  the  sole  restriction  implied  by  the  con- 
tract. Subsequent  incumbrancers  will  not  be  permitted  to  assert 
a  priority  as  against  the  holders  of  that  portion  of  the  issue 
which  is  not  needed  for  the  purpose  of  paying  off  tlie  old  bonds. 
Such  surplus  bonds  will  take  precedence  in  the  hands  of  bona  fide 
holders,  whether  sold  before  or  after  the  execution  of  the  junior 
mortgage.! 

In  a  controversy  between  bondliolders,  part  of  whom  claimed 
that  certain  bonds  of  higher  numbers  were  an  over-issue,  and 
therefore  not  entitled  to  any  payment  from  the  jjroceeds  of  the 
road  on  account  of  issue  being  limited  to  -$16,000  per  mile,  it 
was  held  by  the  court  that,  since  the  holders  of  bonds  issued  in 
excess  of  this  amount  had  purchased  them  in  good  faith  and 
after  ascertaining  that  the  Governor  had  indorsed  them,  and,  as 
the  law  authorizing  their  issue  required,  had  recited  in  his  in- 
dorsement that  he  had  done  so  in  pursuance  of  law,  and  all  the 
statements  on  bonds  and  mortgages  which  put  the  purchasers  on 
inquiry  lulled  and  satisfied  inquiry,  they  were  not  bound  to  look 
any  further.  These  bonds  of  the  higher  numbers,  or  excessive 
issue,  if  it  were  such,  were  therefore  entitled  to  share  pro  rata 
with  the  others.  The  purchasers  were  entitled  to  presume  that, 
as  the  bonds  bore  the  indorsement  of  the  State,  the  Governor 
had  not  violated  his  duty,  and  that  there  was  evidence  on  file  to 
the  effect  that  a  sufficient  number  of  miles  had  been  constructed 
to  authorize  him  to  indorse  the  bonds.^ 

1  Claflin    V.    South    Carolina    R.     Co.  this  contention,    and  said  :   "  The  second 

(1880),  8  Fed.  Rep.  118,  122.  mortgagee  vohintarily  permitted  the  first 

In  tliis  case  a  first  mortgage  was  exe-  mortgage  to  stand  as  it  was.     In  this  the 

cuted  to  secure  an  issue  of  bonds  to  a  stated  second   mortgage   bondholders    are   repre- 

amount  by  a  railroad  company.     The  bonds  sented     and     bound     by    their    trustees. 

were  to  be  used  in  sul)stitution  for  bonds  of  Wliatever    the    company    could    do   with 

a  former  issue,  and  any  not  used  in  that  the  first  bonds  before,  it  might  do  after, 

way  were  to  be  left  in  the  hands  of  the  so  far  as  any  express  limitations   in    the 

company,  to  be   used  as  they   should  see  second    mortgage    were    concerned.      The 

proper.     A  holder  of  bonds  under  a  second  lien  of  the  first  mortgage  to  its  full  amount 

mortgage,  which  recognized  tlie  first  tnort-  was  recognized,  and  nothing  was  said  or 

gage  as  a  lien  to  the  extent  of  the  amount  done  having  direc'tly  any  intention  to  limit 

of  bonds  authorized   ujurn  it,  maintained  the  jiower  of  the  company  under  it." 

that  bonds  of  \\w  first  issue,  used  by  the  ^  Stanton  ct  a.l.  Trustees  v.  Alabama  & 

company    .-is    pledges    and    otherwise    to  Chattanooga  U.  Co.  (1875),  2  Woods,  523. 

flecnre  loans  to  the  company,  were  bonds  See  also  State  exrd.  Plock  &  Co.  i'.  Cobb 

issued  contrary  to  the    limitations  of  the  (1879),  64  Ala.  127  ;  7  Am.  &  Eng.  R.  R. 

mortgage,  and  sliouM   not   he  ))referr('d  to  Cas.  147. 
these  bonds.     Waite,  C  J.,  ruled  against 


1 


§  58.]  RIGHTS   OF   BONDHOLDERS.  91 

In  a  case  in  Kentucky,  where  a  mortgage  was  made  for 
1400,000,  to  insure  four  hundred  bonds,  twenty  extra  bonds  were 
issued  by  mistake  and  were  purchased  bona  fide.  There  was  a  cer- 
tificate to  each  of  these  bonds  that  it  was  secured  by  mortgage, 
and  that  the  amount  of  such  bonds  issued  and  to  be  issued  was  not 
to  exceed  1400,000.  The  bonds  were  not  numbered  consecutively, 
but  in  two  classes,  for  which  reason  holders  could  not  detect  the 
over-issue  by  examination  of  the  mortgage,  as  the  latter  did  not 
describe  the  manner  in  which  the  bonds  were  numbered.  As  to 
the  company,  it  was  held  to  be  estopped  to  deny  that  the  twenty 
extra  bonds  were  secured  by  the  mortgage,  and  that  by  this 
estoppel  the  mortgagor  gave  the  holder  of  them  an  equitable 
lien,  which,  though  unrecorded,  was  superior  to  the  lien  given  by 
unrecorded  income-bonds  subsequently  issued,  but  inferior  to  that 
given  by  a  subsequently  recorded  mortgage.  Further,  that  where 
the  purchaser  of  the  third-mortgage  bonds  had  no  notice  of  the 
over-issue,  but  had  notice  of  the  income  bonds,  the  holder  of  the 
latter  would  be  substituted  to  the  legal  advantage  which  the  pur- 
chaser acquired  by  the  record  of  the  third  mortgage,  and  was 
consequently  entitled  to  a  preference  over  the  holders  of  the 
extra  bonds.^ 

The  Massachusetts  statute  of  1854,  ch.  286,  limited  the  issue  of 
the  bonds  to  the  amount  of  capital  actually  paid  in.  A  company 
having  issued  largely  in  excess  of  that  amount,  the  court  held 
that  the  illegality  of  those  bonds  was  apparent  on  their  face,  and 
open  equally  to  the  knowledge  of  the  party  who  issued  and  the 
party  who  received  them,  and  that,  though  the  company  did  not 
seek  to  repudiate  them,  one  who  had  taken  a  valid  second  mortgage 
containing  no  contracts  of  warranty,  but  not  made  expressly  subject 
to  the  former  mortgage,  might  take  advantage  of  their  invalidity .^ 

§  58.  Rights  of  Bona  Fide  Holders  not  affected  by  Misapplication 
of  Proceeds  of  Bonds  by  Original  Holders  or  others.  —  The  misap- 
propriation of  the  proceeds  of  a  sale  of  bonds  cannot  affect  a 
purchaser  3  unless  he  has  notice  of  such  misapplication,* 

1  Stephens  v.  Benton  (1863),  1  Duv.  (1882),  103  111.  187;  s.  c.  7  Am.  &  Eng. 
(Ky.)  112.  E.    R.    Gas.    101;    Stradley   v.   Tailthorp 

2  Comm.  o.  Smith  (1865),  10  Allen,  (1893),  96  Mich.  287;  s.  c.  55  N.  W.  Rep. 
448.  The  provision  here  construed  is  in-  807  ;  Thompson  et  al.  v.  Lambert  et  al. 
corporated  in  the  Mass.  Pub.  Stat,  of  (1876),  44  Iowa,  239  ;  Morton  v.  New  Or- 
1882,  ch.  112,  §  62.  See  Peatman  v.  leans  &  Selma  Ry.  Co.  (1885),  79  Ala. 
Centerville  Light,  Heat,  &  Power  Co.  590.  See  also  Haley  v.  Halifax  St.  Ry. 
(Iowa),  69  N.  \V.  Rep.  541,  holding  the  Co.,  25  Nova  Scotia  L.  R.  140. 

bonds  issued  in  excess  to  be  valid  to  the  ex-  «  Morton  v.  New  Orleans  &  Selma  Ry- 

tent  of  the  consideration  received  for  them.     Co.  (1885),  79  Ala.  590. 
8  Peoria    &    S.    R.    Co.    v.    Thompson 


92  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  II. 

Bona  fide  purchasers  of  bonds  are  not  affected  in  their  rights 
by  the  fact  that  the  original  holders,  who  were  the  president  and 
vice-president  of  the  company,  consented  to  the  misappropriation 
of  the  proceeds.^ 

Such  a  purchaser  is  not  bound  to  see  to  the  application  of  the 
money  to  the  purposes  of  the  corporation.^ 

*'  The  duty  of  the  company  to  pay  the  bonds,  and  the  duty  of  the 
chancellor  to  subject  to  their  payment  the  security  pledged  for  that 
purpose,  cannot  be  called  in  question  because  of  the  subsequent 
default  of  the  company  in  the  performance  of  a  public  duty."  ^ 

That  bonds  were  issued  and  exchanged  for  State  bonds  in  order 
that  the  stockholders  of  the  company  might  use  the  proceeds  of 
the  State  bonds  for  their  own  private  advantage,  and  that  they 
w^ere  so  used  contrary  to  the  statute  authorizing  the  exchange,  is 
no  defence  against  the  bonds  of  the  company  in  the  hands  of  a 
bona  fide  holder.'* 

§  59.  No  Recovery  on  Bonds  where  the  Trustee's  Certificate  is  a 
Forgery.  — Wherever  a  part  of  the  bonds,  upon  the  genuineness  of 
which  the  obligatory  effect  of  the  bonds  depends,  is  a  forgery,  the 
general  principle  is  applicable,  that  no  liability  can  be  predicated 
upon  a  forged  negotiable  instrument,  even  if  the  holder  is  an  in- 
nocent purchaser.  Thus  where  each  bond  provides  on  its  face 
that  it  "  shall  not  become  obligatory  until  it  shall  have  been 
authenticated  by  a  certificate  indorsed  thereon,  duly  signed  by 
the  trustee,"  a  purchaser  must  at  his  peril  ascertain  whether  the 
certificate  is  genuine.  If  he  takes  a  bond  relying  on  the  assur- 
ance of  his  vendor  that  it  is  genuine,  and  the  signature  of  the 
trustee  proves  to  be  a  forgery,  the  fact  that  he  paid  value  and 
bought  in  good  faith  cannot  relieve  him  from  the  consequences  of 
his  omission  to  make  proper  inquiries.^ 

§  60.  Amount  recoverable  on  Bonds  -where  they  have  been  pur- 
chased at  less  than  the  Face  Value.  —  In  a  late  case  in  the  Supreme 
Court  of  the  United  States  the  rule  as  to  the  amount  which  a 
holder  of  bonds  is  entitled  to  recover  was  stated  as  follows:  "  By 
the  decisive  weight  of  authority  in  this  country,  where  negotiable 
paper  has  been  put  in  circulation,  and  thci-e  is  no  infirmity  or  de- 
fence between  the  antecedent  parties  thereto,  a  purchaser  of  sucii 

1  I'..-liliMi  I'.  I'.iiiki;  (1894),  72  Hiin,  .'"^l.  ^  I\laas  v.   Missouri,   Kansas,   &  Texas 

2  I'liila.l.-lpliia  &  Sunbury  R.  Co.  v.  Ily.  Co.  (1880),  83  N.  Y.  223.  As  to 
Lewi.s  (ISf)!*),  33  I'a.  St.  33.  liability  of  tru.stee  to  bondholder  upon  a 

8  Newport  &  CincMimati   IJriilfje  Co.  v.  certificate  on  bond  that  it  is  secured  by 

Dou;,'lass  (1877),  12  lUish  (Ky.),  673.  a  inortgaf,'e  which  in  fact  was  never  ex- 

*  Schntle   V.     Florida    Cent.    II.    Co.  ecuted,   .see  Miles  v.   Roberts   (18'J6),   76 

(1879),  3  Woods,  692.  Fed.  Hep.  919. 


§§  61,  62.]  RIGHTS   OF   BONDHOLDERS.  93 

securities  is  entitled  to  recover  thereon,  as  against  the  maker,  the 
whole  amount,  irrespective  of  what  he  may  have  paid  therefor.^ 

This  rule  avails  in  favor  of  a  purchaser  from  one  who  has 
bought  at  a  pledgee's  sale.^ 

As  to  whether  one  who  holds  bonds  as  collateral  security  for  a 
debt  smaller  in  amount  than  the  face  of  the  bonds  should  be 
allowed  to  recover  the  whole  amount  due  thereon,  the  courts  are 
at  variance.  The  generally  received  doctrine  is  believed  to  be 
that  the  pledgee  should  recover  the  full  amount  due  on  the  in- 
struments, though  in  excess  of  the  debt  secured  thereby. 

§  61.  Title  of  Bona  Fide  Purchaser  not  affected  by  Fraud  of  Person 
intrusted  with  the  Negotiation  of  the  Bonds. — The  entire  absence 
of  delivery  of  negotiable  instruments  has,  in  a  majority  of  cases, 
been  regarded  as  a  sufficient  defence  even  against  an  innocent 
holder,  unless  the  maker  has  executed  an  instrument  perfect  in 
form,  and  been  negligent  in  letting  it  go  out  of  his  possession.^ 
But  when  a  corporation  has  made  its  negotiable  bonds  perfect  in 
form,  payable  to  bearer,  and  has  caused  them  to  be  certified  by 
the  trustee,  as  evidence  that  they  have  become  obligatory,  and 
has  placed  them  in  possession  of  its  president,  with  authority  to 
exchange  them  for  the  benefit  of  the  company  alone,  the  company 
cannot  defeat  the  title  of  an  innocent  purchaser  for  value  and 
before  maturity  by  showing  that  its  president  has  fraudulently 
pledged  or  sold  such  negotiable  bonds  for  his  own  private  use, 
with  its  knowledge  or  consent.* 

§  62.  Purchase  of  Bonds  by  Directors  of  a  Company  at  a  Dis- 
count. —  Upon  the  question  whether  a  director  may  purchase  the 
bonds  of  his  own  company  at  a  discount,  the  authorities  are  in 

1  Wade  V.  Chicago,  Springfield,  &  St.  quired  in  the  ordinary  course  of  business, 
Louis  R.  Co.  (1894),  149  U.  S.  327,  citing  and  not  at  a  sale  upon  the  pledgor's 
Cromwell  v.  Sac  County  (1877),  96  U.  S.  default  in  the  payment  of  his  debt,  as  in 
51;  Fowler  v.  Strickland  (1871),  107  Mass.  the  cases  cited  in  §  56,  aiite.  But  it  is  not 
552;  Moore  v.  Baird  (1858),  30  Pa.  St.  quite  apparent  why  the  original  and  the 
138;  Bange  i».  Flint  (1876),  25  Wis.  544;  second  transferees,  if,  as  the  court  de- 
Nat.  Bank  of  Mich.  v.  Green  (1871),  33  clared,  they  were  both  in  the  position  of 
Iowa,  140;  Baily  v.  Smith  (1863),  14  Son^yfo^c  purchasers,  should  not  both  have 
Ohio  St.  396.  been  entitled  to  recover  the  face  value  of 

2  Morris  Canal,  etc.  Co.  I'.  Lewis  (1858),  the  bonds.  Admitting  that  the  transfer 
12  N.  J.  Eq.  323;  Wade  v.  Chicago,  by  the  pledgee  was  wrongful,  the  trans- 
Springfield,  &  St.  L.  R.  Co.  (1894),  149  ferees  were  surely  in  at  least  as  strong  a 
U.  S.  327.  In  Grand  Rapids,  etc.  R.  Co.  position  as  one  who  acquires  lost  or  stolen 
y.  Sanders  (1877),  54  How.  Fr.  214,  the  commercial  paper  payable  to  bearer, 
court  restricted  the  recovery  of  one  who  3  Long  Island  Loan  &  Trust  Co.  v. 
bought  from  a  transferee  of  the  pledgee  to  Cohinibus,  C.  &  I.  C.  Ry.  Co.  (1895),  65 
the  amount  actually  paid  to  such  trans-  Fed.  Rep.  455. 

feree.      The  bonds   were   apparently  ac-  *  Ibid. 


94  RAILWAY    BONDS   AND   MORTGAGES.  [CHAP.  II. 

conflict.  In  New  York  it  is  held  that  a  director  cannot  purchase 
such  bonds  below  par  except  on  peril  of  the  avoidance  of  the 
transaction  bj  the  courts  on  the  application  of  the  corporation, 
but  he  is  entitled  in  a  foreclosure  suit  to  prove  as  many  bonds  as 
he  may  hold  as  pledgee,  and  share  in  the  distribution  up  to  the 
amount  of  the  debt  secured  by  the  pledge.^ 

By  a  subsequent  decision,  however,  the  application  of  this  rule 
would  seem  to  be  confined  to  cases  where  the  director  is  dealing 
directly  with  the  company,  and  not  to  cases  where  he  is  dealing 
wholly  with  third  persons  to  whom  he  owes  no  duty.^ 

In  Illinois  it  has  been  quite  recently  ruled  that  a  director  may 
purchase  claims  against  his  corporation  at  a  discount  and  enforce 
them  in  full,  provided  he  acts  fairly  and  for  the  interest  of  the 
corporation,  and  the  corporation  is  given  a  fair  opportunity  to  be- 
come the  purchaser  itself,  and  cannot  or  will  not  embrace  the 
opportunity.^ 

Such  is  apparently  the  rule  in  Kansas  also.* 

§  63.  Amount  recoverable  on  Bonds  tainted  ■with  Fraud  in  their 
Issue.  —  Bonds  given  by  a  company  in  pursuance  of  a  construction 
contract  fraudulent  and  void,  on  account  of  its  being  made  with 
another  company  in  which  the  directors  of  tlie  obligor  corpora- 
tion are  interested,  are  themselves  void,  and  cannot  be  enforced 
unless  they  have  passed  into  the  hands  of  innocent  holders  for 
value.  But  a  holder  who  does  not  receive  them  in  the  ordinary 
course  of  business  may  recover  upon  them  to  the  extent  of  the 
value  of  the  work  actually  done  by  the  construction  company, 
such  value  to  be  estimated  as  on  a  quantum  meruit  without 
regard  to  the  prices  fixed  by  the  contract.^ 

§  64.  Innocent  Purchaser  of  Stolen  Bonds  entitled  to  recover 
thereon.  —  A  purchaser  of  negotiable  bonds  before  maturity,  in 
the  usual  course  of  business,  acquires  a  good  title  thereto,  although 

1  Duncomb  v.  New  York,  etc.  R.  Co.  knew  nothing  about  the  intended  sale  of 
(1881),  84  N.  Y.  190  ;  s.  c.  4  Am.  &  Eng.     the  securities. 

R.  R.  Ca.s.  293.  *  St.  Louis,  Fort  Scott,  &  Wicliita  R. 

2  Inglehart  u.  Thousand  Islands  Hotel  Co.  v.  Chenault  et  al.  (1886),  36  Kan. 
Co.    (1888),    109  N.  Y.    454,    where  the     51,  57. 

president  of  the  company  was  allowed  to  ^  Tlioinas  v,  Brownville,  Fort  Kearney, 

make  a  profit  out  of  a  judgment  against  it.  &   Tac.    R.   Co.    (1883),   109    U.   S.   522, 

8  Iliggins    V.     Lansingh    (1895),    154  aj^jroving  AVardell  v.  Railroad  Co.  (1877), 

111.  300,   386;  s.  (;.    40  N.   E.  Rep.    362.  4  Dill.  330,  339;  Wardell  v.  Railroad  Co. 

The  court,    however,    thought  the  case  a  (1880),   103  U.   S.    651,    659,    where   the 

proper  one  for  denying  this  jirivilege  to  plaintiff    was   allowed   to   recover   a   fair 

the  director,   as  at  the  time  of  the  pur-  compensation    for    his    personal    services 

chase  he  practically  controlled  the  corpora-  under  a  contract  in  itself  fraudulent. 
tion,  and  the  other  members  of  the  board 


§G5.] 


RIGHTS   OF   BONDHOLDERS. 


95 


they  may  have  been  stolen  ;  and  in  a  suit  by  the  purchaser  the 
burden  of  proof  that  he  did  not  acquire  them  in  good  faith  is 
upon  the  defendant.^ 

§  6t5.  Rights  of  Purchaser  of  Bonds  the  Coupons  of  which  are 
overdue.  —  A  purchaser  of  negotiable  bonds  in  good  faith  and  for 
their  full  market  value  does  not  lose  his  rights  as  a  bona  fide 
holder  merely  by  reason  of  the  fact  that  some  of  the  interest 
coupons  attached  thereto  are  past  due  and  unpaid  at  the  time  of 
the  purchase.^ 

A  few  cases  countenance  the  doctrine  that  this  fact  is  suffi- 
ciently suspicious  to  put  the  jnirchaser  on  inquiry,  and  to  impair 
his  title  to  that  extent ;  but  these  are  opposed  to  the  general  cur- 
rent of  authority.^ 


1  Murray  v.  Lardner  ('1864),  2  Wall. 
110,  containing  a  review  of  the  previous 
authorities  in  this  country  and  in  Eng- 
land ;  same  principle,  Hotchkiss  v.  Na- 
tional Banks  (1874),  21  Wall.  354  ; 
Consolidated  Association,  etc.  v.  Avegno 
(1876),  28  La.  Ann.  552;  Dutchess  Co. 
Insurance  Co.  v.  Hachfield  (1874),  1  Hun, 
675;  Venables  v.  Baring  Bros.  (1892), 
L.  R.  3  Ch.  527.  Compare  Seybel  v. 
National  Currency  Bank  (1873),  54  N.  Y. 
288,  a  case  where  United  States  bonds 
had  been  stolen,  and  State  of  Califoinia  v. 
Wells,  Fargo,  &  Co.  (1860),  15  Cal.  336, 
where  the  instruments  were  warrants  of 
State  indebtedness. 

In  Ledwich  v.  McKim  (1873),  53  N.  Y. 
307,  incomplete  bonds,  stolen  from  the 
office  of  a  Southern  railroad  company  by 
Federal  soldiers  during  the  war,  and  sold 
in  New  York,  were  held  not  to  be  good 
against  the  company  even  in  the  hands  of 
bona  fide  purchasers.  This  ruling  was 
based  upon  the  principle  that  the  rule 
that  the  bona  fide  holder  of  an  incomplete 
instrument,  negotiable  but  for  some  omis- 
sion capable  of  being  supplied,  has  an 
implied  authority  to  supply  the  omission 
and  to  hold  the  maker  thereon,  only 
applies  where  the  latter  has,  by  his  own 
act  or  the  act  of  another,  authorized,  con- 
fided in,  or  invited  with  apparent  author- 
ity by  him,  put  the  instrument  in  circula- 
tion as  negotiable.  See  also  Jackson  v. 
Vicksburg,  Shreveport,  &  Texas  R.  Co. 
(1875),  2  Woods,  141. 

In  Maas  v.  Missouri,  K.  &  T.  R.  Co. 
(1880),  83  N.  Y.  223,  affirming  Same  v. 


Same  (1877),  11  Hun,  8,  it  was  held  that 
neither  the  payment  of  value  nor  good 
faith  on  the  part  of  the  purchasers  of 
bonds  which  had  been  stolen,  and  a  seal 
and  certificate  forged  tliereon  to  appar- 
entl}''  complete  them,  created  a  cause  of 
action  ;  nor  did  the  failui-e  of  the  obligor, 
after  discovering  that  the  bonds  had  been 
lost  or  stolen,  to  notify  the  public  of  that 
fact  constitute  negligence  that  would 
make  it  liable. 

2  Cromwell  v.  County  of  Sac  (1877), 
96  U.  S.  51  ;  Morgan  v.  United  States 
(1885),  113  U.  S.  476  ;  Railroad  Co.  v. 
Sprague  (1880),  103  U.  S.  756  ;  Thompson 
V.  Perrine  (1882),  106  U.  S.  589  ;  JIcLane 
V.  Placerville  &  Sacramento  Valley  R.  Co. 
(1885),  66  Cal.  606  ;  National  Bank,  etc. 
V.  Kirby  (1871),  108  Mass.  497;  State 
ex  rcl.  Plock  &  Co.  v.  Cobb  (1879),  64  Ala, 
127  ;  s.  c.  7  Am.  &  Eng.  R.  R.  Cas.  147  ; 
Boss  V.  Hewitt  (1862),  15  Wis.  260  ;  Long 
Island  Loan  &  Trust  Co.  v.  Columbus,  C.  & 
I.  C.  Ry.  Co.  (1895),  65  Fed.  Rep.  455. 

^  First  National  Bank,  etc.  v.  Commis- 
sioners (1869),  14  Minn,  77  ;  Morton  v. 
New  Orleans  &  Selma  R.  Co.  (1885),  79 
Ala.  590;  Parsons  v.  Jackson  (1878),  99 
U.  S.  434.  In  the  last  case,  however,  the 
fact  of  overdue  coupons  being  still  at- 
tached to  the  bonds  was  only  one  of 
several  circumstances  of  .suspicion,  and  it 
is  scarcely  an  authority  for  the  naked 
proposition  that,  as  a  matter  of  law,  the 
purchaser  is  put  upon  incjuiry  by  this  one 
circumstance  alone.  Indeed,  to  put  this 
construction  on  the  decision  would  render 
it  quite  irreconcilable  with  the  other  rul- 


96 


RAILWAY   BONDS   AND    MORTGAGES. 


[chap.  II. 


§  66.  Pledgees  of  Bonds  as  Bona  Fide  Holders.  —  Whether  a 
pledgee  of  bonds  is  to  be  regarded  as  a  bona  fide  holder  must  be 
determined  by  the  principles  accepted  on  this  subject  in  the  juris- 
diction where  the  question  arises,  and  as  to  some  of  those  prin- 
ciples there  is,  as  is  well  known,  an  irreconcilable  difference  of 
opinion  between  the  courts  of  this  country. 

The  weight  of  authority  is  in  favor  of  the  view  that  a  pledge  of 
bonds  for  an  antecedent  debt  secures  to  the  pledgee  the  rights  of 
a  bona  fide  holder,  as  long  as  the  debt  for  which  they  were  hypothe- 
cated remains  unpaid,  provided  the  other  elements  of  an  innocent 
transfer  are  present.^ 

Thus  one  who  in  good  faith  advances  money  upon  a  sham  note 
secured  by  a  pledge  of  bonds  is  a  bona  fide  holder  of  such  bonds, 
where  he  has  no  knowledge  of  fraud  in  their  issuance,^ 

But  this  doctrine  has  been  repudiated  in  several  States,  among 
others  in  Alabama,  where  it  has  been  held  that  taking  bonds  as 
collateral  security  for  an  antecedent  debt  is  not  a  purchase  for 
value,  even  when  forbearance  or  indulgence  is  granted,  a  distinc- 
tion being  taken  between  the  acquisition  of  bonds  in  this  manner 
and  receiving  them  in  payment  of  a  pre-existing  debt.^ 

A  like  rule  prevails  in  New  York.* 

§  67.  Rights  of  Purchasers  of  Pledged  Bonds.  —  The  ordinary 
rule  is  that  a  pledge  of  commercial  paper  does  not  carry  the 
power  to  sell  or  dispose  of  it. 


ings  of  the  same  court  cited  in  the  last 
note,  especially  Cromwell  v.  County  of 
Sac,  as  well  as  with  the  general  doctrine 
now  accepted  in  respect  to  negotiable 
instruments,  that  susjiicion  of  defect  of 
title,  or  the  knowledge  of  circumstances 
that  would  excite  suspicion  in  the  mind 
of  a  prudent  man,  or  even  gross  negligence 
on  the  l)uyer's  ]iart,  will  not  affect  his  title. 
Nothing  short  of  had  faith  on  the  part  of 
the  purchaser  of  commercial  pajier  passing 
by  delivery,  and  fair  upon  its  face,  will 
destroy  its  validity,  and  the  burden  of 
proof  lies  on  the  person  who  assails  the 
title  of  the  party  in  possession.  See 
Murray  v.  I.ardner  (1864),  2  Wall.  110; 
Pliil.  &  Sunbury  R.  Co.  v.  Lewis  (1859), 
33  Pa.  St.  33  ;  Galveston  Riilroad  v. 
Cowdrey  (1870),  11  Wall.  4.'i9  ;  Spence  v. 
Mobile  &  Montgomery  R.  To.  (188.5),  79 
Ala.  57C  ;  Ooo^lman  v.  Sinionds  (1857), 
20  How.  343;  Goodman  v.  Harvey,  4  Ad. 
&  El.  870  ;  Long  Island  Loan  &  Trust 
Co.  V.  Columbus,  C.  &  I.  C.  Ky.  Co. 
(180.-,),  6.-,  Fed.  Rep.  455. 


1  Allen  V.  Dallas  &  Wichita  R.  Co. 
(1878),  3  Woods,  316  ;  Baker  v.  Guaran- 
tee  T.  Co.  (N.  J.  Eq.,  1895),  31  Atl.  Rep. 
174;  Allaire  v.  Hartshorne  (1847),  21 
N.  J.  L.  665;  Hayden,  Trustee,  v,  Lincoln 
City  Electric,  etc'  Ry.  Co.  (1895),  43  Neb. 
630;  s.  c.  62  N.  W.  Rep.  73.  See  also  Porter 
V.  Pittsburg  Bessemer  Steel  Co.  (1887), 
120  U.  S.  649,  holding  the  pledgees  of 
railroad  bonds  foi'  advances  of  money 
already  made  and  to  be  made  to  be  used 
in  the  construction  of  the  railroad  to  be 
bona  fide  holders  and  entitled  to  priority 
in  the  distribution  of  sale  under  fore- 
closure of  morts^'ge. 

'^  Thomson -Houston  Electric  Co.  v. 
Capitol  Electrie  Co.  (1894),  65  Fed.  Rep. 
341  ;  R.  c.  12  C.  C.  A.  643. 

8  Reid  V.  Bank  of  Jlobile  (1883),  70 
Ala.  199  ;  14  Am.  &  Eng.  R.  R.  Cas. 
554. 

*  Dinieiimb  I'.  New  York,  etc.  R.  Co. 
(18S1),  84  N.  Y.  190  ;  s.  c.4  Am.  &  Eng. 
R.  R.  Cas.  293. 


§  67.]  RIGHTS   OF   BONDHOLDERS.  97 

In  Illinois  this  rule  has  been  applied  to  a  sale  of  railroad 
bonds.i 

But  by  most  of  the  courts  in  which  the  subject  has  been  dis- 
cussed the  bonds  of  corporations  have  been  excepted  from  the 
operation  of  the  rule.  Thus  in  New  Jersey  it  has  been  held  that 
when  a  corporation  which  has  pledged  its  bonds  as  collateral  for 
a  loan  upon  a  note,  and  at  its  maturity  failed  to  pay  the  note,  the 
pledgee  is  not  bound  to  sue  the  corporation  upon  tbe  note,  but 
can,  as  usual  with  pledges,  on  his  own  motion,  and  with  proper 
notice,  sell  the  bonds  pledged,  and  the  purchaser  at  such  sale 
acquires  the  whole  interest  in  the  bonds,  and  can  enforce  them 
against  the  corporation  for  their  full  amount.  Such  a  deposit,  it 
was  said,  differs  entirely  from  a  deposit  of  ordinary  bonds,  mort- 
gages, promissory  notes,  and  like  eJioses  in  action^  which,  in  the 
absence  of  an  agreement  to  that  effect,  the  creditor  cannot  expose 
to  sale,  because  they  have  no  market  value,  and  it  cannot  be  pre- 
sumed that  it  was  the  intention  of  the  parties  thus  to  deal  with 
them.2 

In  New  York  also  the  rule  is  that  pledged  railroad  bonds  may 
be  sold  at  public  auction,  after  the  debt  is  due,  upon  a  demand  of 
payment  and  due  notice  of  the  time  and  place  of  sale,  unless  a 
sale  is  restricted  by  positive  stipulation.^ 

The  Supreme  Court,  of  the  United  States  has  taken  the  same 
view,  declaring  a  contention  that  the  pledgee  could  not  sell 
pledged  bonds  after  the  company  had  been  adjudicated  bankrupt 
to  be  quite  untenable.  The  ground  taken  was,  the  bonds  were 
negotiable  instruments,  passing  by  delivery,  and  that,  even  where 
there  is  no  expressed  stipulation  in  contracts  of  pledge,  to  the 
effect  that  the  pledgee  may  sell  on  default  of  the  pledgor,  such  a 
right  is  presumable  from  the  nature  of  the  transaction.* 

Where  bonds  are  purchased  in  proceedings  to  foreclose  the  lien 
of  the  pledgee,  the  purchaser  is  entitled  to  have  his  rights  as  an 
owner  for  value  enforced ;  ^  and  the  fact  that,  at  the  foreclosure, 


^  Joliet  Iron  &  Steel  Co.  v.  Scioto  Fire  road  bonds  was  assnmed  in  the  argument  ; 

&  Brick  Co.  (1876),  82  111.  548.  but  the  above  case  was  not  referred  to, 

2  Morris  Canal  &    Rkg.   Co.  v.   Lewis  nor  was  anything  said  in  regard  to  the 

(1858),  12  N.  J.  E(j.  .32.3.     See  also  Morris  general  rule  and  the  exception  in  the  case 

Canal  &  Bkg.  Co.  v.  Fisher  (1855),  9  N.  J.  of  bonds. 
Eq.  66".  4  Jerome  v.  McCarter  (1876),  94  U.  S. 

8  Brown  v.  Ward  (1854),  3  Duer,  660,  734. 
also   liistinguishing    railroad   bonds   from  ^  Newport  &  Cincinnati  Bridge  Co.  v. 

other  commercial  paper.    In  Grand  Rapids,  Douglass  (1877),   12  Bush,  673;  s.  c.  18 

etc.  R.  Co.  V.  Sanders  (1877),  54  How.  Pr.  Am.Ry.  Rep.  221. 
214,  the  power  of  the  pledgee  to  sell  rail- 

7 


98  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  II. 

the  bonds  brought  a  very  small  price  will  not  affect  the  pur- 
chaser's title,  unless  some  fraud  is  shown. ^ 

In  a  bill  for  redemption  it  was  held  that  bonds  given  as  col- 
lateral security  only,  and  taken  by  the  holder  with  notice,  should 
be  treated  as  valid  only  to  the  extent  of  the  debt  due,^  the  balance 
being  in  such  case  held  by  him  in  trust  for  the  pledgor.  Other 
authorities  limit  the  amount  of  the  recovery  to  the  debt  actually 
secured.^ 

The  divergence  of  opinion  is  clearly  one  rather  of  practice  than 
principle,  as  in  any  event  the  pledgee  cannot  by  the  suit  become 
the  beneficial  owner  of  a  sum  larger  than  the  debt. 

One  who  places  in  the  hands  of  another,  upon  information  from 
the  latter  that  certain  bonds  had  been  placed  in  a  bank  as  col- 
lateral, money  with  which  to  purchase  them,  is  not  bound  by  an 
agreement  made  by  this  other  as  to  the  bonds.  He  is  a  pur- 
chaser from  the  bank,  and  can  enforce  the  bonds  accordingly.^ 

In  a  suit  where  it  was  held  the  purchaser  at  a  foreclosure  sale 
under  a  decree  whereby  a  second  mortgagee  was  not  cut  off,  could 
redeem  from  such  second  mortgage  by  paying  the  amount  due,  it 
was  held  that  bonds  given  as  collateral  security  only  were  bind- 
ing to  the  extent  of  the  debts  secured  thereby,  and  not  as  valid 
for  their  face.^ 

Bonds  of  a  railroad  company  properly  and  legally  executed  and 
secured  by  mortgage,  if  placed  with  the  president  of  the  company, 
not  due  as  appears  on  their  face,  and  by  him  pledged  as  collateral 
to  a  broker,  a  purchaser  in  good  faith,  for  value  of  these  bonds, 
when  regularly  and  properly  sold  by  the  broker,  will  obtain  a 
clear  title  to  the  bonds,  and  be  entitled  to  have  enforced  for  his 
benefit  the  mortgage  which  secures  them.^ 

§  68.  Whether  the  Benefit  of  the  Mortgage  clear  of  Equities 
between  the  Original  Parties  passes  -with  a  Transfer  of  the  Bonds.  — 

1  Wlicehvright  v.  St.  Louis,  etc.  Trans-  "Where  this  class  of  paper,  complete  in 
portation  Co.  (189:5),  56  Fed  Rep.  164.  form,   and   transmissible    by   delivery,    is 

2  Simmons  i;.  Taylor  (1885),  23  Fed.  placed  by  the  maker  or  owner  in  the 
Rep.  849,  8.57.  custody   of   one    who   is  thereby  clothed 

8  .lesup  V.  City  l^ank   (1861),  14  Wis.  with  an   apparent   power   of   disposition, 

331 ;  Newport  &  Ciin'.innati  Bridge  Co.  v.  and  the  custodian    avails  hin)self  of  the 

Douglass  (1877),  12  Bush,  673  ;  s.  c.  18  opportunity    thus   afforded   him  to  ncgo- 

Ain.  Ity.  R<'j».  221.  tiate  it  to  an  innocent  party,  the  title  of 

*  Miller    V.   Rutland    &    W.    R.     Co.  the  holder  is  not  to  be  tested  by  principles 

(1867),  40  Vt.  399.  ai)plicable    to    stolen    securities,    but    by 

<»  Sinimon.s  v.  Taylor  (1885),  23  Fed.  jninciples     properly     a])plicable     to     the 

Rep.  849.  transaction  as  it  actually  occurred."     See 

6  Pittsburg,  C.  C.  k  St.   L.  Ry.  Co.  v.  ]!;iilway  Co.  v.  Siu-ague',  103  IJ.  S.   756; 

Lyiide  rf.  al.   (Ohio,   1896),  44  N.  E.  l!ep.  Fearing  v.  Clark,  16  Gray  (Ma.ss.),  74. 
596.     The   coui't  said,    in   the   opinion  : 


\ 


§  69.]  RIGHTS  OP   BONDHOLDERS.  99 

This  is  a  question  which  can  scarcely  be  said  to  be  settled,  at  least 
if  a  corporate  mortgage  is  to  be  placed  on  the  same  footing  as 
mortgages  given  to  secure  ordinary  notes  or  other  evidences  of 
indebtedness.^ 

But  the  Supreme  Court  of  Illinois,  one  of  those  which  has 
adopted  the  doctrine  that  the  mortgage  is  subject  to  equities  even 
when  a  bona  fide  holder  of  the  instrument  secured  is  suing 
thereon,  has  expressly  decided  that  another  rule  is  properly 
applied  in  the  case  of  railroad  coupon  bonds,  intended  to  be 
thrown  on  the  market  and  held  as  permanent  investments,  and 
that  to  hold  otherwise  would  be  doing  violence  to  the  manifest 
intention  of  the  parties,  and  would  unquestionably  lead  to  very 
disastrous  consequences.^ 

§  69.  Doctrine  of  Lis  Pendens  does  not  apply.  —  Where  a  bond- 
holder acquires  bonds  pending  a  litigation,  the  bonds'  being  nego- 
tiable in  form,  it  is  immaterial  whether  or  not  he  has  notice  of  a 
foreclosure  suit,  for  instance,  as  the  doctrine  of  lis  pendens  does 
not  apply  to  a  purchaser  of  bonds  for  value.^ 

The  doctrine  of  lis  pendens  does  not  apply  to  negotiable  paper 
transferred  before  due,  in  due  course  of  business,  for  value.* 

1  As  to  the  conflict  of  opinion  in  regard  ^  Farmers'  &  Merchants'  National  Bank 
to  such  mortgages,  see  Daniel's  Negot.  v.  Waco  Electric  Ry.  &  Light  Co.  et  al. 
Instr.,  sect.  834.  (1896,  Tex.  Ct.  App.),  36  S.  W.  Kep.  131, 

2  Peoria  &  Springfield  R.  Co.  v.  Thorap-  135. 

son  (1882),  103  111.   187,  disapproving  on  *  Pittsburg,  C.  C.  &  St.  L.  Ry.  Co.  v. 

this  point  Chicago,  etc.  Ry.  Co,  v.  Lynde  et  al.  (Ohio,  1896),  44  N,  E.  Rep. 
Loewenthal  (1879),  93  111.  433.  596. 


100 


RAILWAY  BONDS   AND   MORTGAGES. 


[chap.  III. 


CHAPTER  III. 


RIGHTS   OP   COUPON-HOLDERS. 


§70. 
7L 

72. 

73. 
74. 

75. 


Introductory. 

Rate  of  Interest  on  Bonds  before 
and  after  Maturity. 

Whether  Coupons  are  entitled  to 
Days  of  Grace. 

Interest  on  Coupons  after  Default. 

Negotiability  and  Transfer  of  Cou- 
pons generally. 

Eecovery  on  Detached  Coupons. 


§  76.    Rights  of  Purchasers  of  Stolen  or 
Lost  Coupons. 

77.  WhetherCoupous  have  been  bought 

or  paid. 

78.  Rights    of    Persons    participating 

in    Arrangements    for    funding 
Coupons. 

79.  Recoupment  of  Defaulted  Interest 

in  an  Action  to  recover  Dam- 
ages for  failing  to  accept  Bonds. 


§  70.  Introductory.  —  It  is  not  within  the  scope  of  this  work 
to  narrate  the  history  of  the  rates  of  interest  upon  raih'oad  bonds 
in  this  country,  nor  to  discuss  the  principles  which  govern  in 
determining  what  rates  have  been  and  should  be  obtained.  The 
capital  which  has  built  the  roads  of  this  country  is,  speaking 
generally,  represented  by  their  bonded  debt.  The  non-payment  of 
interest  has  been  the  usual  basis  for  railway  foreclosures  and 
reorganizations.     Such  interest  is  usually  evidenced  by  coupons. 

The  term  "  coupon  "  or  "  interest  warrant "  is  applied  to  an  in- 
strument attached  to  a  bond,  evidencing  the  right  to  interest  upon 
the  bond  for  a  specific  period  of  the  life  of  the  bond,  usually 
six  months,  sometimes  three  months,  and  rarely  one  year.  This 
instrument,  as  it  is  substantially  complete  in  itself,  and  capable  of 
being  severed  from  the  bond,  is  often  dealt  with  and  treated  for 
many  purposes  as  independent  of  the  bond  to  which  it  was  origi- 
nally attached.^ 

The  general  idea  as  to  coupons  and  the  bonds  to  which  they 
are  attached  which  has  governed  the  courts  has  been  that  they 
are  of  modern  invention,  and  should  have  the  effect  intended  by 


1  In  Sanborn  v.  Clougli  (1887),  64 
N.  H.  315  ;  a.  c.  10  Atl.  Rep.  678,  it  was 
held  that  coupons  being,  in  legal  effect, 
equivalent  to  separate  bonds  for  instal- 
ments of  interest,  passed  to  a  legatee  as 
brjnds  under  a  clause  by  whicli  he  was  to 
receive  "  all  tlie  rest  of  all  the  testator's 
money  in  banks,  stocks,  and  bonds." 


In  Clokey  v.  Evansville  &  T.  H.  R. 
Co.  (1897),  44  N.  Y.  Supp.  631,  the  Ap- 
pellate Division  of  the  Supreme  Court  of 
New  York  held  tliat  the  holder  of  a  de- 
tached couj)on  could  not  recover  the 
amount  of  his  coupons  of  a  company 
whicli  had  guarantied  the  bonds  on  this 
guaranty.     O'Brien,  J.,  dissented. 


§  71.]  RIGHTS   OF   COUPON-HOLDERS.  101 

the  parties,  and  be  governed  by  the  usage  of  the  country,  and 
not  by  sharp  rules  of  law  applicable  to  instruments  of  a  different 
nature.  Thus  the  possession  of  coupons  is  prima  facie  evidence 
that  the  holder  of  them  is  holder  of  the  bond  (or  was  so,  at  least, 
when  they  were  cut  off),  and  as  such  entitled  to  receive  the 
interest.^ 

§  71.  Rate  of  Interest  on  Bonds. ^  —  (a)  Stipulation  to  pay  In- 
terest in  Gold,  Meaning  of.  —  A  contract  to  pay  8  per  cent  in 
gold  is  not  a  contract  to  pay  more  than  8  per  cent,  for  the  reason 
that  when  the  interest  falls  due  gold  may  happen  to  be  at  a  pre- 
mium. Whether  interest  in  gold  is  better  than  interest  in  currency 
depends  upon  contingencies  not  to  be  foreseen.^ 

(b)  Hate  of  Interest  cannot  be  changed  to  Prejudice  of  other 
Lienors.  —  Where  an  extension  of  the  time  of  payment  of  bonds 
has  been  agreed  upon  between  the  bondholders  and  the  company, 
with  the  consent  of  a  majority  of  its  stockholders  (the  interest  to 
be  payable  in  gold  instead  of  in  currency  as  theretofore),  but  the 
agreement  was  to  be  subject  to  confirmation  by  the  courts,  the 
consideration  that  it  may  prove  an  injury  to  the  second-mortgage 
bondholders,  as  being  tantamount  to  increasing  the  rate  of  interest, 
has  been  held  to  be  probably  a  sufficient  reason  for  a  court's  with- 
holding its  approval.* 

But  this  ruling  might,  it  seems,  have  been  made  without  any 
qualification,  as  it  has  been  expressly  decided  that  an  enactment 
providing  for  a  substitution  of  bonds  of  a  company  to  secure  a 
loan  from  the  State,  the  new  bonds  to  bear  an  increased  rate  of 
interest,  is,  to  the  extent  of  the  increase,  an  invasion  of  the  rights 
of  holders  of  first-mortgage  bonds  who  had  agreed  to  allow  the 
State  security  to  have  priority  over  their  mortgage,  inasmuch  as 
these  holders  had  the  right  to  claim  that  only  bonds  for  so  much 
a  mile,  as  agreed  upon,  and  bearing  the  first-named  lesser  rate  of 
interest,  should  be  made  superior  to  theirs.^ 

1  See  cases  cited  in  notes  to  §  74,  post.       the  ground  stated  in  the  text.     In  Reinach 
See  article  on   "Coupons"  by  Charles     v.   Meyer  (1877),  55   How.  Pr.  283,   this 

W.   Hassler  in  4  Cent.  L.  J.  315  (1877);  ruling' was  approved  and  acted  upon  by 

Durant  t;.  Iowa  County  (1864),   1  Woolw.  another  New  York  court. 

69  ;  s.  c.  8  Fed.  Cas.  117,  Case  No.  4189.  ^  Cam].bell  v.  Texas  &  N.   0.  R.  Co. 

2  As  to  the  rate  of  interest  as  affecting  (1872),  2  Woods,  263. 

the  validity  of  bonds,  see  Chap.  I.  §  9.  As  to  the  inability  of  the  legislature  to 
8  Young  V.  Montgomery  &  Eufaula  R.  validate,  as  again.'^t  non-assenting  bond- 
Co.  (1875),  2  Woods,  606,  614.  holders,  a  .scheme  of  reorganization  which, 
*  Taylor  v.  Atlantic  &  Great  Western  among  other  features,  contemplates  an  ex- 
Ry.  Co.  (1877),  55  How.  Pr.  275.  The  change  of  the  original  bonds  for  new  ones 
Ohio  court  ratified  the  agreement,  while  at  a  lower  rate  of  interest,  see  Chap, 
that  New  York  court  declined  to  do  so  on  XXVII.  (Reorganization). 


102 


RAILWAY   BONDS   AND   MORTGAGES. 


[chap.  111. 


(c)  Party  subrogated  to  Rights  of  Lienor  can  claim  only  Legal 
Rate  of  Interest.  —  Where  a  junior  incumbrancer  protects  the 
property  against  a  forced  sale  by  a  prior  lien,  and  then  becomes 
subrogated  to  the  rights  of  the  latter  to  the  extent  of  the  sum  paid, 
the  court  in  reimbursing  him  for  this  outlay  sliould  allow  what- 
ever is  the  legal  rate  of  interest  at  the  time  of  the  contract,  and 
not  the  rate  stipulated  for  by  the  prior  lienor.^ 

(d)  Rate  of  Interest  on  Bonds  not  paid  at  Maturity.  —  In  some 
States  the  rate  of  interest  on  commercial  paper  which  is  not  paid 
at  maturity  is  the  statutory  rate,  whether  that  is  higher  or  lower 
than  the  contract  rate.  But  the  doctrine  most  generally  accepted 
is  that  the  contract  rate  is  payable  after,  as  well  as  before,  matu- 
rity, though  the  rate  fixed  by  the  general  law  may  be  lower.^ 


1  Memphis  &  Little  Rock  Railroad  v. 
Dow  (1887),  120  U.  S.  287  ;  s.  c.  7  Sup. 
Ct.  Rep.  482.  In  this  case  the  facts  were 
that  a  reorganized  company  had  covenanted 
in  its  mortgage  that  the  interests  convej'ed 
were  free  from  incumbrances,  and  that  it 
would  warrant  and  defend  the  title  against 
all  lawful  claims  whatsoever.  The  debt 
due  the  State  by  the  terms  of  her  contract 
with  the  old  company  bore  interest  at  the 
rate  of  8  per  cent  per  annum  until  paid. 
The  entire  claim  with  interest  at  that  rate 
was  paid  by  the  trustees.  The  constitu- 
tion of  the  State  prohibited  any  contract 
for  interest  above  10  per  cent,  and  fixed 
the  legal  rate  at  6  per  cent.  By  statute, 
judgments  on  decrees  upon  contracts 
bearing  more  than  6  per  cent  interest 
were  to  bear  the  same  interest  as  might  be 
specified  in  such  contracts,  and  the  rale 
of  interest  was  to  be  expressed  in  all  such 
judgments  and  decrees,  while  all  other 
judgments  carried  6  per  cent.  The  court, 
in  considering  what  these  trustees  were 
entitlcjd  to  in  the  way  of  interest,  used  the 
following  language  :  "  The  right  of  subro- 
gation is  not  founded  on  contract.  It  is  a 
creature  of  equity,  is  enforced  solely  for 
the  purpose  of  accomplishing  the  ends  of 
substantial  justice,  and  is  independent  of 
any  contractual  relations  between  the  par- 
ties. All  that  these  trustees  can  in  good 
con.science  demand  is  reiwhursemcnt  for 
tlieir  outlay  in  protecting  the  mortgaged 
property  against  tlio  prior  lien  of  the  State. 
SV'hen  relief  to  that  extent  is  accorded  they 
will  linve  no  just  ground  to  comiil.iin, 
especially  as  the  debt  held    by  the   State 


was  not  the  personal  debt  of  the  reorganized 
company.  There  was  no  agreement  be- 
tween them  and  this  company  in  respect 
to  interest  upon  any  sum  they  might  be 
compelled  to  pay  in  order  to  relieve  the 
property  from  prior  incumbrances."  The 
trustees,  therefore,  were  adjudged  to  have 
a  lien  upon  the  mortgaged  property  for 
the  whole  amount  actually  paid  to  the 
State,  with  interest  thereon  from  the  date 
of  such  payment  at  the  rate  established  by 
law  in  cases  where  there  was  no  agreement 
as  to  rate. 

2  Cases  applying  this  rule  to  bonds  are 
Cromwell  v  Sac  Co.  (1877),  96  U.  S. 
51  ;  Newport  &  Cincinnati  Bridge  Co.  v. 
Douglass  (1877),  673  ;  18  Am.  Ry.  Rep. 
221  ;  Langston  v.  South  Carolina  R.  Co. 
(1870),  2  S.  C.  248  ;  Cheever  v.  Rut- 
land, etc.  R.  Co.  (Vt.,  1869),  4  Am.  Ry. 
Rep.  291  ;  Beckwith  v.  Trustees  (1860),  29 
Conn.  268.  In  the  last  case  the  court 
very  clearly  explains  the  rationale  of  the 
doctrine  as  follows  :  "  This,  though  an  ar- 
bitrary rule,  will  generally  operate  justly, 
and  is  much  more  convenient  than  any 
other  which  could  be  adopted.  But  the 
usual  rate  of  interest  at  any  place,  which, 
of  course,  is  but  another  mode  of  speaking 
of  the  legal  rate  at  such  place,  is  itseif 
as  arbitrary  a  provision  of  law  as  the  dam- 
ages de))endent  u]ion  it,  and  is  by  no 
means  uniform.  It  is  not  only  known  to 
differ  in  different  States  and  countries, 
generally  depending  uj)on  positive  stat- 
utes, but  may  vary  from  the  ordinary  or 
more  general  rate  by  the  jiarties  agreeing 
upon  a  lesser  rate,  or,  if  authorized  so  to 


§T2.] 


RIGHTS    OF    COUPON-HOLDERS. 


103 


Where  the  bonds  and  coupons  arc  both  silent  as  to  the  rate  of 
interest  after  the  coupons  are  in  default,  interest  is  payable  at  the 
rate  fixed  by  tlic  law  of  the  place  where  the  coui)()ns  are  payable  ;  ^ 
until  the  claim  is  merged  in  judgment,  after  which  the  law  of  the 
former  governs.^ 

But  if  the  parties  contract  with  reference  to  the  law  of  one  State 
and  appoint  a  place  of  payment  in  another  State,  merely  for  the 
reason  that  it  is  a  convenient  financial  centre,  interest  will  be 
adjudged  at  the  rate  established  in  the  former  State.^ 

(e)  Coujyons  falling  due  after  Maturity  of  Principal  owing  to 
Election  to  have  Principal  due  are  deemed  to  be  cancelled.  —  The 
election  of  the  bondholders  to  treat  a  default  in  the  payment  of 
interest  as  a  forfeiture  of  the  contracts,  so  far  as  they  prescribe 
the  length  of  time  for  which  the  bonds  were  to  run,  operates  prima 
facie  to  cancel  all  coupons  representing  instalments  of  interest 
not  then  due.^ 

§  72.    Whether   Coupons    are    entitled    to    Days  of  Grace.  —  The 


do,  as  in  the  case  under  consideration,  by 
their  agreement  upon  a  higher  rate  for 
money  borrowed  for  some  particular  pur- 
pose, or  by  a  particular  class  of  persons  or 
corporations  ;  as  is  the  case  in  respect  to 
money  borrowed  by  railroad  companies 
imder  the  act  of  1849.  Rev.  Stat.  (Comp. 
1854),  750,  §  23.  And  the  different  rates 
thus  agreed  upon  become  the  legal  rates  of 
interest  in  respect  to  particular  contracts 
during  their  existence.  And  the  rates  of 
interest  thus  established  by  agreement 
must  be  presumed  to  be  just  and  equitable 
under  the  circumstances  ;  that  is,  a  fair 
compensation  in  such  case  for  the  use  of 
money  between  the  parties  during  the 
tiine  the  contract  had  to  run.  Then  why 
should  we  not  presume,  as  between  the 
same  parties,  that  such  interest  continues 
a  fair  compensation  for  its  use  until  the 
contract  is  performed,  as  well  after  as  be- 
fore the  day  when  the  principal  was  to  be 
paid,  and  thus  permit  the  rate  of  interest 
agreed  upon  to  control  the  damages  to  be 
paid  for  the  detention  of  the  money,  as 
well  as  the  interest  for  its  use  ?  There  is 
no  equity  in  favor  of  one  rate  of  interest 
rather  than  another,  where  they  are  both 
legal,  and  within  reasonable  limits,  and 
the  defendants  ought  not  to  complain  so 
long  as  it  is  in  their  power,  by  paying  the 
principal,  to  protect  themselves  from  pay- 


ing what  they  thought  a  reasonable  rate 
when  they  borrowed  the  money."  The 
statutes  and  decisions  of  each  State  where 
this  question  arises  must,  however,  be  ex- 
amined. It  was  held  error  to  allow  inter- 
est on  past  due  coupons  in  Buffalo  Loan 
Co.  V.  Medina  Gas  &  Electric  Light  Co. 
et  al.,  12  App.  Div.  199. 

1  Scotland  County  v.  Hill  (1889),  132 
U.  S.  107  ;  s.  c.  10  Sup.  Ct.  Rep.  26. 

2  Ibid. 

'  Codman  v.  Vermont  &  Canada  R.  Co. 
(1879),  16  Blatch.  1G5  ;  Cheever  v.  Ver- 
mont, etc.  Ry.  Co.  (1869),  4  Am.  Ry.  Rep. 
291  ;  Cromwell  v.  County  of  Sac  "(1877), 
92  U.  S.  51  ;  Jackson  &  Sharp  Co.  v.  Bur- 
lington, etc.  R.  Co.  (1887),  29  Fed.  Rep. 
474.  See  also  Fauntleroy  v.  Hannibal 
(1879),  5  Dill.  219;  s.  c!  8  Fed.  Cas. 
1093,  Case  No.  4692,  affirmed  in  Han- 
nibal V.  Fauntleroy,  105  IT.  S.  408  ; 
Phelps  V.  Lewiston  (1878),  15  Blatch. 
131  ;  s.  c.  19  Fed.  Cas.  450,  Case  No. 
11,076;  Clarke  v.  Janesville  (1856),  1 
Biss.  98  ;  s.  G.  5  Fed.  Cas.  962,  Case  No. 
2854  ;  First  National  Bank  of  North  Ben- 
nington V.  Bennington,  16  Blatch.  53  ; 
s.  c.  9  Fed.  Cas.  97,  Case  No.  4807. 

*  Newport  &  Cincinnati  Bridge  Co.  r. 
Douglass  (1877).  12  Bush,  673  ;  s.  C  18 
Am.  Ry.  Rej).  221. 


104  RAILWAY    BONDS    AND    MORTGAGES.  [CHAP.  III. 

New  York  courts  have  taken  the  ground  that  coupons  payable  to 
bearer  at  a  fixed  time  and  place,  being  in  legal  effect  promissory 
notes,  necessarily  have  all  the  characteristics  of  such  instruments, 
and  are  entitled  to  the  benefit  of  the  days  of  grace  allowable  on 
bills  and  notes  payable,  at  a  given  day  or  time.^ 

But  the  Supreme  Court  of  Massachusetts  is  of  a  different  opinion, 
holding  that  the  reasons  why  days  of  grace  were  allowed  on  foreign 
bills  of  exchange  payable  at  sight  or  at  a  future  day  certain  have 
little  application  to  coupon  bonds  issued  by  corporations,  which 
usually  have  a  long  time  to  run  and  are  commonly  bought  as  an 
investment.^ 

§  73.  Interest  on  Coupons  after  Default.  —  That  interest  is  re- 
coverable upon  coupons  from  the  time  they  are  in  default  is 
universally  conceded.^ 

This  interest  is  allowed  by  way  of  damages  as  a  compensation 
for  the  delay  of  payment.* 

The  allowance  of  interest  on  coupons  after  demand  and  refusal 
of  payment  is  not  open  to  objection  on  the  ground  that  it  is  an 
infringement  of  the  laws  against  usury .^ 

The  default  on  coupons  payable  on  presentation  and  demand  is 
only  complete  from  the  time  of  presentation  and  demand,  and  the 
interest  on  them  will  not  begin  to  run  till  then.^ 

1  Evertson  v.  National  Bank  (1876),  66  strong  (1862),  44  Pa.  St.  63  ;  Phila.,  etc. 
N.  Y.  14,  holding  that  one  purchasing  be-  R.  Co.  v.  Fidelity,  etc.  T.  Co.  (1884),  105 
fore  the  days  of  grace  expire  is  a  purchaser  Pa.  St.  216  ;  Phila.,  etc.  R.  Co.  v. 
before  maturity.  This  is  immaterial  in  Knight  (1889),  124  Pa.  St.  58  ;  Lang- 
Kew  York  now,  as  days  of  grace  have  been  ston  v.  S.  C.  R.  Co.  (1870),  2  S.  C. 
abolished.  248  ;  Ashuelot   R.    Co.    v.    Elliot  (1874), 

2  Chaffee  v.  Middlesex  R.  Co.  (1888),  57  N.  H.  397;  s.  c.  13  Am.  Ry.  491  ; 
146  Mass.  224  ;  s.  c.  16  N.  E.  Rep.  34.  Humphreys  v.  Morton  (1881),  100  111. 
In  this  case  the  only  question  actually  592  ;  Phila.  &  Read.  R.  Co.  v.  Smith 
decided  was  that  interest  warrants  payable  (1884),  105  Pa.  St.  195  ;  s.  c.  29  Am.  & 
to  bearer,  when  detacheil  from  the  bonds  Eng.  R.  R.  Cas.  400  ;  Gibert  v.  Wash.  & 
with  which  they  were  issued,  were  not  ne-  Gt.  So.  R.  Co.  (1889),  33  Gratt.  586  ; 
gotiable  notes  within  the  meaning  of  Mas-  s.  c.  1  Am.  &  Eng.  R.  R.  Cas.  473. 
fiachusetts  Rev.  Stat.,  eh.  77,  §  9  ;  but  the  ^  Connecticut  Mut.  Life  Ins.  Co.  v. 
eourt  ((xpressly  dissented  from  the  New  Cleveland,  Cincinnati,  etc.  R.  Co.  (1863), 
York  case  just  cited.  The  statutes  of  each  41  P>arb.  9;  Codman  i'.  Vermont,  etc. 
State  must  be  oonsulted  on  this  point.  R.     Co.     (1879),     16  ■  Blatch.    165,    ad- 

8  Dan.    Neg.   Inst.,   sect.   1513;  Town  hered  to  in  Codman  et  al.  v.  Vermont  «& 

of  Genoa   v.    Woodruff   (1875).  92  U.  S.  Canada  R.  Co.  (1879),  17  Blatch.  1  ;  s.  c. 

502  ;     Aurora     City     v.      West      ^1868),  5  Fed.  Cas.  1162,  Case  No.  2936  ;  Cheever 

7    Wall.    82;    Commonwealth    v.    Chesa-  r.  Vermont,  etc.  R.  Co.  (Vt.,  1869),  4  Am. 

P<'akc     &    Ohio     Canal    Co.     (1870),    32  Ry.  ]{ep.  291,  and  cases  cited  above. 
M<1.     501  ;      Welsh     v.     St.     Paul,     etc.  ^  County     of    Beaver     v.     Armstrong 

TJ.    '■'..    (1879),    25    Minn.    314;    North  (1862),  44  Pa.  St.   63. 
I'l'Mii.,  etc.  R.  Co.  u.  Adams  (1867),  54  Pa.  "Corcoran    v.     Oliio,     etc.    Canal    Co. 

St.   94;  County    of  Beaver   Co.  i'.   Arm-  (1874),  1  MacArthur  (1).  C),  358  ;  Aurora 


§  74.]  BIGHTS   OF   COUPON-HOLDERS.  105 

On  the  other  hand,  if  there  are  no  funds  at  place  of  payment, 
interest  runs  after  maturity  without  presentation  ;  ^  though  if  the 
company  has  funds  sufficient  to  meet  the  coupons  and  other  obli- 
gations at  the  place  named  for  payment,  it  will  not  be  held  liable 
for  interest  merely  because  the  money  for  the  payment  of  the 
coupons  is  not  segregated  from  its  other  funds,^ 

§  74.  Negotiability  and  Transfer  of  Coupons  generally.  —  (a} 
When  Coupons  are  negotiable.  —  The  rules  of  law  applicable  to 
coupons  of  municipal  bonds  and  railroad  bonds  are  in  the  main 
the  same,  the  decisions  as  to  each  class  of  coupons  being  cited 
indifferently  by  the  courts  irrespective  of  the  character  of  the 
obligor. 

Interest  coupons  are  instruments  of  a  peculiar  character.  The 
title  passes  from  hand  to  hand  by  delivery .^ 

Bonds  executed  by  a  railroad  company  may  not  be  put  upon 
the  market  until  one  or  more  coupons  have  matured.  The  com- 
pany may  cut  them  off  when  it  sells  the  bonds,  or  leave  them  to 
be  accounted  for  in  the  purchase."^ 

When  payable  to  order  and  indorsed  in  blanks  or  payable  to 
hearer^  they  are  transferable  by  delivery,  and  subject  to  the  same 
rules  and  regulations,  so  far  as  respects  the  title  and  rights  of 
the  holder,  as  negotiable  bills  and  promissory  notes.  Holders  are 
as  effectually  shielded  from  the  defence  of  prior  equities  between 
the  original  parties,  if  unknown  to  them  at  the  time  of  the  trans- 
fer, as  the  holder  of  any  other  class  of  negotiable  instruments. 
A  transfer  of  possession  is  presumptively  a  transfer  of  title,  but 
does  not  import  a  guaranty  of  payment.^ 

City  V.  West  (1868),  7  Wall.  82  ;   Pekin  land  R.   Co.  (1857),   43  Me.  232  ;  Jack- 

V.   Reynolds  (1863),  31  111.  529  ;    Whit-  son  v.  York  &  Cumberland  R.  Co.  (1858), 

aker  v.  Hartford,  Prov.  &  F.  R.,  etc.  Co.  48  Me.  147  (see  a  note  on  this  case  by 

(1864),   8  R.   I.   47;  Nat.  Exchange  Bk.  Mr.  Redfield  in  2   Am.  Rv.  Law,   595); 

V.  Hartford,  Prov.  &  F.  R.  Co.  (1866),  8  Nat.  Exchange  Bank  v.  Hartford,  Prov.  & 

R.    L    375  ;    Fitchett    v.     North    Penn.  F.  R.   Co.    (1866),  8   R.   I.  375  ;    Haven 

R.  Co.  (1863),  5  Phil.  132.  v.    Grand     Junction     R.    &    Depot    Co. 

1  North  Penn.,  etc.  R.  Co.  v.  Adams  (1871),  109  Mass.  88  ;  Grand  Rapids  &  Ind. 
(1867),  54  Pa.  St.  94  ;  Marlor  v.  Texas,  R.  Co.  v.  Sanders  (1877),  54  How.  Pr. 
etc.  R.  Co.  (1884),  21  Fed.  Rep.  383.  214  ;   Hand  v.  Sav.  &  Charleston  R.  Co. 

2  Emlen  D.  Lehigh  Coal  &  Navigation  (1879),  12  S.  C.  314;  Same  v.  Same 
Co.  (1864),  47  Pa.  St.  76.  (1881),   17  S.   C.   219;   12  Am.   &    Eng. 

8  KetL-hum  v.  Duncan  (1877),  96  U.  S.  R.    R.    Cas.    495  ;   County   of  Beaver   v. 

659,    662,   affirming  Duncan  v.  Mobile  &  Armstrong  (1862),  44  Pa.  St.  63  ;  Thom- 

Ohio  R.  Co.  et  al.  (1877),  3  Woods,    567  ;  son    v.    Lee    Co.     (1865),  3  Wall.    327  ; 

8.  c.  8  Fed.  Cas.  19,  Case  No.  4138.  Connecticut,    etc.    M.    Co.    v.    C.    C.    & 

*  Railway   Co.  v.   Sprague  (1880),   103  C.  R.    Co.,    41   N.   Y.  921  ;    Ide   v.  Pas- 

U.  S.  756  ;  s.  c.  26  L.  ed.  554.  sumpsic,  etc.  R.  Co.,  32  Vt.  297  ;  Gelpcke 

6  Ketchum  v.  Duncan  (1877),  96  U.  S.  v.  City  of  Dubuque,  1  Wall.  175  ;  Me5'er 

659,    062;     Myers    v.    York   &   Cumber-  ^.  City  of  Muscatine  (1863),  1  Wall.  384  ; 


106  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  III. 

Railroad  coupons  are  not  rendered  non-negotiable  by  the  fact 
that  they  are  not  made  payable  to  a  particular  person.^ 

The  principle  that  coupons  are  negotiable  instruments  has  no 
application  in  a  case  where  the  rights  of  the  parties  are  dependent 
merely  on  the  true  construction  of  a  public  statute.  A  provision 
in  such  a  statute  waiving  the  liens  of  the  State  in  favor  of  certain 
bonds  to  be  issued,  "  so  as  to  make  such  bonds  and  interest  to 
accrue  thereon  "  preferred  liens  "  until  such  bonds  and  interest 
shall  be  fully  paid,"  is  a  waiver  only  in  favor  of  the  bonded  debt 
and  simple  interest  that  may  accrue  thereon,  and  does  not  extend 
to  interest  that  may  accrue  on  the  coupons.^ 

(b)  When  Coupons  are  not  negotiable.  —  An  interest  warrant  or 
coupon  not  made  payable  to  bearer  or  order  is  not  negotiable  when 
separated  from  its  bond,  although  the  latter  is  negotiable.^ 

Coupons  which,  by  appropriate  references,  are  made  subject  to 
conditions  in  tiie  mortgage  under  which  the  time  of  payment  of 
the  debt  secured  thereby  can  be  changed  and  postponed  at  the 
option  of  a  majority  of  the  bondholders  lack  one  of  the  essential 
characteristics  of  negotiable  paper."^ 

§  15.  Recovery  on  Detached  Coupons.  —  Coupons  are  written 
contracts  for  the  payment  of  a  definite  sum  of  money  on  a  day 
named,  being  purposely  drawn  and  executed  in  such  a  form  and 
manner  that  they  may  be  separated  from  the  bonds  with  which 
they  are  negotiated.  After  being  so  separated,  they  retain  the 
same  nature  and  character  as  to  security  as  the  bonds,  and  do 
not  become  simple  contracts.^ 

They  are  attached  to  bonds  in  the  expectation  that  they  will  be 
paid  as  they  mature,  however  distant  the  period  fixed  for  the  pay- 
ment of  the  principal.  Upon  being  severed  from  the  bonds,  they 
cease  to  be  incidents  of  the  bonds,  and  become,  in  fact,  indepen- 
dent claims.  They  do  not  lose  their  validity  if  for  any  cause  the 
bonds  are  cancelled  or  paid  before  maturity,  or  their  negotiability, 
or  their  capacity  to  support  separate  actions.^ 

Seybert  V.   City   of   Pittslnirg    (186.5),    1  of  bonds  of  a  railroad  company  cannot  sue 

Wall.  272  ;  Van  Hostrup  v.  .Madison  City  on  them  and  enforce  his  jndyment  against 

(1863),  1  Wall.  291,  294  ;  Mercer  County  the  income  of  the  company.     Koberts  v. 

V.    Hackett  (186:3),   1    Wall.  83;  Murray  Denver,  L.  &  G.  R.  Co.   (Colo.  App.),  46 

V.  l/irdner  (1864),  2  Wall.  110;  Shcboy-  Pac.  Rej).  880. 
gan  County  V.  Parker  (186.'')),  3  Wall.  93.  *  McClelland  v.   Norfolk  Southern  R. 

1  Smitli  V.  Clark  County  (1873),  54  Mo.  Co.  (1888),  110  N.  Y.  469  ;  s.  c.  18  N.  E. 
58.  Rep.  237. 

2  Commonwealtli  ?'.  Cliesapeake  &  Oliio  ^  City  v.  Lamson  (1869),  9  Wall.  477. 
Canal  Co.  (1870),  32  iMd.  .001.                               "  Clark  v.  Iowa  City  (1874),  20  Wall. 

8  Evertson  »».  National  I'.ank  (1876),  66  .'J86  ;  s.  v.  Nat.  Exchange  Bank  v.  Hart- 
N.  Y.  14.     A  holder  of  overdue  coupons     ford,    P.    &  F.    R.    Co.    (1866),   8    R.    I. 


§T5.] 


RIGHTS   OP   COUPON-HOLDERS. 


107 


To  enable  the  holder  to  maintain  such  a  suit,  it  is  not  necessary 
that  the  bond  itself  should  be  produced.  As  was  said  by  Mr. 
Justice  Nelson  in  a  leading  case :  "  These  coupons  or  warrants 
for  the  interest  were  drawn  and  executed  in  a  form  and  mode  for 
the  very  purpose  of  separating  them  from  the  bond,  and  thereby 
dispensing  with  the  necessity  of  its  production  at  the  time  of  the 
accruing  of  each  instalment  of  interest,  and  at  the  same  time  to 
furnish  complete  evidence  of  the  payment  of  the  interest."  ^ 


375  ;  State  v.  Spartanburg  &  N.  R.  Co. 
(1874),  8  S.  C.  129  ;  Tyrell  v.  Cairo  & 
St.  Louis  R.  Co.  (1879),  7  Mo.  App.  294; 
McClelland  v.  Norfolk  Southern  R.  Co., 
110  N.  Y.  469  (see  note  to  this  case  1 
Lawyers'  Reports  Ann.  299);  Evertson  v. 
Nat.  Bank  (1876),  66  N.  Y.  14  ;  Dun- 
can V.  Mobile,  etc.  R.  Co.  (1877),  3 
Woods,  567  ;  Stevens  v.  New  York,  etc. 
R.  Co.  (1876),  13  Blatch.  412.  In  Sewall 
V.  Brainerd  (1865),  38  Vt.  364,  though  the 
bond  was  to  pay  A.  B.  or  bearer  ' '  with 
interest  at  the  rate  of  7  per  cent  per 
annum,  payable  semi-annually  on  presen- 
tation of  the  interest  coupons  hereto 
attached,"  it  was  held  that,  as  the  coupons 
were  made  payable  to  bearer,  and  as  the 
coupon  only  was  required  to  be  presented 
when  paid,  it  was  more  reasonable  to  sup- 
pose the  intention  was  to  pay  the  coupon 
to  the  holder  of  the  coupon  in  case  it  should 
be  severed  and  sold  without  the  bond. 

In  Maine  the  authorities  indicate  some 
wavering  of  opinion.  At  first  the  Supreme 
Court  adopted  the  commonly  received  doc- 
trine as  to  the  potency  of  custom  to  impart 
a  uegotiability  to  the  coupons,  the  ruling 
in  Myers  v.  York  &  C.  R.  Co.  (1857),  43 
Me.  232,  being  that,  in  the  absence  of  proof 
of  custom  as  to  the  negotiability  of  coupons 
or  interest  ivarrants  disconnected  from  the 
bonds  with  which  they  ivere  issued,  an  in- 
dependent negotiable  character  cannot  be 
given  them  without  the  interposition  of 
the  legislature,  unless  the  intention  of  the 
party  issuing  them  distinctly  so  appears 
upon  the  face  of  the  coupon  itself.  But 
when  the  question  again  came  a  few  years 
later,  in  Jackson  v.  York,  etc.  R.  Co.,  48 
Me.  147  (1858),  it  was  held  (though  by  a 
divided  court),  that,  in  the  absence  of  some 
statutory  provision,  no  action  could  be 
maintained,  in  the  name  of  an  assignee, 
upon  interest  coupons  which  contain  no 
negotiable  words,  nor  any  language  from 


which  it  can  be  inferred  that  it  was  the 
design  of  the  company  to  treat  them  as 
negotiable  paper,  or  as  creating  any  obli- 
gation distinct  from  and  independent  of 
the  bonds  to  which  they  were  severally 
attached.  The  court  based  its  opinion  on 
the  theory  that  each  of  the  coupons  in 
question  should  continue  to  be  part  of  the 
instrument  until  it  became  due  and  pay- 
able, and  rejected  evidence  of  custom  as 
bearing  on  the  character  of  the  coupons, 
asserting  that  whether  paper  is  negotiable 
or  not  is  a  question  of  law,  to  be  determined 
from  the  paper  itself  by  fixed  and  well- 
settled  rules.  The  earlier  case  was  not 
referred  to  by  the  court,  but  its  concession 
that  custom  alone  can  render  such  instru- 
ments negotiable  was  clearly  inconsistent 
with  this  ruling  as  to  evidence.  The  doc- 
trine thus  formulated  was  adhered  to  in 
Augusta  Bank  v.  City  of  Augusta  (I860), 
49  Me.  507,  where  it  was  denied  that  a 
coupon,  not  payable  to  order  or  bearer,  or 
containing  other  equivalent  words,  was 
negotiable.  The  court  said  that  a  coupon 
to  be  negotiable  must  be  so  upon  its  face 
without  reference  to  any  other  paper,  and 
that  a  coupon  not  negotiable  on  its  face 
will  not  be  held  to  be  so  upon  proof  that 
similar  coupons  have  been  passed  from 
hand  to  hand  as  if  negotiable. 

In  an  early  case  in  the  Court  of  Common 
Pleas  of  Ohio  it  was  held  that  an  interest 
coupon,  which  has  no  payee  designated 
therein,  is  not  a  negotiable  instrument, 
and  that  the  purchaser  of  such  a  coupon 
cannot,  by  reason  of  the  interest  so  ac- 
quired, maintain  an  action  in  his  own 
name  to  enforce  the  mortgage.  Wright  v. 
Ohio,  etc.  R.  Co.   (1857),  1  Disney,  465. 

1  Commrs.,  etc.  v.  Aspinwall  (1858), 
21  How.  539;  s.  p.  Aurora  City  v.  West 
(1S6S),  7  Wall.  82  ;  Comraonwenlth  v. 
Chesapeake  &;  Ohio  Canal  Co.  (1S70),  32 
Md.  501. 


108  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  III. 

While  coupons  are  recognized  as  choses  in  action  having  many 
of  the  incidents  of  commercial  paper,  transferable  from  hand  to 
hand  when  payable  to  bearer,  and  bearing  interest  because  pay- 
able on  a  given  day,  yet,  though  detached  from  the  bond,  they 
still  remain  a  part  of  it  in  contemplation  of  law,  and  are  protected 
by  and  subject  to  the  covenants  which  it  contains.^ 

A  severed  coupon  being  an  independent  obligation,  the  debt 
evidenced  by  the  coupon  cannot  be  recovered  as  interest  in  an 
action  on  the  bonds  after  the  Statute  of  Limitations  has  run 
against  the  coupon  itself.^ 

§  76.  Rights  of  Purchasers  of  Stolen  or  Lost  Coupons.  —  It  has 
been  seen  in  the  preceding  chapter  that  the  fact  of  a  negotiable 
bond  having  been  stolen  will  not  invalidate  the  title  of  a  bona  fide 
purchaser  who  subsequently  acquires  it  before  its  maturity.  The 
same  rule  holds  in  regard  to  the  interest  coupons  of  such  bonds, 
provided  they  are  drawn  in  such  terms  as  to  be  themselves  nego- 
tiable instruments.^ 

If  the  purchaser  has  bought  stolen  bonds  with  the  coupons 
attached,  some  of  them  overdue  and  some  of  them  not  yet  ma- 
tured, he  takes  a  clear  title  as  to  the  latter  only.* 

When  the  maker  of  a  bond  has  notice  that  it  has  been  stolen, 
he  is  bound  to  act  on  the  supposition  that  the  paper  is  still  in  the 
possession  of  the  thief,  and  to  refuse  to  pay  it  to  any  holder  who 
cannot  show  that  he  is  an  innocent  purchaser.^ 

And  if  such  maker  pays  to  the  purchaser  any  overdue  coupons, 
he  will  be  liable  to  the  real  owner  whether  the  purchaser  is  a 
bona  fide  holder  or  not,  as  these  coupons  will  then  have  lost  all 
their  virtue  as  negotiable  paper.*^ 

One  who   purchases  a  non-negotiable  coupon   detached  from 

1  State  V.  Spartanburg,  etc.  R.  Co.  stolen  bond,  upon  his  tendering  a  bond  of 
(1874),  8  S.  C.  129.  indemnity,  was  not  appropriate  in  a  case 

2  Griffin  i'.  Macon  Co.  (1888),  36  Fed.  where  the  lost  bonds  are  numerous  and 
Rep.  885,  distinguishing  these  cases  from  will  not  mature  for  several  years.  An 
those  in  which  no  separate  contract  to  amendment  to  the  petition  so  as  to  make 
pay  instalments  of  interest  is  annexed  to  it  ask  for  an  injunctiou  against  the  obli- 
the  obligation.  gor  to  prevent  it  from  paying  any  of  the 

3  Evertson  v.  National  Bank  (1876),  bonds  until  his  right  as  against  the  origi- 
66  N.  Y.  14.  iial  owner  should  be  determined,  with  an 

*  Gill)ough  I'.  Norfolk,  etc.  Co.  (1877),  order  requiring  the  obligor  to  make  each 

1  Ilnglics,  410.  claimant  a  i>arty,  as  each  bond  or  coupon 

^  Ikinbridge  v.    Louisville  (188.'')),    83  should   be   presented,   so   that   he   might 

Ky.  '2Sfj.  litigate  his   rights  with    the   real   owner, 

8  Baiiibridge  v.   Louisville   (1885),  83  the   case   being   kept   on  the    docket  for 

Ky.    285.     In    this   case    the   court   con-  tliat  purpose,  was  thought  to  be  a   more 

Hidere.l  tliat  the  usual  course  of  requiring  effectual   mode    of    securing    the    various 

the  obligor  to  pay  the  original  owner  of  a  parties. 


§  77.]  EIGHTS   OP   COUPON-HOLDERS.  109 

a  negotiable  bond  acquires  no  title  thereto  if  it  has  been 
stolen.^ 

The  holder  of  lost  coupons,  upon  tendering  indemnity,  is  en- 
titled to  recover  thereon  with  interest  from  the  date  of  demand. ^ 

§  77.  Whether  Coupons  have  been  bought  or  paid.  —  It  happens 
not  infrequently  that  persons  interested  in  the  financial  condition 
of  a  company  take  up  maturing  coupons  themselves,  or  advance 
money  to  the  company  for  that  purpose.  It  then  becomes  essen- 
tial to  determine  the  precise  character  of  the  transaction.  This, 
it  is  plain,  must  be,  in  every  case,  a  matter  of  evidence  as  to  the 
intention  and  understanding  of  the  parties  interested.  But  the 
effect  to  be  given  to  such  evidence  is  materially  different  accord- 
ing as  the  person  who  furnished  the  money  is  seeking  to  establish 
his  position  as  a  secured  creditor  against  other  secured  creditors, 
or  merely  against  unsecured  creditors.  Tlie  rule,  as  now  settled, 
has  been  thus  stated  by  the  New  York  Court  of  Appeals  :  In- 
terest coupons  received  by  one  who  has  advanced  the  money 
with  which  they  were  taken  up,  under  an  agreement  that  they 
were  to  be  delivered  to  him  uncancelled  as  security  for  the  ad- 
vances, are,  as  against  the  corporation,  valid  securities  in  the 
hands  of  the  holder,  and  a  mortgage  upon  the  corporate  property 
given  to  secure  the  bonds  may  be  enforced  for  his  benefit.  But 
as  between  him  and  bondholders  who  received  the  amount  of 
their  coupons  in  ignorance  of  the  transaction,  and  supposing  them 
to  have  been  paid,  the  latter  have  the  prior  equities ;  and  if  the 
proceeds  of  sale  after  foreclosure  are  not  sufficient  to  pay  the  face 
of  the  bonds,  the  company  cannot  share  in  the  proceeds.^ 

The  latter  half  of  this  rule  is  a  special  application  of  the 
familiar  principle  that  a  court  of  chancery  will  uphold  a  mort- 
gage for  the  benefit  of  a  party  who  has  advanced  money  upon  it 
when  equity  requires  it ;  but  will  not  convert  a  payment  into  a 
purchase  in  favor  of  a  party  advancing  the  money,  when  there  is 
a  superior  countervailing  equity  in  another  party.* 

1  Evertson  v.  National  Bank  (1876),  showed  that  there  was  no  equity  in  any 
66  N.  Y.  14.  of    them    superior    to   that   of    the    pur- 

2  Fitchett  V.  Northern  Penn.  R.  Co.  chaser,  and  said:  "The  corporation  can- 
(1683),  5  Phih  132.  not  object  in  the  face  of  their  agreement. 

8  Union  T.  Co.  v.  Monticello  &  Port  The   tliird-mortgage    bondholders    cannot 

Jervis  Ry.  Co.  (1875),  63  N.  Y.  311.  object,  for  these  coupons  are  a  part  of  the 

*  Miller  v.  Rutland  &  Washington  R.  original  mortgage  debt  under  this   prior 

Co.  (1867),  40  Vt.  399.     In  this  case  the  mortgage.     If  it   appeared   that   Bradley 

purchaser  took   up   the  coupons   on    the  represented  to  them  when  they  took  their 

faith  of  an  agreement  that  he  should  have  mortgage  that  the  coupons  were  paid,  the 

the  benefit  of  the  mortgage.     The  court  case  might  be  different.     The  third  mort- 

thus  examined  all  the  adverse  claims,  and  gages  are  in  no  worse  condition  if  these 


110 


RAILWAY  BONDS   AND   MORTGAGES. 


[chap.  III. 


A  review  of  the  cases  shows  that  the  rights  of  the  parties  de- 
pend principally  upon  whether  the  agreement  under  which  the 
coupons  were  taken  up  was  known  to  the  other  secured  creditors 
or  not.^ 

The  theory  which  underlies  the  cases  denying  the  lender  equal 
rights  with  other  secured  creditors  is  that,  although  such  arrange- 
ments, as  between  him  and  the  company,  are  allowable, — a  legiti- 
mate mode  of  furnishing  pecuniary  aid  to  the  company,  changing 
the  form,  but  not  increasing  the  amount  of  the  actual  debt, —  the 
lender  is  estopped,  as  against  the  secured  creditors  who  supposed 
that  the  coupons  surrendered  by  them  were  paid  in  the  usual 
course  of  business,  from  coming  forward  as  a  purchaser  and 
assignee,  and  diminishing  the  dividend  which  such  creditors  are 
entitled  to  receive  from  the  proceeds  of  the  mortgaged  property .^ 


coupons  are  allowed  as  now  presented, 
than  if  they  still  remained  unpaid  at- 
tached to  the  bonds  ;  neither  are  the  first 
mortgagees,  so  far  as  it  appears.  But  it 
is  said  that  these  coupons  being  taken  up 
in  the  manner  they  were,  the  bondholders 
under  the  first  mortgage  had  a  right  to 
suppose  it  was  a  payment,  and  may  have 
thereby  been  induced  to  postpone  pro- 
ceedings to  foreclose  their  mortgage.  This 
is  a  mere  conjectixre.  It  may  be  so,  and 
may  not.  But  whether  it  is  or  not,  if 
this  mortgage  is  redeemed,  it  is  no  preju- 
dice to  them  to  have  these  coupons  al- 
lowed, as  they  will  get  their  whole  debt. 
It  cannot  be  assumed  tliat  it  will  not  be 
redeemed.  But  if  it  is  not  redeemed,  it 
does  not  appear,  nor  is  it  claimed  in  argu- 
ment, that  the  property  is  insufficient  in 
value  to  pay  the  whole  of  this  first-mort- 
gage debt,  including  these  coupons  ;  so 
that  in  either  event  the  first-mortgage 
bondliolders  will  receive  their  whole  pay. 
No  equity  should  be  crowded  out  when 
there  is  enough  to  pay  all.  This  will  not 
be  done  even  in  a  case  of  a  subsetiuent 
lien  ;  nmch  less  against  a  party  who  holds 
a  part  of  the  original  first-mortgage  debt. 
But  it  is  insisted  that  the  allowance  of 
these  coupons  interferes  with  tlic  chance 
of  the  first-mortgage  bondholders  obtain- 
ing til  is  pro|i('rty  by  foreclosure  for  less 
than  its  value.  That  is  a  chance  tliat 
must  be  postponeil  till  all  eipiitable  liens 
an-  discharged.  It  cannot  be  allowed  to 
stand  in  the  way  of  an  equity  so  obvious 


as  this.  A  mortgagee  who  wishes  to 
speculate  out  of  the  mortgage  security  by 
getting  more  than  his  full  pay,  at  the 
sacrifice  of  a  holder  of  a  part  of  the  mort- 
gage debt,  must  do  it  without  the  aid  of  a 
court  of  equity. 

1  Circumstances  which  were  held  suffi- 
cient in  a  leading  decision  to  warrant  the 
inference  that  coupons  were  bought  were, 
that  the  money  was  not  received  by  the 
company  itself  or  any  one  under  a  duty  to 
act  for  it  ;  that  the  transferees  of  the 
coupons  had  repeatedly  informed  the  hold- 
ers of  the  bonds  and  the  rest  of  the  cou- 
pons, that  a  purchase,  not  a  payment,  was 
intended  ;  that  the  coupons  in  question 
had  been  preserved  uncancelled.  Ketchum 
V.  Duncan  (1878),  96  U.  S.  659,  affirming 
Duncan  v.  Mobile,  etc.  R.  Co.  (1877),  3 
"Woods,  567.  This  case  was  followed  in 
Claflin  V.  South  Carolina  R.  Co.  (1880),  8 
Fed.  Rep.  118,  138,  where  Chief  Justice 
Waite,  upon  a  review  of  the  evidence,  es- 
pecially the  publicity  given  to  the  fact  that 
the  transaction  was  intended  as  a  purchase, 
reached  the  conclusion  that  it  should  be 
treated  as  in  law  a  purchase.  The  fact 
that  the  agreement  was  undisclosed  was 
also  relied  on  in  Cameron  v.  Tome  (1886), 
64  Md.  507  ;  s.  c.  24  Am.  &  Eng.  R.  R. 
Cas.  213  ;  2  Atl.  Rep.  837  ;  Union  T.  Co. 
V.  Moiiticello,  etc.  Ry.  Co.  (1875),  63  N.  Y. 
311;  South  Covington  Ry.  Co.  v.  Gest 
(1888),  34  Fed.  Rep.  628. 

2  Haven  v.  Grand  Junction  R.  Co. 
(1871),  109  Mass.  88. 


§77.] 


RIGHTS   OF   COUPON-HOLDERS. 


Ill 


This  consideration  is  entitled  to  special  weight  in  the  case  of 
subsequent  purchasers  of  the  bonds  and  coupons,  whose  estimate 
of  the  value  of  these  evidences  of  debt  must  be  more  or  less  in- 
fluenced by  the  fact  that  a  portion  of  the  interest  is  or  is  not  still 
unpaid,  and  is  decisive  where  the  coupons  have  been  paid  by  one 
who  has  guarantied  their  payment.^ 

Where  the  person  asserting  himself  to  be  the  owner  of  the 
coupons  is  the  financial  agent  of  the  company  charged  with 
the  duty  of  receiving  and  applying  its  earnings  to  the  payment 
of  its  debts,  including  coupons  as  they  mature,  and  such  earnings 
have  been  blended  and  confused  with  his  private  funds,  there  is 
no  presumption  in  his  favor,  arising  from  his  retention  and  pos- 
session of  the  coupons.  Nor  can  a  resolution  passed  by  the 
company,  after  the  coupons  were  actually  taken  at  his  instance 
and  to  serve  his  purpose,  have  any  effect  upon  the  relations  be- 
tween the  parties,  for  those  were  fixed  at  the  time  the  coupons 
were  surrendered  by  the  holders.^ 

Where  the  lien  of  the  coupons  has  once  ceased  to  exist,  it 
cannot  be  revived,  as  against  other  secured  creditors,  by  any  sub- 
sequent arrangement  between  the  company  and  party  whose 
money  paid  off  the  coupons.^ 


1  In  Child  V.  New  York  &  New  Eng- 
land R.  Co.  (18S0),  129  Mass.  170  ;  s.  c. 
2  Am.  &  Eng.  R.  R.  Gas.  329,  a  certain 
railwaj"^  company  under  a  contract  with 
another  had  paid  off  certain  coupons  for 
interest,  and  afterwards  claimed  to  have 
equal  rights  with  the  bondholders  in  a 
reorganization  plan  of  the  latter  com- 
pany. The  court  say  :  "  The  holders 
bought  their  bonds  with  the  agreement  of 
this  company  indorsed  upon  it,  and  upon 
the  faith  of  that  agreement,  which  is 
essentially  a  guaranty.  The  comi)any 
agrees  that  the  several  interest  warrants 
shall  be  paid  as  they  mature.  If  the 
maker  of  the  bonds  did  not  pay  the 
interest,  it  was  the  duty  of  the  guaran- 
tor to  pay  it.  When  these  bondholders 
received  the  amounts  of  the  interest  war- 
rants, they  had  the  right  to  regard  it  as 
payment  and  extinguishment  of  the  inter- 
est which  diminished  the  amount  of  their 
debt  and  strengthened  their  security." 

2  South  Covington,  etc.  Ry.  Co.  v. 
Ge6t(]888),  34  Fed.  Rep.  628. 

^  South  Covington,  etc.  Ry.  Co.  v. 
Gest  (1888),  34  Fed.   Rep.  628.     In  this 


case  a  bondholder  agreed  with  a  company 
to  pay  off  its  pressing  debt,  including  cer- 
tain coupons  for  interest,  upon  receipt  of 
the  company's  notes  for  $15,000,  due  at 
different  times,  he  to  hold  the  coupons, 
when  taken  up,  as  collateral  security,  and 
that,  as  fast  as  the  notes  were  paid,  cou- 
pons to  a  proportionate  amount  were  to  be 
surrendered  to  the  company.  An  outsider 
agreed  with  him  that  he  would  bu}'  him 
out  if  he  would  secure  his  being  placed  in 
full  control  of  the  road.  This  was  done, 
and  the  latter  raised  the  money  on  the 
company's  notes,  and  paid  the  bond- 
holder, and  had  turned  over  to  him,  not 
only  the  coupons  detached  from  this  bond- 
holder's bonds,  but  certain  others  that 
had  been  paid  to  other  holders,  when  pre- 
sented at  the  company's  office,  and  had 
passed  into  this  bondholder's  hands  with- 
out the  knowledge  or  consent  of  the 
former  holders.  Concerning  the  effect  of 
this  transaction  the  court  say  :  "  This 
bondholder  had  realized  money  on  the 
notes  ;  this  money  in  his  hands  was  appli- 
cable to  the  payment  of  these  coupons 
which  he  undertook  to  pay  off  with  the 


112 


RAILWAY   BONDS   AND   MORTGAGES. 


[chap.  III. 


S  78.  Rights  of  Persons  participating  in  Arrangements  for  funding 
Coupons.  —  When  coupon-holders  accept  a  scheme  which  involves 
the  funding  of  overdue  interest,  and  the  issue  of  new  evidences  of 
debt  in  place  of  their  unpaid  coupons,  the  presumption  is  that 
there  is  no  novation  in  their  contract,  and  that  they  are  still  en- 
titled to  the  benefit  of  the  security  of  the  mortgage;  and  this 
presumption  can  be  overcome  only  by  clear  evidence  that  it  was 
their  intention  to  waive  their  lien.^ 

It  is  immaterial  that  the  new  evidences  of  debt  are  under  seal, 
and  the  coupons  only  simple  contracts,  for  the  bonds  themselves 
are  also  sealed  instruments,  and  it  is  by  force  of  these  that  a  lien 
and  priority  are  secured  to  the  bondholder  both  for  the  principal 
sum  and  for  the  interest  thereon.  Nor  can  the  acceptance  of 
such  evidences  of  debt  be  made  to  operate  as  payment  of  the  in- 
terest funded,  on  the  ground  that  by  their  terms  the  coupon- 
holder  obtains  the  obligation  of  the  company  to  pay  interest  on 
interest,  the  result  being  a  new  and  different  contract  between 
the  parties.  As  the  bondholder  is  entitled  to  interest  on  the 
coupons  from  the  time  of  their  maturity,  the  new  instruments 
merely  secure  in  express  terms  something  which  the  bondholder 
already  possessed,  and  therefore  changes  neither  the  rights  nor 
the  obligations  of  the  parties.^ 


proceeds  thereof.  With  the  receipt  of 
that  money  said  coupons,  as  between  him 
and  the  company,  were  paid.  The  cou- 
pons were  not  turned  over  to  the  party  or 
parties  who  purchased,  or  discounted  and 
held,  the  notes  before  maturity,  but  they 
were  delivered  up  to  the  one  who  was 
then  the  sole  managing  and  financial 
agent  of  the  company,  and  the  proper 
officer  to  receive  and  cancel  the  same  as 
no  longer  subsisting  liabilities  of  the  com- 
pany. When  the  arrangement  was  made 
with  the  company  afterwards  to  surrender 
the  notes  and  hold  the  coupons  absolutely, 
they  constituted  nothing  more  tlian  newly 
issueil  evidences  of  debt.  Other  holders 
of  first-mortgage  bonds  and  outstanding 
coupons  due  or  to  become  due  could  not 
be  aflfected  by  the  substitution,  nor  could 
said  coupons  be  reinvested  with  the  lien 
which  had  once  ceased,  even  for  a  moment, 
to  exist."  See,  as  to  an  agreement  between 
a  third  party  furnishing  the  money  to  pay 
coupons  and  the  mortgagor  not  Ixnng  en- 
forceable against  th(!  bondlioldcrs,  Fi<lclity 
Ins.  Truiit  &  Safe  Deposit  Co.  v.  West  I'a. 


&  S.  C.  R.  Co.,  138  Pa.  St.  494  ;  s.  c.  21 
Atl.  Rep.  21,  where  coupons  which  have 
been  apjiarently  paid  were  treated  by  the 
court  as  paid.  See  Farmers'  Loan  &  Trust 
Co.  V.  Iowa  Water  Co.,  78  Fed.  Rep.  881, 
decided  upon  the  authority  of  the  case  last 
cited,  and  Claflin  v.  South  Carolina  R. 
Co.,  8  Fed.  Rep.  118. 

1  Skiddy  i'.  Atlantic,  Mississippi,  & 
Ohio  R.  Co.  (1878),  3  Hughes,  320.  In 
Gibert  v.  Washington,  Va.  Jlid.  &  Great 
Southern,  etc.  R.  Co.  (1880),  33  Gratt.  586  ; 
.s.  c.  1  Am.  &  Eng.  R.  R.  Cas.  473,  where 
the  company  was  unable  to  pay  its  in- 
terest, and  gave  what  they  called  coupon 
bonds  to  the  holder,  the  court  held  them 
to  be  secured  by  the  original  mortgage, 
upon  the  piinciple  that  "so  long  as  the 
debt  exists  the  courts  will  never  jiresume 
the  chief  security  taken  for  its  ])ayment 
has  been  surrendered  without  satisfaction, 
unless  iipon  the  clearest  and  most  con- 
vincing testimony." 

'•^  Commonwealth  v.  Clicsiqicake,  etc. 
Canal  Co.  (1871),  3.5  Md.  1. 


§  79.]  RIGHTS   OF   COUPON-HOLDERS.  113 

One  who  funds  coupons  under  a  statute  is  bound  by  its  terms, 
not  merely  as  to  the  coupons  actually  funded,  but  also  as  to  any 
bonds  or  coupons  held  by  him  at  the  time  of  funding,  at  least 
where  they  belong  to  the  same  class  as  the  coupons  funded.  The 
statute  operates  upon  the  entire  obligation,  both  principal  and 
interest,  and  one  who  accepts  its  provisions  for  one  purpose 
accepts  it  for  all  purposes.  The  principle  that  when  a  contract 
is  one  and  indivisible,  if  it  takes  effect  at  all  it  must  take  effect 
as  to  all  its  parts,  necessarily  involves  the  conclusion  that  the 
benefit  of  such  a  statute  must  cither  be  accepted  as  a  whole  or 
rejected  as  a  whole.^ 

S  79.  Recoupment  of  Defaulted  Interest  in  an  Action  to  recover 
Damages  for  failing  to  accept  Bonds.  —  Where  a  party  binds  himself 
on  a  certain  condition  to  take  a  certain  number  of  bonds,  secured 
by  a  mortgage  which  provides  that,  if  any  of  the  interest  on  the 
bonds  is  not  paid  within  ninety  days  after  it  is  due,  the  entire  prin- 
cipal and  interest  shall  become  immediately  due,  and  receives  and 
pays  for  a  portion  of  the  bonds,  he  may,  in  an  action  brought  by 
the  company  to  recover  damages  for  failing  to  take  the  residue, 
such  action  being  brought  after  the  interest  on  the  bonds  paid  for 
has  been  in  default  more  than  ninety  days,  recoup  the  amount  due 
thereon  against  the  damages  growing  out  of  his  refusal  to  accept 
and  pay  for  the  remaining  bonds.  The  undertaking  of  the  party 
agreeing  to  receive  the  bonds  amounts  to  a  promise  to  make  a 
loan  to  the  company  of  the  amount  indicated  by  the  subscription, 
for  the  length  of  time  and  upon  the  terms  specified  in  the  mort- 
gage. The  payment  of  interest,  in  this  view,  is  a  vital  part  of 
the  consideration  and  affects  the  entire  contract.^ 

^  Hand  v.  Savannah  &  Charleston  R.  consideration  in  Hand  v.  Savannah,  etc. 

Co.  (1879),  12  S.  C.  314,  350.    The  appli-  R.  Co.  (1883),  17  S.  C.  219  ;  .s.  c.  12  Am. 

cation  of  the  doctrine  stated  in  the  text  to  &  Eng.  R.  R.  Cas.  495. 
the  peculiar  circumstances  of  these  coupon-  ^  Galena,  etc.  K.  Co.  r.  Barrett  (1880), 

holders  and  other  lienors  was  again  under  95  111.  467. 


114 


RAILWAY   BON  Do   AND   MUliTGAGES. 


[chap.  IV. 


CHAPTER  IV. 


GUARANTY   OP   BONDS. 


80.  Introduptor}-. 

81.  A  Contract   of  Guaranty  creates 

Independent    Rights    and   Lia- 
bilities. 

82.  Guaranty  for  Accommodation  not 

valid. 

83.  What    is    generally    a    Sufficient 

Consideration, 

84.  Guaranty  given    as    Part   of    the 

Consideration     of    a    Lease    is 
valid. 

85.  Guaranty  to  save  Corporation  from 

Actual  Financial  Embarrassment 
is  valid. 

86.  Guaranty  of  Obligations  of  Com- 

panies carrying  on  another 
Business,  how  far  valid. 
86  a.  Guaranty  valid  where  it  forms 
part  of  a  Compromise  Arrange- 
ment with  a  Debtor  of  the 
Guarantor. 


§  87.    Guaranty  of  Bonds  owned  by  the 
Corporation  is  valid. 

88.  Guaranty   may    be   validated    by 

Ratification,  where  not  abso- 
lutely ultra  vires. 

89.  Negotiability  of  Guaranty. 

90.  Guaranty   not    invalidated    as   to 

Innocent  Purchasers  by  the 
Omission  of  merelj^  Directory 
Formalities. 

91.  Improper  Exercise  of  a  Power  of 

Guaranty,  Rights  of  Innocent 
Purchaser  not  impaired  by. 

92.  Rights   of   Guarantor   of   Interest 

when  postponed  to  those  of 
Bondholders. 

93.  State-indorsed  Bonds  are  subject 

to  Constitutional  Limitations  in 
Force  when  Guaranty  Act  was 
passed. 


§  80.  Introductory.  —  The  fundamental  rule  upon  which  the 
enforceability  of  contracts  of  guaranty  depends  has  been  thus 
enunciated  in  an  English  treatise  of  high  authority :  "  It  is  no 
part  of  the  ordinary  business  of  commercial,  and  a  fortiori  still 
less  so  of  non-commercial,  corporations  to  become  security  for 
others.  Under  ordinary  circumstances,  without  positive  author- 
ity in  this  l)chalf  in  the  constating  instruments,  all  engagements 
of  this  description  are  ultra  vires,  whether  they  take  the  direct 
form  of  suretyship  or  the  indirect  forms  of  joining  in  accommoda- 
tion bills,  or  otherwise  becoming  liable  for  the  debts  of  others,  or 
the  still  more  indirect  form  of  guaranteeing  ])rofits  or  expenses, 
or  otherwise  assisting  the  business  of  others,  or  in  the  development 
tlicreof,  or  obtaining  further  powers  therefor.  Therefore,  there 
ought  ])ropcrly  to  be  an  express  power  to  this   effect."  ^     This 

'  Bricc's  Ultra  Vires  (Grenn's  Am.  ed.,  illustrative  of  the  principles  apj)licable  to 

1H80),  i».  2r)2.     The  decisions  in  this  cha])-  gunraiity  of  railway  bonds.      See   note  in 

tcr  an'  not  limited  to  cases  involving  rail-  26  Am.  &  Fng.  K.  R.  Cas. ,  10.5,  on  guaranty 

way   bonds,   but  include   acme   others  as  of  bonds  of  another  company. 


§  80.]  GUARANTY   OF   BONDS.  115 

would  seem,  however,  to  be  a  more  rigorous  statement  of  the  rule 
than  is  justified  either  by  the  principles  on  which  the  rule  is 
founded,  or  the  cases  in  which  those  principles  have  been  applied. 
There  is  no  question  but  that  the  courts  have  fully  recognized  the 
doctrine  that  corporate  officers  have,  under  various  circumstances, 
implied  authority  to  bind  the  corporation  by  a  guaranty.  In  fact 
it  is  only  in  a  few  of  the  States  that  the  legislature  has  made  any 
express  provision  for  this  contract  by  general  laws,  and  the  litiga- 
tion on  the  subject  ^  indicates  that  it  is  rarely,  if  ever,  regulated 
by  provisions  either  in  special  charters  or  in  by-laws.  The  actual 
task  of  the  courts,  therefore,  has  been  to  determine  when  such 
authority  is  implied. 

While  it  is  difficult  to  frame  a  rule  which  shall  be  sufficiently 
definite  to  furnish  a  key  to  the  solution  of  all  the  manifold  prob- 
lems arising  in  connection  with  this  subject,  the  cases  at  all 
events  show  that,  provided  the  transaction  of  which  the  guaranty 
is  a  part  is  not  ultra  vires,  and  the  guaranty  is  sustained  by  a 
sufficient  consideration,  the  proper  officers  of  the  corporation 
may  bind  it  by  guarantying  the  obligation  of  other  corporations 
or  of  individuals,  wherever  the  guaranty  will  render  the  transac- 
tion more  beneficial  to  the  corporation  on  behalf  of  which  it  is 
executed,  either  by  saving  it  from  loss  or  securing  some  direct 
benefit.  The  preliminary  question,  then,  in  every  case  is,  whether 
the  transaction  in  which  the  guaranty  was  given  was  wholly  be- 
yond or  within  the  powers  of  the  corporation.  If  it  was  beyond 
those  powers,  this  excess  of  authority  necessarily  vitiates  the 
guaranty,  this  being  the  result,  according  to  the  weight  of  author- 
ity, whether  the  stockholders  have  ratified  it  or  not  (see  §§  85,  88, 
infra?).  On  the  other  liand,  if  the  transaction  was  not  ultra  vires 
in  this  absolute  sense,  the  binding  character  of  any  guaranty 
which  the  corporate  officers  may  have  executed  while  engaged  in 
carrying  it  tlirough,  depends,  at  least  where  the  peculiar  policy 
of  the  law  in  regard  to  commercial  paper  does  not  qualify  the 
rights  of  the  parties,  upon  the  ordinary  considerations  which  de- 
termine the  validity  of  the  acts  of  such  officers.  If  it  was  reason- 
ably appropriate  for  the  purpose  of  securing  the  benefits  of  the 
transaction  for  the  shareholders,  there  seems  to  be  no  reason  why 
it  should  not  be  enforced  against  them  by  any  one  who  has  not 
actual  notice  of  a  defect  of  authority.  The  proper  way,  therefore, 
to  determine  whether  the  guaranty  is  valid  is  to  regard  it,  not  as 
a  separate  transaction,  but  as  a  part  of  a  larger  transaction.  It 
is  submitted  that  there  is  nothing  in  the  cases  at  variance  with 

1  See  notes  to  §  93,  below. 


116  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  IV. 

this  theory,  so  far  as  the  actual  decisions  are  concerned  ;  though 
it  must  be  conceded  that  the  courts  have  in  the  majority  of  in- 
stances argued  as  though  a  corporate  guaranty  was  something 
distinct,  which  must  stand  or  fall  on  its  own  merits.  This  has 
been  a  source  of  needless  difficulties,  if  not  of  actual  errors.  A 
review  of  the  cases  cited  below  shows  they  have  really  turned 
upon  two  questions  :  First,  whether  the  transaction  on  which  the 
guaranty  was  given  was  within  the  corporate  powers;  and,  second, 
whether,  supposing  the  transaction  to  be  of  that  character,  the 
circumstances  were  such  as  would  have  warranted  the  directors 
in  undertaking  to  place  the  corporation  in  the  position  of  a  prin- 
cipal obligor,  for  the  performance  of  some  act  which  was  to  con- 
stitute the  consideration  for  the  benefit  anticipated  from  the 
transaction.  Or  more  briefly  still,  it  may  be  said  that  the  only 
point  to  be  decided  is,  whether  the  case  is  one  in  which  the  di- 
rectors can  render  the  corporation  directly  liable.  If  it  is  such  a 
case,  they  can  clearly  impose  upon  it  the  secondary  liability  of  a 
guarantor.  If  it  is  not  such  a  case,  their  inability  to  charge  it 
with  this  secondary  liability  is  equally  manifest. 

The  directors  of  a  railroad  company,  being  trustees  and  repre- 
sentatives charged  with  the  exercise  of  all  the  powers  of  the 
corporation,  which  do  not  involve  fundamental  changes  in  the 
purposes  of  the  incorporators,  under  a  power  given  tlie  company 
to  guaranty  bonds  of  another  company  which  may  prove  a  feeder 
to  its  business,  may  make  such  guaranty  without  the  assent  of  the 
stockholders.^ 

1  Louisville  Trust  Co.  et  al.  v.  Louisville  conditions    as     might     be     agreed     upon 

N.  A.  &  Chicago  R.   Co.    (1896),  75  Fed.  between    the    companies.      The   company 

Rep.    433,   reversing    Louisville   N.    A.  &  leased  a  road,  and  one  to  be  constructed  in 

Chicago  R.  Co.  v.  Ohio   Valley  Improve-  the  State  would  continue  the  leased  road 

ment  &  Contract  Co.  et  al.  (1894),  69  Fed.  toward  the   line   of  Virginia.     The  lessor 

Rep.  431.  company    guarantied    the    bonds    of    the 

A    railroad    company    incorporated    in  company  whose  road  was  to  be  constructed, 

Indiana   was  made  a   corporation    by  the  to  be    delivered  to  the  contractors  for  its 

legislature  of  Kentucky.     As  a  Kentucky  construction,    and   received   stock    of  the 

corporation  the  legislature  granted  it  au-  company   for   the   guaranty.     The   U.    S. 

thority   to   indorse  or  guaranty  the  prin-  Circuit    Court   of  Appeals   for  the   Sixth 

cipal  and  interest  of  the  bonds  of  any  rail-  Circuit     held     that,    under     the    i>owers 

way   company   then  constructed   or  to  be  granted  by  the  Kentucky  legislature,  the 

thereafter  constructed  witliin  the  limits  of  company    was    authorized    to    make    the 

the  State  of  Kentucky,  and  to  consolidate  guaranty  of  bonds  and  to  acquire  the  stock 

its  rights,  frandiises,  and  privileges  with  of  the  other  company  ;  that  the  guaranty 

any    railway  company  authorized  to  con-  was  binding  on  it  and  enforceable  against 

struct  a  raili'oad  from   the  city  of  Louis-  its  property  in  Kentucky,  notwithstanding 

ville  to  any  point  on   the    Virginia  line,  the  fact  tliat,  as  an   Indiana  corporation, 

such  indorsement,  guaranty,  or  consolida-  it  may  not  havi;  had  granted  to  it  auch 

tion    to   be   made   upon    such    terms   and  power. 


§  81.]  GUARANTY   OF   BONDS.  117 

§  81.  A  Contract  of  Guaranty  creates  Independent  Rights  and  Lia- 
bilities. —  For  this  reason  the  guarantor  of  bonds  cannot,  in  an  ac- 
tion on  his  guaranty,  escape  liability  on  the  ground  that  the  bonds 
are  void.^  On  the  other  hand,  where  the  mortgage  expressly 
provides  that  entry  by  the  trustees,  upon  default  in  the  payment 
of  interest,  shall  not  deprive  them  or  any  other  parties  of  their 
full  rights  and  remedies,  a  bondholder  who  has  taken  no  part  in 
proceedings  by  the  trustees  to  obtain  possession  may  bring  an 
action  to  enforce  a  guaranty  indorsed  on  the  bonds  by  another 
company  .2 

One  accepting  the  guaranty  of  one  railroad  company  of  the 
bonds  of  another  will  be  charged  with  notice  of  a  statute  of  the 
State  of  its  creation  which  requires  a  petition  of  its  stockholders 
for  such  a  guaranty  to  be  filed  before  its  board  of  directors,  and 
if  he  knows  such  a  petition  of  stockholders  was  not  filed  with 
the  board,  cannot  hold  the  guarantor  to  any  liability  on  the 
guaranty.^ 

The  negotiability  of  the  guaranty  of  such  bonds  is  not  affected 
by  such  statutes  as  that  of  Kentucky  (Gen.  St.,  c.  22,  §§  6, 13, 14), 
with  respect  to  the  negotiability  and  assignability  of  bonds  and 
promissory  notes,  as  they  have  no  application  to  bonds  like  rail- 
road bonds  payable  to  bearer.  They  apply  only  when  an  assign- 
ment is  necessary  to  pass  the  title  to  the  chose  in  action^ 

Though  a  statute  empowering  a  railroad  company  to  guaranty 
the  bonds  of  another  may  require  a  petition  to  that  effect  from 
the  stockholders  to  the  board  of  directors,  if  such  a  guaranty  is 
directed  by  the  board  without  such  a  petition,  the  guaranty  is  not, 
as  ultra  vires  the  company,  absolutely  void.  It  may  be  ratified, 
and  one  purchasing  such  guaranty  without  notice  of  the  fail- 
ure to  petition  will  be  entitled  to  enforce  the  same  against  the 
guarantor.^ 

Bonds  issued  by  corporations   or  joint-stock   companies,  and 

1  Connecticut  Mutual  Life  Ins.  Co.  v.  Fed.  Rep.  4.33,  reversing  Louisville,  N.  A. 
Cleveland,  Columbus,  &  Cincinnati  R.  Co.  &  Cliicago  R.  Co.  v.  Ohio  Vallej'.Improve- 
(1863),  41  Barb.  9.  ment  &  Contract  Co.  et  al.  (1894),  69  Fed. 

2  Raceyi;.  Erie  Ry.  Co.  (1881),  12  N.  Rep.  431,  in  which  case  the  court  sus- 
Y.  Weekly  Dig.  457  ;  s.  c.  24  Hun,  342.  tained   an   injunction   against   the    boiid- 

3  Louisville  Trust  Co.  et  al.  v.  Louis-  holders  and  decreed  a  cancellation  of  the 
ville,  N.  A.  &  Chicago  R.  Co.  (1896),  75  guaranty.  There  is  upon  this  point  an 
Fed.  Rep.  433,  450.  elaborate  argument  and  a  very  full  reference 

*  Louisville  Trust  Co.  v.  Louisville,  N.  to  the  cases  pertinent  to  the  subject  in  the 

A.  &  Chicago  R.  Co.  et  al.  (1896),  75  Fed.  opinion  of  the  U.  S.  Circuit  Court  of  \v- 

Rep.  433,  4:^8.  peals  in  Louisville  Trust  Co.  et  al.  v.  Louis- 

5  Louisville  Trust  Co.  et  al.  v.  Louis-  ville,  N.  A.  &  Chicago  R.  Co.,  supra. 
ville,   N.  A.  k  Chicago  R,  Co.  (1896),  75 


118  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  IV. 

made  negotiable  by  the  Pub.  Sts.  Mass.,  c.  77,  §  4,  and  the  holder 
of  such  bonds,  although  not  the  person  to  whom  they  were  origi- 
nally delivered,  and  though  no  consideration  moved  from  him  to 
the  corporation,  may  maintain  an  action  upon  them  in  his  own 
name.^ 

§  82.  Guaranty  for  Accommodation  not  valid,  —  It  is  well  settled 
that  no  corporate  agent  has  implied  authority  to  give  away  any 
portion  of  the  corporate  property,  or  to  create  a  corporate  ob- 
ligation gratuitously.  From  this  principle  it  follows  that  the 
assumption  of  the  position  of  surety  for  a  liability  in  which  the 
corporation  has  no  direct  interest  is  undeniably  a  transaction 
which  is  outside  the  scope  of  its  business,  and  that  the  corporate 
officers  of  the  corporation  have  no  implied  power  to  place  it  in 
such  a  position  by  making  an  accommodation  indorsement. 

The  cases  in  which  this  rule  is  qualified  by  circumstances 
amounting  to  a  ratification  on  the  part  of  the  corporation,  or  by 
the  special  principles  protecting  innocent  purchasers  of  negoti- 
able paper,  are  noticed  below,  §§  88,  91. 

§  83.  What  is  generally  a  Sufficient  Consideration.  —  Where  the 
contract  of  guaranty  is  indorsed  on  the  bonds  before  their  issue 
and  delivery  by  the  obligor  company,  the  credit  given  to  the 
latter  is  a  sufficient  consideration  to  support  the  contract  of 
guaranty.  But  if  the  guaranty  is  given  after  the  execution  and 
delivery  of  the  bonds,  the  contract  is  not  binding  on  the  guarantor 
unless  he  receives  some  separate  consideration  for  the  guaranty .^ 

A  guarantor  who  inserts  the  words  "  value  received "  in  his 
guaranty  is  not  a  mere  accommodation  indorser,  as  this  expres- 
sion imports  a  sufficient  consideration.^ 

In  the  leading  case  of  Railroad  Co.  v.  Howard  ^  it  was  held  that, 
as  railroad  companies  have  power  to  issue  their  own  bonds  to  con- 
struct their  roads,  they  have  also  power  to  guaranty  the  bonds  of 
cities  and  counties  which  have  been  lawfully  issued,  and  are  sold 
instead  of  their  own,  as  the  means  of  accomplishing  the  same 
end.  Being  entitled  to  receive  such  bonds,  they  may  transfer 
them  to  others ;  and  having  the  capacity  to  make  such  transfer, 
they  may,  if  they  deem  it  expedient,  guaranty  their  payment  for 

1  Strauss  v.  United  Telegram  Co.,  164  '  ConnectifMit  Mutual  Life  Ins.  Co.  v. 

Ma,s.s.   130;  s.  c.  41    N.  E.    Kep.  (189.''>).  Cleveland,  Colunil)Us,  &  Cincinnati  R.  Co. 

SecCnrr  v.  LeFevre  (1856),  27  Pa.  St.  413,  (1863),  41  P>arl).  9. 

418  ;  Biinlint;  v.  Camden  &  Atlantic  Rail-  ■»  7  Wall.  392  (1868),  followed  in  Arnot 

road  (1876),  81  I'a.  St.  2ri4;  Society  for  Sav-  v.  Erie  Ry.  Co.  (1876),  67  N.  Y.  35.     See 

ings  V.  New  London  (1860),  20  Conn.  174.  §§  86a,  <Jl. 

'^  Tn|i|)an    V.   Cl(5V(land,   Columbus,    & 
Cincinnati  R.  Co.  (1860),  1  Flip.  74. 


84.] 


GUARANTY   OF   BONDS. 


119 


the  purpose  of  augmenting  their  credit  in  the  market.  So,  also, 
under  a  general  authority  to  issue  bonds  for  construction  pur- 
poses, a  lessor  company  may  lawfully  guaranty  the  payment  of 
notes  issued  for  that  purpose  by  the  trustees  and  managers 
appointed  in  proceedings  to  enforce  a  mortgage  upon  all  the  prop- 
erty of  a  company  to  which  the  guarantor  has  leased  its  road  in 
perpetuity.^ 

§  84.  Guaranty  given  as  Part  of  the  Consideration  of  a  Lease  is 
valid. — Authority  to  accept  a  lease  of  another  road  necessarily 
implies  authority  to  arrange  for  paying  rent,  and  one  of  the  ways 
in  which  such  payment  may  legitimately  be  effected  is  by  paying 
the  coupons  of  the  lessor's  bonds,  or  guarantying  their  payment.^ 

So,  also,  a  statute  providing  that  railroad  corporations  may 
lease  their  roads  to  other  corporations,  and  "  shall  be  capable  in 
law  to  make  all  contracts  .  .  .  necessary  for  the  construction, 
completion,  and  maintenance  of  its  road,  .  .  .  and  generally  to 
possess  all  the  powers  and  privileges  for  the  purpose  of  carrying 
on  the  business  of  the  corporation,  that  private  individuals  and 
natural  persons  now  enjoy,"  has  been  held  to  entitle  such  a  cor- 
poration to  guaranty  the  bonds  of  a  company  whose  line  it  has 
leased.^ 


1  Codman  v.  Vermont  &  Canada  R.  Co. 
(1879),  16  Blatch.  165. 

2  Eastern  Township  Bank  v.  St.  Johns- 
bury  &  L.  C.  R.  Co.  (1889),  40  Fed.  Rep. 
423. 

8  Low  V.  Central  Pac.  R,  Co.  (1877), 
52  Cal.  53  ;  s.  o.  9  Am.  Ry.  Rep.  366.  The 
majority  of  the  court  proceeded  upon  the 
ground  that  it  was  competent  for  the  les- 
see company  to  contract  to  pay  as  rent  an 
amount  equal  to  the  amount  of  the  lessor's 
bonds,  and  that  this  involved  the  pi'opo- 
sition  that  the  company  might,  upon  a 
sufficient  consideration,  guaranty  such 
bonds,  the  power  to  make  an  absolute 
promise  of  payment  necessarily  embrac- 
ing the  power  to  make  a  conditional  prom- 
ise of  payment.  Stress  was  also  laid 
on  the  fact  that  the  statute  placed  the 
company  on  the  same  footing  as  private 
persons  in  regard  to  contracts.  The  latter 
reason  is  possibl}'  open  to  the  objection 
noticed  by  Judge  McKinstry  in  his  dis- 
senting opinion,  viz.,  that  as  the  clause 
conferring  this  freedom  of  contract  followed 
an  enumeration  of  certain  powers  specifi- 
cally conferred,  it  was  merely  declaratory 
of  the  rule  that  powers  incidental  to  the 


powers  expressly  conferred  may  be  exer- 
cised by  a  corporation.  But  the  former 
reason  is  quite  sufficient  to  justify  the 
ruling  in  view  of  the  fact  that  the  court 
was  not  called  upon  to  determine  whether 
the  contract  was  one  which  tiie  corporators 
might  have  objected  to  on  the  ground  of 
its  improvidence,  but  whetlier,  when  those 
corporators  were  satisfied  with  the  arrange- 
ment, it  was  competent  for  one  who  had 
agreed  to  take  the  bonds  to  refuse  to 
fulfil  his  contract  on  the  ground  that  the 
guaranty  was  void  as  being  absolutely 
ultra  vires.  It  is  to  be  regretted  that  the 
court  has  somewhat  weakened  the  author- 
ity of  the  decision,  and  provoked  criticism 
by  opening  up  the  subject  of  the  implied 
powers  of  corporations,  instead  of  planting 
itself  firmly  on  the  absurdity  of  maintain- 
ing that  the  debt  of  a  corporation  may  be 
acknowledged  directly  by  its  own  notes, 
and  not  indirectly  by  the  assumption  of  a 
secondary  liability  on  the  obligations  of 
other  parties.  It  is  undoubtedly  one  of 
the  numerous  cases  in  which  the  unfor- 
tunate ambiguity  of  the  term  ultra  vires 
has  produced  a  mischievous  confusion  of 
thought. 


120  EAILWAY   BONDS   AND   MORTGAGES.  [CHAP,  lY. 

§  85.  Guaranty  to  save  Corporation  from  Actual  Financial  Em- 
barrassment is  valid.  —  The  assumption  of  a  third  person's  debt  is 
within  the  scope  of  the  powers  of  the  directors  of  a  corporation 
when  such  assumption  is  urgently  required  for  the  purpose  of 
saving  the  credit  of  the  corporation  and  enabling  it  to  go  along 
with  its  business.^ 

§  86.  Guaranty  of  Obligations  of  Companies  carrying  on  another 
Business,  how  far  valid. ^  —  (a)  Cases  in  which  the  Power  has 
been  denied.  —  The  well-settled  doctrine,  that  a  company  in- 
corporated for  a  special  purpose  cannot  devote  any  part  of  its 
funds  to  objects  unauthorized  by  its  charter,  however  desirable 
such  an  application  may  appear  to  be,  involves  the  corollary  that 
any  guaranty  is  invalid  which  is  essentially  an  undertaking  that 
a  corporation,  partnership,  or  individual  shall  be  indemnified 
against  loss,  or  receive  certain  profits  in  the  conduct  of  a  busi- 
ness which  the  guarantor  itself  is  not  authorized  to  engage  in. 
The  State  which  confers  the  franchise  of  a  corporation,  as  well 
as  the  stockholders  who  have  invested  their  money  in  the  enter- 
prise, and  the  creditors  who  have  advanced  their  money  on  the 
faith  of  it,  have  a  right  to  assume  that  no  such  diversion  of  the 
corporate  funds  shall  be  raade.^ 

Thus  a  railroad  company  cannot  guaranty  that  the  subscribers 
to  the  stock  of  an  elevator  company  shall  receive  a  certain  per- 
centage of  dividends,  though  it  may  undoubtedly  build  or  rent 
elevators  for  the  purpose  of  facilitating  the  conduct  of  its  own 
business.^ 

The  mere  ground  that  conjectural  or  speculative  benefits  were 
believed  by  the  corporate  ofhcers  to  be  likely  to  result  from  the 
guaranty,  and  that  the  other  party  has  incurred  expenses  on  the 
faith  of  it,  will  not  render  the  contract  enforceable.  Since,  there- 
fore, the  holding  of  a  "  World's  Peace  Jubilee  and  International 
Musical  Festival "  is  an  enterprise  wholly  outside  the  objects  for 

1  Stark  Bank  v.  U.  S.  Pottery  Co.  Mass.  1  ;  s.  c.  39  N.  E.  Rep.  416  ;  Ilum- 
(1860),  34  Vt.  144.  holdt  Mining  Co.  r.  American  Manufactur- 

2  Louisiana  State  Bank  v.  Orleans  Nav-  ing,  Mining,  &  Milling  Co.  (1894),  62  Fed. 
igation  Co.  (1848),  3  La.  Ann.  294  ;  Rep.  356  ;  National  Bank  of  Gloversville 
National  Park  Bank  v.  German-American  v.  Wells  (1880),  79  N.  Y.  498. 
Warehousing,  etc.  Co.  (1889),  116  N.  Y.  ^  Marburj'  v.  Kentucky  Union  Land 
281  ;  s.  c.  26  N.  Y.  St.  Rep.  e?.')  ;  22  N.  Co.  (1894),  62  Fed.  Pep.  335  ;  10  C.  C.  A. 
V,.  Uej).  567  ;  Wahlig  v.  Standard  Pump  393,  and  cases  cited,  alTirming  Tod  v.  Ken- 
.Mannfg.  Co.  (1889),  5  N.  Y.  Suppl.  420;  tucky  Union  Land  Co.  (1893),  57  Fed.  Rep. 
H.  c.  25  N.   Y.  St.   Rep.  864  ;  Mather  v.  47. 

Union  Loan  &  Trust  Co.  (1889),  7  N.   Y.  *  Elevator  Co.  v.  Memphis  &  Cliarlos- 

Snppl.   213  ;  h.  o.  26  N.  Y.  St.  Rep.  58  ;     ton  R.  Co.  (1887),  85  Tenn.  703  ;  s.  c.  5 
Uaher  V.  Raymond  ykato  Co.  (189J),  103     S.  W.  Rep.  52. 


§  86.]  GUAEANTY  OF  BONDS.  121 

which  raih"oad  and  manufacturing  companies  are  established,  a 
guaranty  of  the  expenses  of  such  a  festival,  although  it  will 
have  a  favorable  effect  on  the  profits  of  both  companies,  in  the 
one  case  by  increasing  the  passenger  travel,  and  in  the  other  by 
creating  a  more  active  demand  for  the  articles  manufactured,  has 
been  held  to  be  ultra  vires  the  corporation.^ 

So,  also,  a  guaranty  by  the  secretary  of  a  transportation  com- 
pany that  a  brewing  company  shall  be  paid  for  all  the  beer 
purchased  by  one  of  its  customers  is  ultra  vires  against  the 
shareholders  at  least,  if  not  absolutely  so.^ 

Similarly  it  has  been  held  that  a  guaranty  of  a  loan  made  to 
another  for  the  purpose  of  constructing  a  connecting  road, 
expected  to  be  advantageous  to  the  guarantor,  was  unauthorized, 
and  that,  if  the  guarantor  discharged  the  loan,  it  could  not  hold 
the  second  company  liable  for  the  money.^ 

So,  also,  it  is  an  excess  of  power  for  a  company  organized  to 
manufacture  ironwork  for  mines,  to  guaranty  the  performance 
of  another's  contract,  although  the  object  of  the  guaranty  is  to 
secure  a  customer.* 

According  to  a  recent  English  case,  contracts  of  this  description 
are  ultra  vires,  not  merely  of  the  corporate  officers,  but  of  the  cor- 
poration itself,  and  therefore  incapable  of  ratification  even  by  the 
whole  body  of  shareholders.^ 

This  principle  has  been  accepted  by  at  least  two  courts  of  the 
highest  authority  in  this  country.^ 

1  Davis  V.  Old  Colony  Railroad  (1881),  being  apparently  that  the  contract  was  not 

131  Mass.  258.     An  agreement  by  which  contrary  to  the  policy  of  the  statutes  of  the 

the  E.  Company  agreed  to  make  good  any  State. 

deficiencies  of  the  interest  on  the  bonds  of  2  Lm^as   v.   White   Line   Transfer   Co. 

the  T.  Company,  the  consideration  being  (1886),  70  Iowa,  541  ;  s.  c.  30  N.  W.  Rep. 

that  the  T.  Company   should   deliver   to  771. 

the  E.    Company    all    the    freight   which  8  Madison,    etc.    Plank    Road    Co.    v. 

it  could  control,    and  that  the  T.   Com-  Watertown,  etc.  Plank  Road  Co.  (1859),  7 

pany  should  use  its  influence,  so  far  as  it  "Wis.  59. 

could  with  proper  regard  to  its  own  inter-  *  Humboldt  Mining  Co.  v.  Variety  Iron 

ests,  to   promote   the   business  of  the  E.  Works   Co.    (1894),    62    Fed.    Rep.    356  ; 

Company,    has    been     held     to     contain  s.  c.  10  C.  C.  A.  415. 

nothing  obnoxious  to  the  laws  of  New  5  Ashbury  Ry.  Carriage  &  Iron  Co.  v. 
York.  Tonawanda  Valley  &  Cuba  R.  Co.  Riche,  L.  R.  7  H.  L.  653. 
V.  New  York,  Lake  Erie,  &  West.  R.  Co.  6  Thomas  v.  Railroad  Co.  (1879),  101 
(1886),  4  N.  Y.  St.  Rep.  744  ;  s.  c.  42  U.  S.  71  ;  Davis  v.  Old  Colony  Railroad 
Hun,  496  ;  Bradford,  Eldred,  &  Cuba  R.  Co.  (1881 ),  131  Mass.  258.  In  Lucas  v.  AVhite 
V.  New  York,  L.  E.  &  Western  R.  Co.  Line  Transfer  Co.  (1886),  70  Iowa,  541  ; 
(1888),  2S  N.  Y.  St.  Rep'r,  208;  s.  c.  48  s.  c.  30  N.  W.  Rep.  771,  the  court  left 
Hun,  621.  In  the  last  case  Daniels,  J.,  the  point  undecided,  but  said  that  at 
dissented  on  the  ground  that  such  a  con-  all  events  the  ratification  would  be  inef- 
tract  was  !<Z/r'x  ?^zrc5,  the  ground  of  decision  fectual  unless  the  assent  of  all  the  share- 
by  the  majority  of  the  court  in  both  cases  holders   was    obtained.      In    Indiana    an 


122  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  IV. 

A  less  rigid  rule  perhaps  prevails  in  other  jurisdictions.  Thus 
it  has  been  held  in  New  York  that  when  the  officers  of  a  cor- 
poration engage  in  an  ultra  vires  business  for  the  benefit  of  the 
corporation,  and  when  the  business  is  so  carried  on  with  the 
acquiescence  of  the  stockholders  that  it  actually,  although  illegally, 
becomes  the  business  of  the  corporation,  it  cannot  maintain  an 
action  against  such  officers  for  any  damages  it  has  suffered  in  the 
business.-^ 

So  it  has  been  held  that  a  lumber  company  may  guaranty  rail- 
road bonds  issued  to  construct  a  road  penetrating  the  country 
from  which  the  timber  for  such  lumber  company  is  to  be  drawn, 
and  essential  to  the  successful  prosecution  of  its  business,  where 
the  express  consent  of  the  stockholders  and  directors  is  given 
thereto.^ 

Supposing  the  former  doctrine  to  be  the  true  one,  the  question 
presents  itself,  whether,  in  case  the  guaranty  should  take  the 
shape  of  an  indorsement  of  the  negotiable  securities  of  the  com- 
pany to  whom  the  guaranty  is  given,  a  bona  fide  holder  would  be 
able  to  recover  on  the  guaranty.  The  conclusion  that  he  would 
not  seems  to  be  warranted  by  the  rulings  which  deny  such  a 
holder  the  right  to  recover  on  bonds  issued  for  an  entirely  unau- 
thorized purpose  (see  Chap.  II.),  for  the  principle  is  clearly  recog- 
nized that  the  power  to  issue  bonds  is  coextensive  with  the  power 

acceptance  of  paper  for  an  unauthorized  ^  Mercantile  Trust  Co.  v.  Kiser  et  al, 
purpose  by  a  railroad  company  apparently  (1893),  91  Ga.  636  ;  s.  c.  18  S.  E.  358.  In 
raises  no  legal  liability  even  in  favor  of  an  Cozart  v.  Georgia  Railroad  &  Bkg.  Co. 
innocent  holder  :  Stnead  v.  Indianapolis,  (1875),  54  Ga.  379,  the  court  assumed  that 
Pittsburg,  &  Cleveland  R.  Co.  (1858),  11  an  arrangement  embracing  a  joint  guaranty 
Ind.  104;  though  the  court  held  that  under  of  the  bonds  of  another  company  for  the 
the  special  provisions  of  the  company's  purpose  of  sharing  in  the  advantages  of 
charter  the  guaranty  was  valid.  the  control  obtained  by  the  other  guaran- 
1  Holmes,  Booth,  &  Haydens  v.  Willard  tor  over  the  management  of  the  company 
(1890),  125  N.  Y.  75  ;  s.  c.  25  N.  E.  Eep.  which  had  issued  the  bonds,  was  only 
1083.  It  is,  however,  worthy  of  note  that  ultrn  vires  as  against  the  stockholders  of 
(1)  the  action  here  was  not  by  a  third  the  guarantor  companies, 
party  against  the  corporation  on  an  execu-  In  Macon  &  Augusta  R.  Co.  v.  Georgia 
tory  contract,  like  the  cases  cited  above.  Railroad  &  Bkg.  Co.  (1879),  63  Ga.  103, 
and  that  it  was  virtually  an  attempt  by  the  court  referred  to  the  fact  of  there 
one  set  of  wrongdoers  to  recover  damages  being  no  statute  to  legalize  the  guaranty 
from  another  set  who  had  participated  in  by  the  defendant ;  but  it  is  evident  that  it 
the  same  wrong  ;  and  (2)  that,  apart  from  was  not  intended  to  lay  down  the  I'ule  that 
thi.s  special  ground  for  the  decision,  one  of  a  statute  is  necessary  for  that  purpose 
the  authorities  relied  on  as  to  the  possibil-  where  innocent  ])urchasers  are  suing  on 
ity  of  tlie  stockholders  ratifying  an  illegal  the  guaranty.  The  actual  ground  of  de- 
contract  was  the  decision  in  a  lower  court  cision  in  both  cases  was  that  jtarties  wdio 
to  that  cfTect  in  the  Ashbury  Railway  might  have  objected  successfully  to  the 
Carriagf,  etc.  Co.  case,  supra,  which  was  guaranty  had  by  actpiiescence  lost  tlieir 
overruled  by  the  House  of  Lords.  right  to  do  so. 


§  86.]  GUARANTY   OF   BONDS.  123 

to  guaranty  them.^  But  no  direct  decision  on  the  point  has,  so 
far  as  is  known,  been  rendered.'^ 

(b)  Cases  in  which  the  Power  has  been  conceded.  —  The  prin- 
ciples on  which  the  above  cases  were  decided  will  be  more  clearly 
realized  by  considering  the  decisions  in  which  the  power  of  a 
corporation  to  assist  other  parties  in  their  business  has  been 
sustained.  It  is  evident,  in  the  first  place,  that  a  guaranty  must 
be  valid  if  it  was  executed  to  further  a  transaction  which  the 
corporation  was  competent  to  carry  through  as  principal.  Thus 
a  railroad  company  empowered  to  build,  construct,  and  run,  as  a 
part  of  their  corporate  property,  such  number  of  steamboats  or 
vessels  as  they  may  deem  necessary  to  facilitate  its  business 
operations,  has,  by  implication,  the  power  to  employ  steamboats 
belonging  to  others,  in  connection  with  its  own  business,  under 
an  agreement  by  which  it  guaranties  to  the  proprietors  of  the  boats 
that  their  gross  earnings  shall  not  fall  below  a  certain  sum.  The 
ground  of  the  decision  was  that  the  power  to  secure  steamboat 
connection  by  the  guaranty  was  of  the  same  character  as  that 
of  owning  and  running  a  steamboat,  and  involved  less  responsi- 
bility and  risk  of  loss  on  the  part  of  the  railroad  company.^ 

An  analogous  principle  is  illustrated  in  those  cases  where  the 
power  of  one  corporation  to  guaranty  the  obligations  of  another 
has  been  inferred  from  a  statutory  authority  to  assist  it  by  direct 
contributions,  or  to  participate  in  the  enterprise  to  be  promoted. 
Thus  a  company  authorized  to  aid  another  company  in  construct- 
ing its  road  "  by  means  of  subscription  to  its  capital  stock  or  other- 
wise," for  the  purpose  of  forming  a  connection  with  the  road  of 
the  company  furnishing  the  aid,  may  guaranty  the  bonds  of  such 
other  company,  as  a  part  of  an  arrangement  for  aiding  it.* 

Sufficient  consideration  for  a  guaranty  in  such  a  case  exists, 

1  Railroad  Co.  v.  Howard  (1868),  7  his  notes  and  by  its  credit  mising  money 
Wall.  392.  thereon,  looking  for  reimbursement  out  of 

2  See,  however,  Smead  v.  Indianapolis,  the  goods  to  be  manufactured  and  delivered 
Pittsburg,  &  Cleveland  R.  Co.  (1858),  11  to  it.  Holmes,  Booth,  &  Haydens  v.  Wil- 
Ind.  104,  referred  to,  supra,  a  case  involv-  lard  (1890),  125  N.  Y.  75 ;  s.  c.  25  N.  E. 
ing  an  acceptance  of  a  bill.  Rep.    1083.     By   the    laws   of  New  York 

8  Green  Bay    &  Minnesota   R.    Co.  i\  manufacturing  companies  may  hold  stock 

Union  Steamboat  Co.  (1882),  107  U.  S.  98.  in  corporations  engaged  in  supplying  such 

A   corporation    dealing    in    manufactured  materials  as  are  required  in  the  prosecu- 

goods,  and  needing  them  for  sale,  may,  as  tion  of  their  business.     N.  Y.  L.  1848,  ch. 

a  proper  incident  to  its  business,  extend  40,  §  4. 

linancial  aid  to  a  manufacturer  by  advano  *  Connecticut    Mut.    Life   Ins.    Co.    v. 

ing  him  money  to  enable  him  to  furnish  Cleveland,  Columbus,  k  Cincinnati  R.  Ca 

the  goods,  and  that  this  aid  may  be  ex-  (1863),  41  Barb.  9. 
tended  by  a  loan  of  its  own  money,  or  take 


124  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  IV. 

where  it  is  a  part  of  an  arrangement  between  the  guarantor  and 
other  companies  for  the  purpose  of  securing  a  uniform  gauge  on 
their  connecting  roads  and  tlms  securing  an  increase  of  profits.^ 

So  the  fact  that  a  raih^oad  company  holds  stock  in  another,  and 
that  the  latter  road,  when  constructed,  will  become  a  feeder  to  the 
former  line,  is  a  sufficient  consideration  for  the  guaranty  by  the 
former  of  bonds  issued  by  the  latter  to  aid  in  the  construction  of 
the  road. 2 

Similarly  the  power  of  one  company  to  guaranty  the  bonds  of 
another  is  necessarily  implied  where  the  charter  of  the  former 
authorizes  it  to  effect  a  temporary  or  permanent  consolidation 
with  the  latter,  since  this  virtually  amounts  to  a  permission  to 
risk  its  whole  capital  in  another  business.^ 

Some  courts  have  shown  a  disposition  to  extend  the  operation 
of  these  principles  further  than  is  perhaps  warrantable.  Thus  it 
has  been  held  that  a  guaranty  by  a  brewing  company  of  a  lease  of 
premises  occupied  by  one  of  its  customers  is  not  ultra  vires.^ 

But  this  doctrine  is,  to  some  extent,  inconsistent  with  an  earlier 
decision  by  the  same  court  to  the  effect  that  a  brewing  company 
cannot  guaranty  the  payment  of  rent  by  a  hotel-keeper,  the 
ordinary  rule  being  applied,  that  the  fact  of  the  guarantor's  ex- 
pecting to  reap  some  profit  from  the  arrangement  did  not  give 
the  company  that  direct  interest  in  the  contract  which  alone 
could  justify  such  an  undertaking.^ 

Finally  it  is  evident  that  there  is  no  reason  why  a  corporate 

1  Connecticut  Mut.  Life  Ins.  Co.  t).  Supr.  Ct.,  1892),  18  N.  Y.  Supp.  456.  No 
Cleveland,  Columbus,  &  Cincinnati  R.  Co.  reasons  are  given  for  its  opinion  by  the 
(1863),  41  Barb.  9.  Somewhat  similar  in  court,  which  is  possibly  based  on  the  fact 
principle  is  Smead  v.  Indianapolis,  Pitts-  that  it  is  customary  for  brewers  to  set  up 
VHir<(,  &  Cleveland  R.  Co.  (1858),  11  Ind.  saloon-keepers  in  business  by  advancing 
104,  where  a  railroad  company  empowered  money  to  them,  or  guarantying  the  pay- 
to  make  such  contracts  with  a  company  ment  of  their  liabilities.  If  so,  the  de- 
owning  a  connecting  road  for  the  trans-  cision  may  perhaps  be  justified  on  the 
portation  of  freight  and  passengers,  and  ground  that  the  guaranty,  under  the  pecu- 
for  the  use  of  its  road,  as  the  board  of  liar  circumstances  of  the  case,  was  given  to 
directors   might   think   proper,    was   held  protect  the  guarantor's  loan. 

to  have  power  to  give  its  bills  and  notes  *  Filon  r\  Miller  ]>rewing  Co.    (N.  Y. 

to  the   second    company,  to  enable   it   to  Supr.  Ct.,  1891),  60  Hun,  582;  s.  c.  15  N. 

change  the  gauge  of  its  road.  Y.    Supp.    57.     In    Ridley    v.    Plymouth, 

2  Harrison  v.  Union  Pac.  Ry.  Co.  etc.  leaking  Co.  (1848),  2  Exch.  711,  the 
(1882),  13  Fed.  Rep.  522.  court  seems  to  have  assumed  that  a  con- 

'  .Maibury    v.    Kentucky    Union    Land  tract  to  indemnify  a  sul)-tenant  against  the 

Co.  (18!t4),  62  Fed.  Rcji.  335  ;  s.  c.  10  C.  payment  of  any  of  the  head  rent  was  ultra 

C  A.  393,  foiitaining  an  elaborate  review  vires,  as  tlie  discussion  was  confined  to  the 

of  cascH,  alfinning  Tod  v.  Kentucky  Union  (piostion    whether   the   contract   made   by 

Land  <'n.  (1893),  57  Fed.  Rep.  47.  the  directors  was   invalid    for   the   reason 

*  Fiild  V.  Burr    Brewing   Co.    (N.    Y.  that  it  was  not  under  seal. 


^  86  a.]  GUARANTY   OF   BONDS.  125 

guaranty  designed  to  enhance  the  credit  of  another  company 
should  not  be  regarded  as  within  the  power  of  the  directors, 
where  it  takes  the  shape  of  a  guaranty  of  debentures  of  tlie 
second  company  assigned  to  the  guarantor  in  liquidation  of  a 
debt.  The  exercise  of  such  a  power  is  justifiable  on  the  prin- 
ciple that,  having  lawfully  become  vested  with  the  ownership 
of  the  debentures,  they  are  entitled  to  dispose  of  them  to  the 
best   advantage.^ 

§  86  a.  Guaranty  valid  where  it  forms  Part  of  a  Compromise 
Arrangement  with  a  Debtor  of  the  Guarantor.  —  It  has  been  sug- 
gested obiter  in  an  English  case  by  Lord  Campbell  that  a  con- 
tract by  directors  to  indemnify  a  debtor  on  certain  obligations 
might  possibly  be  upheld  as  a  reasonable  part  of  a  compromise 
arrangement.^ 

This  suggestion  enunciates  a  principle  which  has  been  recognized 
in  some  cases.  A  guaranty  of  the  bonds  of  another  company 
which  a  person  having  a  valid  claim  against  the  guarantor  agrees 
to  accept  in  discharge  of  such  claim  is  a  lawful  transaction.  The 
company  having  the  option  of  paying  the  claim  in  anything  that 
has  a  money  value  may  obviously  impart  additional  value  to  the 
choses  in  action  of  another  obligor  by  making  itself  responsible  for 
their  payment.  In  such  a  case  it  is  of  no  importance  whether 
the  guaranty,  when  originally  executed,  was  ultra  vires  or  not, 
for  the  transfer  of  the  bonds  with  the  guaranty  upon  them  to  a 
creditor  amounts  to  a  renewal  of  the  guaranty  upon  a  sufficient  con- 
sideration then  passing  between  the  parties.  The  transferee  takes 
the  guaranty  as  part  of  the  purchase,  altliough  it  is  not  mentioned, 
the  failure  to  express  the  true  consideration  being  immaterial, 
since  that  is  always  open  to  explanation  and  variation  by  parol.^ 

So  also  bonds  of  one  company  transferred  to  another  in  payment 
of  a  debt  owed  by  the  obligor  may  be  guarantied  by  the  trans- 

1  In  Re  West  of  England  Bank  (1880),  Fed.   Rep.  335  ;    10   C.  C.   A.   393.      See 

14    Ch.    Div.    317,    Vice-Chancellor  Ma-  §§  83,  87. 

liiis   laid  a  good  deal  of  stress  on  the  ex-  ^  [^ij.\^   j,,   gell   (1851),   16  Ad.    &  E. 

tensive  character  of  the  powers  bestowed  (X.  S. )  290. 

on  the  directors ;  but  this  reasoning  is  in  ^  Arnot  v.  Erie  Ry.  Co.  (1876),  67  N.  Y. 

other  respects  of  a  general  description,  and  315;  s.  c.  15  Am.  Ry.  Rep.  133.      Judge 

indicates  clearly  that  the  distinction  pres-  Earl  remarked  that  the  transaction  might 

ent   to  his  mind  was  that    which   exists  be  treated  as  if  the  company  had  said  to 

between   engaging   in    an    entirely   differ-  its  creditor,  "  Here  are  our  bonds  and  here 

ent  business  and   augmenting   the  credit  is  our  guaranty,  take  them  in  satisfaction 

of  one  of  the  company's  debtors  by  giv-  of  your  claims."    The  case  was  followed  in 

ing   currency   to   the   obligations   of    the  Atchison,  etc.  R.  Co.  v.   Fletcher  (1886), 

latter.      To  the  same  effect  see  Marbury  35  Kan.  236;  24  A.  &  E.   234.      See  also 

V.  Kentucky  Union  Land  Co.  (1894),  62  §§  83,  91. 


126  RAILWAY  BONDS  AND  MORTGAGES.       [CHAP.  IV. 

fcree  as  a  means  of  augmenting  the  credit  of  the  bonds,  and 
thus  enabling  the  guarantor  to  obtain  an  adequate  price  from 
a  purchaser.! 

§  87.  Guaranty  of  Bonds  o"wned  by  the  Corporation  is  valid.  — 
The  power  of  a  corporation  to  indorse  the  written  obligations  of 
others,  which  it  holds  as  owner,  with  a  view  to  raising  money  on 
them,  is  as  complete  as  that  of  an  individual.^ 

Hence  a  guaranty  of  the  bonds  of  another  corporation  is  valid, 
when  such  bonds  have  been  taken  by  the  guarantor  in  payment  of 
a  debt  due  to  it.^ 

§  88.  Guaranty  may  be  validated  by  Ratification,  -where  not 
absolutely  ultra  vires.  —  The  rule  that,  where  a  transaction  is 
ultra  vires  merely  as  between  the  directors  and  the  corporators, 
the  latter  may  be  estopped  from  repudiating  it,  either  by  ex- 
press ratification  or  by  such  acquiescence  and  an  enjoyment  of 
its  fruits  that  to  permit  it  to  be  set  aside  would  constitute  a 
fraud,  applies  to  an  indorsement  by  one  company  of  another's 
bonds.* 

Thus  where  the  proper  officers  of  a  corporation  have  negotiated 
a  bill  to  an  indorsee,  representing  it  to  belong  to  the  corporation, 
and  upon  the  faith  of  that  representation  the  indorsee  has  dis- 
counted it  in  the  usual  course  of  business,  advancing  the  proceeds 
to  the  corporation,  the  latter  is  precluded  from  setting  up  that  it 
was  indorsed  without  authority.^ 

So  an  accommodation  indorsement  will  create  a  liability  against 
the  corporation  if  the  stockholders  assent  to  it.^ 

1  Eof^crs  Locomotive  &  Machine  Works  Co.  (1875),  54  Ga.  379  ;  Macon  &  Augusta 
r.  Southern  Railroad  Association  (1888),  34  R.  Co.  v.  Georgia  Railroad  &  Bkg.  Co. 
Fed.  Rei).  278.  (1869),  63  Ga.  103. 

2  Bank  of  Genesee  v.  Patchin  Bank  ^  Bank  of  Genesee  v.  Patchin  Bank 
(1855),  13  X.  Y.  309;  Madison,  etc.  R.  (1855),  13  N.  Y.  309;  s.  p.  Central 
Co.  V.  Norwich  Sav.  Soc.  (1865),  24  Ind.  Bank  v.  Empire  Stone  Dressing  Co. 
457.  Compare  Bonner  v.  City  of  New  (1858),  26  Barb.  23.  An  allegation 
Orleans,  2  Woods,  135,  where  a  railroad  that  the  defendant  has  caused  a  represen- 
company,  having  transferred  by  indorse-  tation  to  be  indorsed  on  tlie  bonds  of  an- 
ment  a  negotiable  bond  issued  by  a  muni-  other  company  to  the  effect  that  the 
cii>al  corporation  to  the  company  as  payee,  payment  of  the  interest  of  those  bonds  is 
was  held  bound  as  indorser,  upon  the  guarantied  by  the  defendant  for  a  specific 
default  of  the  municipal  corporation,  period,  sets  forth  a  good  cause  of  action, 
See  also  Olctott  i'.  Tioga  R.  Co.,  27  N.  Y.  inasmuch  as  ]u-oof  of  the  fact  alleged  will 
546.  make  the  defendant  liable  for  the  interest. 

'  Marbuiy   v.    Kentucky  Union   Land  Opdyke  v.    Pacific  R.   Co.  (1874),  3  Dill. 

Co.  (1804 ),  fi2  Fed.  Rep.  3.35  ;  s.  c.  10  C.  55. 

C,  A.  393  ;  T,i  re.  West  of  England   Bank  «  Martin  v.  Niagara  Falls  Paper  Mfg. 

(1880),  14  Ch.  Div.  317.      See  also  §§  85,  Co.,  122  N.  Y.  165  ;  s.  c.  25  N.   E.   Rep. 

86'-'.  303,    affirming   Martin  v.    Ningnra    Falls 

*  Cozart   V.   Georgia  Railroad  &    Bkg.  Paper  Mfg.  Co.  (1887),  44  Hun,  130. 


§§  89,  90.]  GUARANTY   OF   BONDS.  127 

A  court  will  be  very  slow  to  set  aside  a  contract  of  guaranty 
as  being  ultra  vires,  in  the  sense  of  not  being  beneficial  to  the 
corporations,  where  stockholders,  at  the  time  it  was  executed, 
with  the  information  they  then  possessed,  considered  it  to  be 
beneficial.^ 

§  89.  Negotiability  of  Guaranty.  —  A  general  guaranty  indorsed 
by  one  company  upon  the  bonds  of  another  at  the  time  of  their 
issue  is  negotiable  like  the  bonds  themselves.^ 

But  it  is  otherwise  with  what  is  on  its  face  a  purely  collateral 
guaranty  given  as  a  part  of  the  consideration  of  a  contract  subse- 
quent to  the  issue  of  the  bonds,  as  where  a  lessee  guaranties  the 
interest  on  the  bonds  of  a  lessor.^ 

§  90.  Guaranty  not  invalidated  as  to  Innocent  Purchasers  by  the 
Omission  of  merely  Directory  Formalities.  —  The  principle  that  a 
corporation  acting  within  the  range  of  its  general  authority,  but 
failing  to  comply  with  some  formality  or  regulation  which  should 
have  been  observed,  is  precluded  from  setting  up  its  neglect,  with 
a  view  to  defeat  the  rights  of  the  parties  with  whom  it  has  been 
dealing,  operates  so  as  to  prevent  a  stockholder  of  a  guarantor 
company  from  obtaining  an  injunction  against  the  payment  of  in- 
terest on  the  bonds  guarantied  by  it,  after  the  bonds  have  been 
sold  to  innocent  purchasers  on  the  faith  of  representations  that 
the  legal  prerequisites  to  the  execution  of  the  guaranty  have  been 
duly  complied  with.* 

A  bondholder  suing  a  guarantor  company  on  its  guaranty  is  not 
bound  to  aver  that  the  guaranty  was  given  agreeably  to  the  pro- 
visions prescribed  by  the  enabling  statute  in  regard  to  obtaining 
the  assent  of  the  stockholders,  the  presumption  being  that  the 

1  Marbury  v.  Kentucky  Union  Land  bonds,  and,  in  equity,  could  be  enforced  by 
Co.  (1894),  62  Fed.  Rep.  335  ;  s.  c.  10  C.  a  subsequent  purchaser  of  the  bonds.  In 
C.  A.  393,  affirming  Tod  v.  Kentucky  the  Appellate  Division  of  the  Supreme 
Union  Land  Co.  (1893),  57  Fed.  Rep.  47.  Court  of  New  York,  1st  Dept.,  the  court 

2  Toppan  V.  Cleveland,  Col.  &  Cine.  R.  held  that  coupons  severed  from  bonds 
Co.  (1862),  1  Flip.  74.  A  guarantor  com-  which  had  been  guarantied  became  inde- 
pany  is  liable  on  its  guaranty  for  the  prin-  pendent  obligations,  and  were  not  within 
cipal  when  the  bonds  become  due  by  the  the  guaranty  of  the  principal  and  interest 
terms  of  the  mortgage  on  account  of  default  on  these  bonds.  Clokey  y.  Evansville  & 
in  payment  of  interest,  and  they  are  de-  T.  H.  R.  Co.  (1897),  44  N.  Y.  Supp.  631. 
clared    due   by   the   trustee.     Dougan    v.  O'Brien,  J.,  dissented. 

Evansville  &  T.  H.  R.  Co.,  15  App.  Div.  3  Eastern  Township  Bank  v.  Johnsbury 

483;  s.  c.   44  N.   Y.    Supp.    503.      The  &  S.  C.  R.  Co.  (1889),   40  Fed.  Rep.  423. 

Sujireme  Court  of  Ohio  held  in  Bank  of  In  this  case  the  guaranty  was  not  by  its 

Ashland  V.  Jones  et  al.  (1865),  16  Ohio  St.  terms  made  negotiable,  and  under  the  stat- 

145,  that  a  guaranty  of  the  bonds  of  a  ute  of  Vermont  it  was  not  made  so. 
company   by  its  directors  to  make  them  *  Zabriskie  v.  Cleveland,  Columbus,  & 

salable  would  pass  as  an  incident  of  the  Cincinnati  R.  Co.  (1859),  23  How.  381. 


128 


RAILWAY   BONDS   AND   MORTGAGES. 


[chap.  IV. 


defendant  in  executing  the  guaranty  has  complied  with  all  legal 
requirements  and  regulations.^ 

§  91.  Improper  Exercise  of  Power  of  Guaranty,  Rights  of  Innocent 
Purchaser  not  impaired  by.  —  A  stockholder  in  a  company  which 
has  executed  a  guaranty  under  the  provisions  of  a  statute  empower- 
ing it  to  guaranty  the  bonds  of  another  company  "  whose  road  is 
being  constructed  to  connect  with  its  own,"  cannot,  after  the  bonds 
have  passed  into  the  hands  of  bona  fide  purchasers,  maintain  a 
suit  to  cancel  them  on  the  ground  that  there  was  no  actual  connec- 
tion between  the  roads  at  the  time  the  guaranty  was  executed.^ 

So  also  a  corporation  is  bound  by  the  act  of  its  oificer  in  affix- 
ing its  signature  to  accommodation  paper,  when  such  paper  has 
passed  into  the  hands  of  an  innocent  holder.^ 

In  determining  the  rights  of  a  bona  fide  purchaser  of  guarantied 
bonds,  the  guaranty  will  be  treated  as  if  written  at  the  time  of  the 
purchase,  where  there  is  nothing  to  show  that  the  guaranty  did  not 
pass  as  a  part  of  the  consideration.* 

§  92.  Rights  of  Guarantor  of  Interest  when  postponed  to  those  of 
Bondholders.  —  A  company  which  has  guarantied  the  interest  on 


1  Toppan  V.  Cleveland,  Columbus,  & 
Cincinnati  R.  Co.  (1862),  1  Flip.  74; 
Connecticut  Mut.  Life  Ins.  Co.  v.  Cleve- 
land, Columbus,  &  Cincinnati  R.  Co. 
(1863),  41  Barb.  9. 

2  Atchison,  Topeka,  &  Santa  Fe  R.  Co.  v. 
Fletcher  (1880),  35  Kan.  236;  s.  c.  24  Am. 
&  Eug.  R.  R.  Cas.  234  ;  10  Pac.  Rep.  596. 

3  Bank  of  Genesee  v.  Patchiu  Bank 
(1855),  13  N.  Y.  309  ;  s.  P.  Bridgeport  City 
Bank  c.  Empire  Stone  Dressing  Co.  (1859), 
30  Barb.  421  ;  Madison,  etc.  R.  Co.  v. 
Norwich  Sav.  Soc.  (1865),  24  lud.  457. 
In  the  last-mentioned  case  the  guarantied 
bonds  were  made  payable  by  the  company 
which  issued  them  to  the  company  which 
guarantied  them.  The  assignment  with 
the  guaranty,  therefore,  amounted  to  a  rep- 
resentation that  the  assignor  was  the  owner 
of  the  bon<ls.  The  court  said  that  a  differ- 
ent question  would  have  been  presented  if 
the  bond.s  had  been  payable  to  bearer,  as 
that  would  have  implied  little  or  nothing 
as  to  tlie  fact  of  ownerslu])  by  the  guaran- 
tor, and  would  have  had  but  a  .slight  ten- 
dency to  mislead  as  to  a  circumstance  on 
the  existence  of  wliich  the  power  to  make 
the  guaranty  dejiended.  Granting  that 
every  person  taking  the  bonds  was  bound 
to  take  notice  of  the  limits  of  the  powers 


of  the  company  which  guarantied  them, 
the  question  whether  they  had  been  re- 
ceived by  the  company  in  the  course  of  its 
lawful  business,  or  whether  the  company 
had  no  ownership  or  interest  in  them,  was 
a  question  of  fact,  and  not  of  law.  To  hold 
that  the  purchaser  in  such  a  case  was 
obliged  at  his  peril  to  ascertain  these 
extrinsic  facts  was  a  doctrine  utterly  at 
variance  with  the  settled  principle  of  law 
relating  to  commercial  paper  ;  viz.,  that  the 
general  agent  of  a  corporation,  clothed  with 
a  certain  power  by  the  charter,  or  by  the 
lawful  act  of  the  corporation,  may  use  that 
power  for  an  unauthorized,  or  even  a  pro- 
hibited purpose,  in  his  dealings  with  an 
innocent  third  party,  and  yet  render  the 
corporation  liable  for  his  acts.  Smead  v. 
Indianapolis,  etc.  R.  Co.,  11  Ind.  104,  was 
overruled  as  to  the  distinction  there  taken 
between  paper  executed  beyond  the  corpo- 
rate power,  and  that  executed  within  that 
power,  but  by  an  abuse  of  it  in  the  partic- 
ular instance.  Compare  on  this  subject 
Cha]).  II.,  §  55,  ante. 

*  Rogers  Locomotive  &  Machine  Works 
V.  Southern  Railroad  Association  (1888), 
34  Fed.  Rep.  278,  citing  Arnot  v.  Erie 
Ry.  Co.  (1876),  67  N.  Y.  315;  s.  c.  15 
Am.  Ry.  Rep.  133.     See  also  §§  83,  86  a. 


§  93.]  GUARANTY   OF   BONDS.  129 

the  bonds  of  another  company,  and,  in  pursuance  of  the  contract, 
taken  up  luuturing  coupons,  cannot,  as  against  the  holders  of  the 
bonds,  assert  a  right  to  share  irro  rata  in  the  allotment  of  stock 
in  a  new  company  organized  by  those  bondholders.  When  the 
bondholders  receive  the  amount  of  the  coupons,  they  have  a  right 
to  regard  it  as  payment  and  extinguishment  of  the  interest  which 
diminishes  the  amount  of  their  debt  and  strengthens  their  se- 
curity. To  allow  the  guarantors  under  such  circumstances  to 
be  subrogated  to  the  rights  of  the  bondholders  in  regard  to  the 
coupons,  whether  detached  or  not,  would  violate  the  spirit  of  the 
contract  of  guaranty.^     (Compare  Chap.  II.,  §  37  ) 

§  98.  State-indorsed  Bonds  are  subject  to  Constitutional  Limita- 
tions in  Force  when  Guaranty  Act  was  passed.  —  After  the  ol)li- 
gation  of  a  State  to  guaranty  the  bonds  of  a  railroad  company 
has  lapsed  through  the  non-performance  within  the  time  limited 
of  the  acts  which  were  to  have  entitled  the  company  to  such 
guaranty,  it  can  only  be  renewed  subject  to  such  constitutional 
provisions  as  may  have  been  adopted  since  it  was  first  offered 
to  the  company.'-^ 

And  if  the  legislature  could  not  create  a  debt  when  the  bonds, 
the  validity  of  which  is  questioned,  was  guarantied,  they  are 
equally  without  the  power  to  enact  that  the  Governor's  certifi- 
cation of  guaranty  shall  be  the  conclusive  proof  of  an  indebted- 
ness by  the  State,  and  thereby  cut  off  the  judiciary  from  inquiry 
into  the  validation  of  the  obligation  arising  from  the  guaranty.^ 

1  Child  V  New  York  &  New  England  company.  Mich.,  How.  Ann.  St.  1882, 
R.  Co.  (1880),  129  Mass.  170  ;  s.  c.  2  Am.  §  3413,  Under  what  circumstances  guar- 
&  Eng.  R.  R.  Cas.  329.  anty  may  be  made  of  bonds  of  another 

2  State  V.  Clinton  (1876),  28  La.  Ann.  company.  Mont.,  Civ.  Code  1895,  §§  912, 
393.  923,    Guaranty    of    bonds   of    connecting 

8  State  ea;  reZ.,  etc.  v.    Funding   Board  line.     Nebr.,   Comp.    St.    1895,    §    4026, 

(1876),  28  La.  Ann.  249.  Guaranty   of    bonds   of  connecting   line. 

For  some  of  the  statutes  in  some  of  the  See   New  York   Stock  Corporation    Law. 

States  affecting  the  subject  of  this  chapter  Pa.,  Br.  Purd.   Dig.  1887,  p.  1442,  §  738, 

see  the  following :  Ark.,  Dig.  1894,  §  6321.  Guaranty  of  bonds  of  another  company. 

Guaranty    of   bonds   of  connecting   com-  S.  C,  Gen.  St.  1882,   Guaranty  of  bonds 

panics  ;    §    6322,    By    foreign    companies  of  connecting   road.     Tenn.,  Code  1884, 

connecting.    Ind.,  Rev.  St.  1888,  §  3951  «,  Aid  of  other  roads  by  purchasing   these 

3951  c.  Guaranty  of  bonds  for  construe-  bonds.     W.  Va.,  Acts  1877,  ch.  88  ;  Acts 

tion  of  a  line  beneficial  to  guarantor.     See  1872-73,  ch.  88,  §  40.    Wash.,  Code  1891, 

also  Rev.  St.  1894,  §§5216,  5218.     Kan.,  May  own  and  guaranty  bonds  of  irrigation 

Gen.  St.  1889,   §§1247,  1269,1272,  Pur-  companies.     See  article  on  Power  of  Com- 

chase  or   guaranty   of  bonds   of  another  panies  to  Guaranty,  31  Am.  L.  Rev.  363. 


130 


RAILWAY  BONDS  AND   MORTGAGES. 


[chap.  V. 


CHAPTER   V. 


DEFINITIONS   OP   WORDS    AND   PHRASES. 


§94. 

Introductory. 

§  115.    Materials. 

95. 

All  other  Pioperty. 

116.    Maturity. 

96. 

Apparatus. 

117.    Moneys. 

97. 

Appendages. 

118.    Net  Earnings. 

98. 

Appurtenances. 

119.    Operating  Expenses. 

99. 

Charge. 

120.   Past  due  Interest. 

100. 

Claims. 

121.    Preferred  Stock. 

101. 

Compromise. 

122.    Profits  used  in  Construction. 

102. 

Consolidation. 

123.    Property. 

103. 

Corpus. 

124.    Protected. 

104. 

Earnings. 

124  a.    Railway. 

105. 

First- mortgage  Bonds. 

124  &.   Road-bed. 

106. 

Franchises. 

125.    Road  and  Property. 

107. 

Fuel. 

125  a.   Servant  and  Employee. 

108. 

Going  Concern. 

126.    Sinking  Fund. 

109. 

Income  and  Profits. 

127.    Stock. 

110. 

Income  and  Revenues. 

128.    Tax. 

111. 

In  such  Case. 

129.    Terms,    Conditions,  and   Limita 

112. 

Labor  and  Supply  Creditors. 

tions. 

113. 

Laborer. 

129  a.    Written  Assent. 

114. 

Lien. 

§  94.  Introductory.  —  It  not  iuf requeiitly  happens  that,  in  seek- 
ing to  determine  the  rights  of  bondholders,  the  courts  find  that 
the  inquiry  narrows  itself  down  to  ascertaining  the  precise  signifi- 
cation of  some  particular  word  or  phrase  occurring  in  the  instru- 
ment or  statute  upon  which  those  rights  are  founded.  In  the 
present  chapter  it  is  proposed  to  give  the  judicial  construction 
which  has  been  placed  upon  words  or  ])hrases  of  controlling  im- 
portance, cither  by  way  of  explanation  or  formal  definition.  But 
only  those  cases  are  cited  which  embrace  other  subjects  treated 
of  in  this  book.  For  convenience  of  reference,  an  alphabetical 
arrangement  will  be  adopted. 

§  95.  All  other  Property.  —  This  })hrase,  when  found  neither  in 
the  beginning  of  the  granting  clause  of  a  mortgage,  to  be  after- 
wards f'm|)li!isi/('d  l)y  a  more  minute  description,  nor  at  tlie  end, 
as  a  summary  of  what  precedes  it,  is  interpreted  on  the  principle 


§§  96-99.]  DEFINITIONS    OF    WORDS    AND    PHRASES.  131 

of  ejusdem  generis,  as  being  intended  to  remove  any  doubt  that 
may  arise  as  to  the  meaning  of  the  words  with  which  it  is  imme- 
diately connected.  Thus  where  a  railway  company,  in  pursuance 
of  a  statute,  made  a  mortgage  giving  the  State  of  Alabama  a  first 
lien  upon  all  lands  granted  by  the  United  States  to  the  company, 
and  "  on  the  telegra{)h  line  and  telegraph  offices  along  the  line  of 
said  road  belonging  to  said  company  ;  also  on  the  machine  shops 
and  '  all  other  property,'  "  in  four  specified  States  ;  "  also  on  all 
coal  mines,  etc.  ;  also  on  all  iron  or  mineral  lands,  etc.,"  the  lien 
docs  not  extend  to  certain  town  lots  owned  by  the  company,  but 
not  coming  within  any  of  the  specified  classes.  In  the  position 
in  which  the  disputed  words  occurred,  it  was  held  that  they  were 
only  designed  to  cover  property  of  the  company  in  and  about  the 
telegraph  offices,  machine  shops,  etc.,  in  regard  to  which  a  doubt 
might  otherwise  arise  whether  it  formed  part  of  those  classes  of 
property.^ 

.Where  a  mortgage,  after  specifying  the  road  and  the  several 
parts  of  it,  together  with  the  rolling-stock,  added  "  and  '  all  other 
personal  property '  and  rights  thereto,  and  interest  therein,"  the 
words  "  all  other  personal  property "'  were  thought  probably  to 
refer  to  "  property  appurtenant  to  the  road,  and  employed  in  its 
operation;"  but  the  case  did  not  require  a  direct  decision  of  the 
question.^ 

§  96.  Apparatus.  —  The  word  "  apparatus  "  in  a  mortgage  by  an 
electric  light  com[)any  includes  the  lamps.^ 

§  97.  Appendages.  —  The  phrase  "  road  and  its  '  appendages'  " 
in  a  railroad  charter  does  not  include  the  equipments,  cars,  en- 
gines, or  other  personal  property  of  the  company,  but  is  applied 
to  its  real  estate.^ 

§  98.  Appurtenances.  —  The  meaning  of  this  word,  when  used 
in  mortgages,  is  discussed  in  Chap.  IX.,  jjost. 

§99.  Charge.  —  In  the  Alabama  statute  giving  a  judgment 
creditor  the  right  to  redeem  real  estate  which  has  been  "  sold 
under  execution,"  or  by  virtue  of  any  decree  in  chancery,  or  under 
any  deed  of  trust  or  power  of  sale  in  a  mortgage,  ...  or  payment 
bid  for  the  land,  interest  thereon,  and  "  all  lawful  '  charges,' "  the 
word  "  charges  "  implies  every  lien,  or  incumbrance,  or  claim  the 
purchaser  may  have  upon  the  premises,  and  for  whicli,  at  law  or 
in  equity,  he  would  be  entitled  to  hold  the  lands  as  security,  or 

1  Alabama  v.  Montague  (1886),  117  Power  Co.  (1894),  103  Mich.  89 :  s.  c.  61 
U.  S.  602.  N.  W.  275. 

2  Peniiock  v.  Coe  (1859),  23  How.  117.  *  State     Treasurer    v.     Somerville     & 
»  Ramsdell  v.  Citizens'  Electric  Light  &     Eastou  R.  Co.  (1859),  28  N.  J.  L.  21. 


132  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  V. 

to  the  satisfaction  of  which  a  court  of  equity  would  condemn  them. 
It  includes,  therefore,  a  mortgage  debt  antedating  the  levy  of  the 
attachment  in  the  suit  in  which  the  creditor  seeking  redemption 
obtained  judgment.^ 

A  mortgage  provided  for  the  approval  by  the  trustees  of  the 
expenditure  of  all  moneys  realized  from  the  sale  of  the  bonds,  and 
required  the  written  assent  of  said  trustees  to  all  contracts  of  the 
company  before  such  contracts  should  be  a  "  charge  "  upon  said 
funds,  A  contractor  for  the  construction  of  a  part  of  the  road 
claimed  a  lien  upon  the  funds  from  the  sale  of  bonds.  The  court, 
however,  held  that  the  term,  as  used  in  the  mortgage,  did  not,  in 
a  technical  sense,  import  a  lien  upon  those  funds.  It  simply  war- 
ranted that  a  claim  such  as  this  of  the  contractor  might  be  payable 
out  of  them.  For  instance,  the  company  might  have  appropriated 
the  funds  to  the  satisfaction  of  such  claims,  and,  by  thus  depriv- 
ing itself  of  their  control,  have  conferred  upon  the  contractor  the 
right  to  have  them  applied  to  I'eimburse  him  for  services  ren- 
dered or  materials  furnished.^ 

§  100.  Claims.  —  In  a  decree  ordering  the  conveyance  of  a  rail- 
road which  had  been  sold,  it  was  declared  that  the  conveyance 
should  not  have  "  the  effect  of  discharging  any  part  of  the  said 
property  from  the  payment  of  '  claims  '  or  demands  chargeable 
against  the  same."  Several  claims  were  then  specifically  enumer- 
ated, all  relating  to  matters  which  would  come  in  during  the  pro- 
cess of  the  administration.  It  was  held  that  the  word  must  be 
confined  to  these  matters,  and  could  not  be  construed  as  charging 
on  the  purchasers  the  burden  of  prior  underlying  mortgagees, 
none  of  which  were  being  foreclosed.^ 

§  101.  Compromise.  —  Under  this  term  are  comprehended 
agreements  between  two  or  more  persons  for  the  ascertainment 
of  their  rights  when  there  is  some  question  in  controversy  between 
thom,  or  some  difficulty  in  the  enforcement  to  the  uttermost 
farthing  of  the  rights  of  the  claimant.* 

§  102.  Consolidation.  —  "  The  words  '  consolidate '  and  '  consoli- 
dation,' as  used  in  statutes  authorizing  and  ratifying  the  union  or 
combinntion  of  several  railroad  corporations  into  one,  have  not 
acquired  a  recognized  judicial  construction  which  imports  that  all 
the  companies  are  dissolved  and  merged  into  one  new  company  ; 

^  C.r'i'^'^Hv.  IJaiik.s  (1877),  f)9  Ala.  3U.  *  Fry,  L.  J.,  in  Mercantile  Investment 

2  Dillon   V.    i'.aruani  (1874),   21    Wall.  Tnist  Co.  v.   International  Co.  of  Mexico 

430.  (181)3),  1   Ch.    484,  n.,  68   L.  T.  60.3,  n., 

•I  CpnlralTnist  Co.  u.  Waliash.St.Louis,  reprinted  in  note  to  40  Am.  &  Eng.  Corp. 

&.  Pii<!.  R.  ('u.  (1887),  30  Fed.  Kep.  332.  Cas.,  p.  337. 


§§  103-105.]        DEFINITIONS    OF   WORDS   AND    PHRASES.  133 

on  the  contrary,  the  terms  arc  equally  applicable  to  a  union  of 
two  or  more  companies  in  such  a  way  that  one  of  them  is  con- 
tinued in  existence,  though  under  a  new  name  and  with  enlarged 
powers,  while  the  others  are  merged  in  and  absorbed  by  it ;  and 
when  the  statute  authorizes  the  companies  to  unite  and  consolidate 
to  such  an  extent  and  upon  such  terms  as  may  be  agreed  on  by 
and  with  the  company  or  companies  entering  into  agreement  with 
them,  the  character  of  the  consolidation  is  determined  by  the 
stii)ulations  of  the  agreement."  ^ 

§  103.  Corpus.  —  The  corpus  of  an  estate  is  the  material  object, 
or  species  of  property,  of  which  the  estate  is  composed.  As  ap- 
plied to  a  railroad,  the  term  embraces  the  "  roadway,  embank- 
ment, superstructure,  and  equipment."  ^ 

The  fund  obtained  from  the  sale  of  this  property  in  foreclosure 
proceedings  is,  of  course,  subject  to  any  charges  or  liens  estab- 
lished against  the  property  itself ;  and  although  the  franchises  of 
the  company  are  not  specified  by  Mr.  Justice  Bradley  in  the  case 
just  cited  as  a  portion  of  the  corpus,  this  omission  is  presumably 
owing  to  the  fact  that  his  definition  was  given  rather  in  view  of 
the  character  of  the  question  before  him  —  the  right  of  one  oc- 
cupying another's  land  in  bad  faith  to  be  allowed  compensation 
for  improvements  thereon  —  than  as  a  comprehensively  accurate 
explanation  of  the  expression.  So  far  as  regards  liens  on  the 
proceeds  of  the  foreclosure  sale,  there  is  nothing  in  the  adjudged 
cases  to  warrant  the  conclusion  that  the  money  derived  from  the 
sale  of  the  franchises  is  any  less  a  part  of  the  corpus,  than  the 
money  derived  from  the  sale  of  the  rest  of  the  property.  It  has 
been  held,  in  fact,  that  the  corpus  includes  franchises  and  other 
intangible  property,  where  claims  of  preferred  creditors  are  in 
question.^ 

§  104.  Earnings.  —  This  word  includes  the  receipts  arising  from 
the  company's  operating  as  a  railroad  company,  but  not  those 
from  sales  of  lands  granted  to  it  by  the  government,  nor  fictitious 
receipts  from  the  transportation  of  its  own  property.^  (See  also 
under  "  Income  and  Revenues,"  and  "  Net  Earnings.") 

§105.  First-mortgage  Bonds. — An  agreement  by  a  railroad 
company  to  deposit  "  first-mortgage  bonds  "  as  a  security  for  an 
issue  of  municipal  bonds  has  been  held  to  have  been  sufficiently 
complied  with,  although  the  mortgage  securing  the  bonds  deposited 

1  Meyer  v.  Johnston  (1879),  64  Ala.  s  Turner  v.  Indianapolis,  B.  &  W.  R. 
603 ;  s.  c.  8  Am.  &  Eng.  R.  R.  Cas.  584.  Co.  (1878),  8  Biss.  315. 

2  Jackson  v.  Ludeling  (1879),  99  U.  S.  *  Union  Pacific  R.  Co.  v.  United  States 
513,  521.  (1879),  99  U.S.  402. 


134  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  V. 

was  junior  to  one  previously  given  to  the  State  to  secure  a  bond 
of  indemnity  for  advances  made  to  the  mortgagor.^ 

§  106,  Franchises.  —  A  "  franchise"  is  a  special  privilege  con- 
ferred by  government  upon  individuals,  which  does  not  belong  of 
common  right  to  citizens  generally.  It  is  not  essential  to  every 
franchise,  even  in  its  legal  sense,  that  it  should  in  all  cases  be 


exclusive.^ 

"  A  corporation  is  itself  a  franchise  belonging  to  the  members 
of  the  corporation  ;  and  a  corporation,  being  itself  a  franchise, 
may  hold  other  franchises  of  the  corporation."  ^ 

'•  The  essence  of  a  corporation  consists  in  a  capacity  (1)  to 
have  perpetual  succession  under  a  special  name  and  in  an  arti- 
ficial form ;  (2)  to  take  and  grant  property,  contract  obligations, 
sue  and  be  sued  by  its  corporate  name  as  an  individual ;  and 
(3)  to  receive  and  enjoy  in  common  grants  of  privileges  and 
immunities."  * 

Tlie  ordinary  franchise  of  a  railroad  company  is,  by  virtue  of 
the  sovereign  power  of  eminent  domain,  to  condemn,  take,  and 
use  lands  for  the  purpose  of  a  public  highway,  and  to  take  tolls 
from  those  who  use  it  as  such ;  ^  or,  as  it  has  been  expressed  in 
another  case,  the  franchise  of  a  railroad  is  the  right  derived  from 
the  charter  to  construct  and  maintain  the  road  in  its  entire  length 
on  the  route  designated  in  the  charter,  and  to  receive  compen- 
sation for  the  transportation  of  persons  or  property  over  that 
road.*" 

This  franchise  to  maintain  and  enjoy  a  road  is  not  restricted 
afid  limited  to  what  is  barely  necessary  for  that  purpose,  but 
extends  to  what  is  appropriate  and  useful  and  actually  in  use. 
It  includes  the  right  of  appropriating  lands  for  the  construction 
of  necessary  appurtenances  without  which  the  road  could  not  be 
successfully  operated.'^ 

1  Commonwealth  v.  Inhabitants  of  ^  Coe  v.  Columbus,  Piqua,  &  Indian- 
Willianistown  (1892),  156  Mass.  70  ;  s.  c.  apolis  R.  Go.  (1859),  10  Ohio  St.  372,  cited 
SON.  E.  Re]).  472;  36  Am.  &  Eng.  R.  in  Memphis  &  Little  Rock  R.  Co.  v.  Rail- 
Corp.  Cas.  574.  road  Connnrs.  (1884),  112  U.  S.  609  ;   At- 

2  Chicago  &  Western  Indiana  R.  Co.  v.  kinson  v.  Marietta  &  Cincinnati  R.  Co. 
Dunbar  (1880),  95  111.  571  ;  s.  c.  1  Am.  &  (1864),  15  Ohio  St.  21  ;  Sliamokin  Valley 
Eng.  i;.  R.  Cas.  214.  R.  Co.  v.  Livermore  (1864),  47  Pa.  St.  465, 

3  Pierce  M.  Emery  (1856),  32  N.  II.  484,  cited  in  West  Pennsylvania  R.  Co.  v. 
cited  on   this  point  in  Coe  v.   Columbus,  Johnston  (1868),  59  Pa.  St.  290. 

Piqua,  &  Indianapolis  R.   Co.  (1859),  10  6  Colt  v.  Barnes  (1879),  64  Ala.  108. 

Ohio  St.  :j72,  and  in  Morgan   v.  Donovan  ^  Northern  Pacific  R.  Co.   v.  Shimmell 

(1877).  58  Ala.  241.  (188C),  6  Mont.  161  ;  s.  c.  9  Pac.  Rep.  889  ; 

*  Thomas  y.  I )akin  (1839),  22  Wend.  9  ;  Lawrence  r.  Morgan's  L.  &  Tex.   R.  &   St. 

see  p.  71,  Judge  Nelson's  opinion.  Ship  Co.  (1887),  39  La.  Ann.  427  ;  8.  c.  2 


§  107.]  DEFINITIONS   OP   WORDS   AND   PHRASES.  135 

When  the  word  "  franchises  "  is  used  in  the  plural  number  in  a 
railroad  mortgage,  it  signifies  rights  and  privileges  which  are 
essential  to  the  operations  of  the  corporation,  and  without 
which  its  roads  and  works  would  be  of  little  value,  —  sucli  as 
the  franchise  to  run  cars,  to  take  tolls,  to  appropriate  earth 
and  gravel  for  the  bed  of  its  road,  or  water  for  the  engines, 
and  the  like.^ 

It  will  also  include  a  grant  by  a  municipal  corporation  of  a 
right  of  way  through  certain  streets  of  a  municipality,  with  tiie 
right  to  construct  a  railroad  thereon  and  occupy  them  in  its  use.^ 
But  exemption  from  taxation  is  not  ordinarily  embraced  by  this 
term  when  used  as  descriptive  of  the  property  which  passes  to  the 
purchasers  at  a  foreclosure  sale.     (See  Chap.  XXXIV.) 

§  107.  Fuel.  —  Under  a  statute  giving  a  lien  to  "  all  persons 
who  should  do  any  work  or  labor  in  constructing  or  improving 
the  road-bed  of  railroad  companies  within  Missouri,"  and  to  "  all 
persons  who  shall  furnish  ties,  '  fuel,'  bridges,  or  materials  "  to 
such  companies,  Mr.  Justice  Brewer  ruled  that  the  word  "  fuel  " 
did  not  enlarge  the  meaning  of  the  other  words, "  materials,  etc.," 
so  as  to  give  it  a  different  meaning  from  that  which  "  materials  " 
bore  in  prior  statutes,  but  merely  added  a  specified  matter  for 
which  a  lieh  was  given.  The  language  used  could  not,  therefore, 
be  made  to  cover  an  article  like  lubricating  oil,  which,  although  a 
part  of  the  supplies  necessary  for  the  operation  of  the  road,  did 
not  go  into  the  permanent  structure  and  thus  come  within  the 
principle  underlying  the  statutes  which  give  a  lien  for  labor  and 
materials.^ 

In  another  case  it  was  contended  that  a  lien  should  be  awarded 
for  certain  scales,  trucks,  letter-presses,  and  similar  articles,  on 
the  ground  that,  by  the  use  of  the  word  "  fuel "  the  legislature 
intended  to  enlarge  the  scope  of  the  word  "  materials,"  and  make 
it  include  everything  which  passed,  not  merely  with  the  structure, 
but  into  the  permanent  equipment ;  but  the  same  learned  judge 
adhered  to  the  opinion  he  had  expressed  in  his  first  opinion,  and 
refused  to  allow  the  claim.* 

So.  Rep.  69  ;  30  Am.  &  Eng.  R.  R.  Cas.  R.  Co.  v.  Delamore  (1885),  114  U.  S.  50  ; 

309  ;  see  also  20  Am.  L.  Rev.  867  et  scq. ;  s.  c.  5  Sup.  Ct.  Rep.  1009. 
Pierce  v.   Emery  (1856),    32  N.  H.  484  ;  3  Central   Trust   Co.    v.   Texas    &    St. 

Hatcher  v.  Toledo,  Wab.  &  West.  R.  Co.  Louis   R.    Co.    (Waters    Pierce    Oil    Co., 

(1872),  62  111.  477  ;  s.  c.  16  Am.  Ry.  Rep.  Intervener)  (1885),  23  Fed.  Rep.  703. 
405.  4  Central    Trust   Co.    v.   Texas   &   St. 

1  Morgan  v.  Louisiana  (1876),  93  U.  S.  Louis  R.  Co.  (Borden,  Intervener)  (1886), 

217.  27  Fed.  Rep.  178,. 

•-  New  Orleans,  Spanish  Fort,  &  Lake 


136  RAILWAY    BONDS   AND   MORTGAGES.  [CHAP.  V. 

§  108.  Going  Concern.  —  This  expression  is  properly  applied 
to  a  corporation  which,  although  it  may  be  insolvent,  still  con- 
tinues to  transact  its  ordinary  business.^ 

This  term  cannot  be  used  of  a  railroad  unless  it  is  constantly 
in  operation.  If  the  rolling-stock  is  lying  idle  in  the  round-houses 
or  upon  the  tracks,  the  company  is  not  discharging  the  duty  it 
owes  to  the  public  for  the  franchises  granted  to  it.  To  discharge 
this  obligation,  the  company  must  keep  its  road  in  operation, 
transporting  passengers  and  freight.^ 

§  109.  Income  and  Profits.  [In  hands  of  receiver  for  cred- 
itors.]—  The  phrase  "income  and  profits"  signifies  the  surplus 
after  all  expenses  and  repairs  and  necessary  replacements  have 
been  made.^ 

§  110.  Income  and  Revenues.  —  In  the  "income  and  revenues" 
of  a  railroad  company  are  included  all  the  income  and  revenues 
of  the  company,  and  these  words  necessarily  embrace  the  "  earn- 
ings "  of  the  road,  when  used  in  a  statute  creating  a  lien  in  favor 
of  the  State,  as  a  security  for  a  loan  of  its  bonds.* 

§  111.  In  such  Case. — Where  a  clause  in  a  mortgage  provided 
that,  in  case  the  payment  of  interest  should  be  in  default  for  six 
months  the  whole  principal  of  the  bonds  should,  at  the  option  of 
the  holders  of  a  majority  in  interest  of  the  bonds,  become  due 
and  payable ;  and  it  was  declared  further  that,  "  in  such  case," 
it  should  be  lawful  for  the  trustee  to  enter  on  and  operate  the 
road,  it  was  held  that  a  mere  default  in  the  payment  of  interest 
for  six  months  was  not  enough  to  confer  this  extraordinary  power 

1  White,  Potter,  &  Page  Mfg.  Co.  v.  would  treat  as  a  preferential  debt  a  claim 

Pettee's    Importing   Co.    (1887),   30    Fed.  for  the  coal  or  wood  consumed  in  generating 

Rey).  865.  the  steam  which  killed  them,  but  would 

In  Green  v.  Coast  Line  R.  Co.  (1895),  deny  any  preference  whatever  to  a  judg- 

97  Ga.  15,  37  ;  s.  c.  24  S.  E.  Rep.   814,  ment    for    damages    resulting    from    the 

820,  the  late  Chief  Justice  Buckley  refers  homicide.     Public  policy  certainly  favors 

to  tlie  doctrine  of  a  debt  against  a  com-  keeping  the  franchises  active,  but  it  favors 

pany  assuming  a  preferential  character,  as  more  the  security  of  all  who  as  a  part  of 

against  the  claims  of  bondholders  by  reason  the  public  are  liable   to   suffer   by   their 

of  its  having  been  incurred  in  keeping  the  activity.     No  policy  is  subserved  by  going 

road  a  "going  concern,"  in  these  words:  wrong.     Nonfeasance  is  better  than   mis- 

"  There  seems  to  be  a  tlieory  that  if  inort-  feasance  ;  idleness  is  better  than  homicidal 

gageil  roads  can  be  kept  'going  concerns,'  mischief  resulting  from  a  vicious  or  negli- 

it  mattr-rs  not  wliat  else  may  stop.     That  gent  activity." 

the  puljiic  is  decidedly  the  most  important  '■'  Eells  v.  Johann  (1886),  27  Fed.  Rep. 

'  going  concern  '  in  existence;  appeal's  to  be  327. 

overlooked.     As  a  part  of  the  public  the  ^  Strang  v.  Montgomery  &  Eufaula  R. 

h'isl)an<l  an<l  son  of  Mrs.  Green  were  '  gi)ing  Co.  (1879),  3  Woods,  613,  619. 
concerns,'  and  the  going  of  the  railroad  *  Tompkins    v.    Little    Rock    &    Fort 

was  the  cause  of  their  ceasing  to  be  such.  Sniitli  K.  Co.  (188-1),  15  Fed.  Rep.  6,  14. 
The  ciuses  on  which  we  arc  animadverting 


§§  113,  114.]        DEFINITIONS   OP   WORDS   AND   PHRASES.  137 

on  the  trustee,  and  that  the  words  "  in  such  case  "  implied  that 
the  right  of  entry  was  to  arise  only  after  the  option  of  the  bond- 
holders had  been  exercised  in  the  manner  specified.^ 

§  112.  Labor  and  Supply  Creditors.  —  These  words  include  SUCh 
as  have  wrought  and  given  of  their  substance  under  promises  of 
prompt  payment  from  the  railway  company,  and  for  that  reason 
are  preferred  creditors  of  the  income.^ 

§113.  Laborer. — The  term  "laborer,"  in  an  order  requiring 
the  mortgagees  to  pay  claims  for  services,  embraces  counsel  en- 
gaged by  the  receiver  for  services  necessary  to  the  successful 
management  of  the  road.^ 

Railroads  are  made  liable  by  Rev.  Stats.  Me.,  c.  52,  §  141,  for 
the  wages  of  laborers  employed  by  contractors  for  labor  actually 
performed  on  the  road.  One  who  superintends  the  building  of 
bridges  at  an  agreed  compensation  of  seven  dollars  per  day,  keeps 
au  account  of  the  men's  time  and  makes  out  their  pay-rolls,  has 
been  held  not  to  be  a  "  laborer "  within  the  meaning  of  this 
statute.* 

§114,  Lien. — Taken  in  its  widest  sense,  the  term  "lien" 
includes  every  case  in  which  personal  or  real  property  is  charged 
with  the  payment  of  a  debt.  Statutory  liens  depend  upon  the 
construction  of  the  statute,  and  contract  liens  on  the  terms  of  the 
contract."  ^ 

A  common-law  lien  has  been  defined  as  a  right  in  one  man  to 
retain  that  which  is  in  his  possession  belonging  to  another,  till 
certain  demands  of  him,  the  person  in  possession,  are  satisfied;^ 
but  this  definition  is  clearly  too  narrow  to  cover  equitable  liens, 

1  Union  Trust  Co.  v.  Missouri,  K.  &  s.  c.  33  Am.  Rep.  348  ;  nor  one  who  has 
T.  R.  Co.  (1880),  26  Fed.  Rep.  485.  contracted    to    do    a    certain    amount    of 

2  Frank  v.  Denver  &  Rio  Grande  R.  grubbing,  notwithstanding  he  Labors  with 
Co.  (1885),  23  Fed.  Rep.  123,  128.  the  men  employed  by  him  to  do  the  work: 

^  Bayli.ss     v.     Lafayette,     IVIuncie,     &  Rogers   v.   Dexter   &   Piscata([uis    R.    Co. 

Bhjomiiigton  R.  Co.  (1S79),  9  Biss.  90.  (1893),   85  Me.  372;  s.  c.   27  Ath   Rep. 

•*  Bhtnoliard   v.    Portkmd   &    Rumfoi-d  257. 
Falls  Ry.   (1895),   87  Me.  241 ;    s.   c.   32  5  Sullivan  v.  Portland  &  Kennebec  R. 

Atl.  Rep.  890.  Co.  (1874),  4  Cliff.  212,  225.     For  general 

It   was   said   in  the  opinion:  "In  the  discussion  of  the   meaning  of  this  word 

construction  of  statutes  similar  to  our  own,  see    19    Am.    Law    Rev.    783.      See    also 

it  has  been  held  that  the  word  'laborer'  Peck  v.  .Jenness  (1849),  7  How.  612,  619. 
does  not  include  a  book-keeper  or  a  super-  ^  Hammons  v.   Barclay,    2   East,    227. 

intendent:"  Wakefield  v.    Fargo  (1882),  That   the   use   of  the  word  "lien"  in  a 

90    N.    Y.    213;    nor   a    civil    engineer:  statute  may  not  always  be_  conclusive  as 

Pennsylvania     &     Delaware    R.     Co.     v.  to    the    actual    existence    of    a    lien,    see 

Leuffer  (1877),  84  Pa.  St.   168  ;  s.  c.  24  Tompkins  v.    Little  Rock  &  Fort  Smith 

Am.  Rej).  189;   nor  an  assistant  engineer:  R.    Co.    (1888),   125    U.  S.   109  ;    S.  C.  8 

Brockway  v.  Innes  (1878),  39  Mich.  47  ;  Sup.  Ct.  Rep.  762. 


138  RAILWAY   BONDS    AND   MORTGAGES.  [CHAP.  V. 

and  the  liens  created  by  statute  for  the  benefit  of  certain  classes 
of  creditors  with  specially  meritorious  claims. 

§  115.  Materials.  —  In  Central  Trust  Co.  v.  Texas  &  St. 
Louis  R.  Co.^  it  was  said  that,  when  employed  in  relation  to  rail- 
roads, the  word  "  materials,"  in  statutes  giving  laborers,  etc.,  a 
lien,  is  limited  to  such  articles  as  pass  into  the  permanent  struc- 
tures and  equipment  of  the  company.  (See  supra,  as  to  fuel  not 
being  "  material "  in  this  sense.) 

In  a  railroad  mortgage  the  word  "  materials "  relates  only  to 
such  materials  as  the  railroad  company  there  had,  and  wliich 
were  capable  of  being  conveyed.  If  the  words  "  used  in  operat- 
ing the  road  "  relate  to  all  kinds  of  property  specifically  named, 
tiie  word  "  materials  "  would  be  limited  by  them.  The  word  does 
not  cover  "  chairs  "  which  were  lying  on  the  ground  in  stacks  and 
had  never  become  appurtenant  to  the  road.^ 

Coal  furnished  to  an  electric  light  and  power  company,  used  by 
it  to  operate  its  plant,  has  been  held  to  be  "  material  furnished  " 
within  the  meaning  of  section  1255,  Code  of  North  Carolina, 
which  disables  corporations  from  mortgaging  their  property  freed 
from  liability  on  judgments  obtained  against  them  "  for  labor  per- 
formed, for  material  furnished,"  etc.  ^ 

§  116.  Maturity.  —  The  word  "  maturity,"  in  its  application  to 
bonds  and  similar  instruments,  refers  to  the  time  fixed  for  their 
payment,  which  is  the  termination  of  the  period  they  have  to 
run.^ 

§  117.  Moneys.  —  Where  the  mortgage  conveys  "  all  the  in- 
come, rents,  tolls,  profits,  receipts,  '  moneys,'  rights,"  etc.,  the  use 
of  the  word  "  moneys  "  does  not  enlarge  the  rights  of  the  mort- 
gagee so  as  to  convey  to  him  such  moneys  as  are  simply  past  in- 
come or  earnings.  The  words  are  prospective,  not  retrospective, 
in  their  operation ;  the  only  exception  to  this  rule  being  the  case 
in  which  the  mortgagor  has  in  his  possession  moneys  received 
from  the  sale  of  rolling-stock,  lands,  or  other  tangible  property.^ 

§  118.  Net  earnings  have  been  variously  defined  as  the  ex- 
cess of  the  gross  earnings  over  the  expenditures  defrayed  in  pro- 
ducing them  aside  from  and  exclusive  of  the  exi)cnditurcs  for 
construction  and  the  ordinary  expenses  incident  to  operating  and 

1  2.3  F(!tl.  Rop.  70.3  (1885).  *  United  States  v.  Union  Pac.   R.  Co. 

2  Farmers'  Loan  &  Trust  Co.  v.   Com-     (1875),  91  U.  S.  72. 

mcrcial  Bank  (18C0),  11  Wis.  211.  ^  Dow  v.   Memphis  &  Little  Rock  R. 

8  Pocaliontas   Coal   Co.    v.   Ilomlorson     Co.  (1884),  20  Fud.  Rep.  772. 
Eleetric  Li.'.,'lit  k  Power  Co.  (N.  C,  189G), 
21  S,  E.  Rei>.  22. 


§  118.]  DEFINITIONS   OP   WORDS   AND    PHRASES.  139 

maintaining  the  roads  and  woi'ks  of  a  railroad  company  ;  ^  as  the 
gross  receipts,  less  the  expenses  of  operating  the  road  to  earn 
such  receipts,  2  or  what  is  left  of  the  income  after  paying  the 
legitimate  cost  and  expense  of  working  earnings  by  the  use  of 
the  property.^ 

Nor  "  is  the  meaning  of  '  net  earnings '  limited  to  earnings  in 
any  one  particular  mode,  but  tlie  expression  is  broad  enough  to 
include  the  revenue  to  be  derived  from  the  property  in  any 
manner."  * 

Thus,  where  a  company  operates  leased  roads  in  addition  to  its 
own,  the  "'net  earnings'  of  the  road"  are  not  limited  to  those 
derived  from  its  own  road,  but  embrace  all  those  which  accrue 
from  the  business  done  on  the  leased  roads  also.^ 

But  the  net  earnings  of  one  of  the  roads  may  also  be  segre- 
gated by  the  express  terms  of  the  mortgage ;  as  where  the  L. 
railroad  gave  the  C.  railroad  a  mortgage  of  the  "net  earnings" 
of  all  business  coming  to  it  from  the  C.  road.  In  this  case  the 
"net  earnings"  specified  were  ascertained  by  deducting  from  the 
gross  receipts  of  such  business  the  expenses  of  operating  the  road 
by  which  the  receipts  were  earned.  The  expenses  were  found 
by  proportion,  and  the  proper  proportion  charged  to  the  business 
in  dispute.^ 

For  further  information  as  to  this  term,  see  25  Am.  L.  Reg. 
N.  S.  558,  and  the  notes  in  1  Am.  &  Eng.  R.  R.  Cas.  517,  and  23 
Am.  &  Eng.  R.  R.  Cas.  745. 

1  Union  Pacific  R.  Co.  v.  United  States  2  gt.  John  v.   Erie  E.  Co.   (1872),   10 

(1879),  99  U.  S.   402,   420  ;    followed    in  Blatch.  271,  affirmed  in  St.  John  v.  Erie 

Barry  v.  Missouri.  K.  &  T.  K.  Co.  (1886),  R.  Co.  (1874),  22  Wall.  136,  149. 

27  Fed.  Rep.  3,  5.  ^  Vermont  &  Canada  R.  Co.  v.  Vermont 

In  United  States  v.  Kansas  Pacific  Ky.  Central  R.  Co.  (1877),  50  Vt.  500;  s.  c. 
Co.  (1879),  99  U.  S.  455,  the  court  14  Am.  Ry.  Rep.  497. 
excluded  the  money  needed  to  place  the  *  Phillip's  Trustee  v.  Ea.stern  R.  Co. 
road  in  proper  repair,  but  not  actually  et  al.  (1884),  138  Mass.  122,  128  ;  s.  c.  22 
expended  for  that  purpose,  the  expenses  Am.  &  Eng.  R.  R.  Cas.  247,  in  which  case 
of  the  Land  Department  and  the  interest  on  the  words  of  the  statute  were  referred  to 
the  funded  debt,  which  had  priority  over  by  the  court  in  these  words:  "The  phrase 
the  lien  of  the  United  States,  from  the  '  net  earnings,'  as  used  in  this  act,  is  sub- 
amount  to  be  charged  against  the  gross  stantially  synonymous  with  '  net  income ' 
earnings  to  ascertain  the  "  net  earnings  ;  "  or  '  net  profits,'  and  required  all  the  sums 
but  allowed  the  equipment  account,  or  received  for  a  lease  of  the  road  to  be 
replacing  and  rebuilding  rolling-stock,  applied  as  the  statute  required  the  net 
machinery,  etc.,  the  amounts  paid  for  earnings  to  be  applied." 
dejiot  grounds  and  the  expenses  of  the  *  gt.  John  v.  Erie  R.  Co.  (1874),  22 
same,    and   the   construction    account,   or  Wall.  136. 

improvements  and  additions  to  the  track,  ^  Schmidt  v.   Louisville  &   N.  R.   Co. 

where  they  had  been  actually  paid  out  of  (1894),  95  Ky.  289  ;   s.  c.  25  S.  W.  Rep. 

the  earnings  of  the  road,  to  be  deducted.  494. 


140  RAILWAY    BONDS    AND    MORTGAGES,  [CHAP.  V. 

As  to  the  meaning  of  "  earnings,"  "  income,"  and  "  revenues," 
see  those  words. 

"  Net  earnings,"  in  a  by-law  providing  that  dividends  should  be 
paid  therefrom,  are  the  gross  receipts,  less  the  expenses  of  oper- 
ating the  road,  and  less  also  interest  on  such  of  tiie  company's 
indebtedness  as  it  is  prudent  and  proper  to  keep  in  a  permanent 
form,  and  less  also  any  floating  or  temporary  liabilities  which 
good  judgment  would  require  to  be  presently  paid,  and  less  also 
any  annual  contribution  to  a  sinking  fund  for  the  payment  of 
debts,  whenever  expedient  and  proper  to  provide  such  a  fund/ 

§  119.  Operating  Expenses.  —  Interest  on  receivers'  certificates 
made  payable  out  of  the  corpus  of  the  mortgaged  property,  and 
costs  and  allowances  to  the  master  or  other  officers  of  court,  are 
not  a  part  of  the  "  operating  expenses  "  of  a  road  to  be  taken 
into  account  in  determining  the  "  net  earnings  "  of  a  road.^ 

A  Massachusetts  statute,  passed  for  the  relief  of  a  railroad  com- 
pany, provided  that  it  might  mortgage  its  property,  and  that, 
after  default  in  the  payment  of  interest  should  continue  for  twelve 
months,  the  trustees  named  might,  at  the  request  of  a  certain 
proportion  of  the  bondholders,  take  possession  and  proceed  to 
foreclosure ;  but  no  provision  was  made  for  disposing  of  the  gross 
income  of  the  corporation  while  it  was  in  control  of  the  road, 
except  that  authority  was  given  for  applying  the  net  earnings 
over  and  above  operating  expenses  to  certain  specified  purposes. 
It  was  held  that,  until  the  mortgagees  should  enter,  the  income 
of  the  road  remained  liable  to  attachment  by  trustee  process 
founded  on  claims  arising  out  of  the  operation  of  the  road  since 
the  statute  went  into  effect,  and  that  a  claim  founded  on  damage 
done  to  property  at  a  crossing  must  be  paid  to  one  suing  by  such 
process,  as  a  part  of  the  "  operating  expenses,"  which  the  com- 
pany was  empowered  to  liquidate  before  the  application  of  the 
earnings,  in  pursuance  of  the  act.*^ 

In  a  later  case  an  attempt  was  made  to  show  that  the  interest 
on  certain  bonds  securing  a  loan  and  guarantied  by  the  lender 
came  under  the  "  o{)erating  expenses "  mentioned  in  the  same 
statuto  ;  but  this  view  did  not  prevail.* 

W  lie  re  a  railroad  company  is  authorized  by  a  statute  embody- 
ing a  comj)i()mise  agreement  to  remain  in  possession,  and  apply 

1  H.'lfa.st  &  Mooseliead  Lake  R.  Co.  v.  8  Smith  v.  Eastern  R.  Co.  (1878),  124 
City  of  Belfast  (188.''>),  77  Me.  445  ;  s.  c.     Mass.  154. 

1  Atl.   K(;i).  302;  23  Am.   &  Kii<,'.  R.  R.  *  Kastcni  R.  Co.  v.  Rogers  (1878),  124 

Cas.  736.  Mass.  527. 

2  I '.lair  V.    St.  Louis,   K.  &  T.  K.  Co. 
(1885),  25  Fed.  Jiep.  232,  234. 


§§  120-122.]         DEFINITIONS   OF   WORDS    AND   PHRASES.  141 

to  the  payment  of  the  incumbrances  any  portion  of  its  net  earn- 
ings over  and  above  its  "  operating  expenses,"  including  therein 
its  necessary  expenditures  for  construction,  insurance,  taxes, 
renewals,  and  repairs  needful  to  maintain  its  road  in  good  condi- 
tion, and  its  rentals,  certificates  of  indebtedness,  and  such  pay- 
ments as  may  be  required  by  the  statute,  the  term  "  operating 
expenses  "  has  a  wider  scope  than  that  which  it  ordinarily  bears.^ 

The  "  operating  expenses "  which  are  commonly  to  be  paid 
under  reorganization  schemes  before  the  common  stockholders 
are  entitled  to  the  benefit  thereof  do  not  include  money  spent  on 
steel-rail  betterments,  or  on  steamers  owned  by  the  company  to 
make  them  more  efficient,  or  the  purchase  of  engines  and  cars. 
Nor  should  the  expense  account  be  charged  with  an  estimate  de- 
preciation, where  the  money  so  charged  was  not  actually  spent 
upon  repairs.^ 

§  120.  Past  due  Interest.  —  This  term  can  only  mean  interest 
which  has  matured  and  which  is  collectible  on  demand.^ 

§  121.  Preferred  Stock.  — Stock  of  this  description  differs  from 
other  capital  stock  merely  in  the  preference  given  to  it  in  the 
payment  of  dividends,  and  does  not  confer  on  the  holder  any 
other  privilege  or  entitle  him  to  priority  in  any  other  respect.^ 

A  preferred  "  stockholder  "  is,  therefore,  not  a  creditor ;  nor  is 
a  dividend  guaranteed  to  him.^ 

§  122.  Profits  used  in  Construction.  —  This  expression  does  not 
embrace  earnings  expended  in  repairs  for  keeping  the  property 
up  to  its  normal  condition,  but  refers  to  new  constructions  adding 
to  the  permanent  value  of  the  capital ;  and  when  these  are  made 

1  Phillips  V.  Eastern  R.  Co.  (1886),  companies,  means  money  invested  in  the 
138  Mass.  122  ;  s.  c.  22  Am.  &  Eng.  R.  R.  business  of  the  company,  represented  by 
Cas.  247.  certificates  of  shares  known  as  '  capital '  or 

2  Mackintosh  v.  Flint,  P.  &  M.  R.  Co.  '  capital  stock,'  and  there  is  no  other 
(1888),  31  Fed.  Rep.  582  ;  s.  c.  36  Am.  &  known  stock  belonging  to  .such  companies 
Eng.  R.  R.  Cas.  340.  having  a  distinct  and  separate  character- 

3  Coquard  v.  Bank  of  Kansas  City  istic  from  'capital  stock,'  what  effect  can 
(1882),  12  Mo.  App.  261.  the  word  'preferred,'  when  attached  to  it, 

*  St.  John  r.   Erie  R.   Co.    (1872),  10  have  except  to  indicate  that  in  the  case  it 

Blatch.  271  ;  State  ex  reL,  etc.  v.  Cheraw  is  to  have  some  advantage  which  otherwise 

&  Chester  R.  Co.  (1881),  16  S.  C.  524.  it  would  not  have  ?     In  other  words,  in 

In  the  latter  case  the  court  said  :"  The  such  case  can  it  be  anything  else  than 
word  'preferred'  is  relative  to  something  'preferred  capital  stock,'  or  a  'preferred 
else,  and  it  means  that  the  thing  to  which  interest '  in  the  money  paid  in  by  stock- 
it  is  attached,  whatever  that  may  be,  has  holders,  divided  into  shares  and  repre- 
some  advantage  over  other  things  of  the  sented  b}'  certificates  showing  the  share  of 
same  character,  which  but  for  this  advan-  each  holder  ?" 

tage  W'ould  be  like  the   former.     If  then  ^  Belfast   v.   Moosehead    Lake   R.    Co. 

the    term    'stock,'    when    employed    in  v.   City  of  Belfast  (1885),   77   Me.   445; 

connection  with  railroad  or  other  chartered  s.  c.  23  Am.  &  Eng.  R.  R.  Cas.  736. 


142  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  V. 

to  take  the  place  of  prior  structures,  it  includes  only  the  increased 
value  of  the  new  over  the  old  when  in  good  repair.^ 

§  123.  Property.  —  A  mortgage  conveying  "  all  the  present  and 
in  future  to  be  acquired  'property'  of  the  L.  Branch  of  the  B. 
it  S.  W.  R.  Co.,  that  is  to  sat/,  all  the  branch  railroad,"  etc.  (these 
words  being  followed  by  a  detailed  description  of  the  different 
kinds  of  property  embraced  by  the  general  words),  do  not  cover 
the  interest  which  the  mortgagor  has  previously  acquired  in  mu- 
nicipal subscriptions  which  have  been  previously  obtained  and 
accepted  by  the  company  for  the  purpose  of  raising  money  to 
build  tbe  road.  The  court  conceded  that  the  word  "  property  " 
was  sufficiently  broad  and  comprehensive  to  include  every  kind  of 
possession  and  right,  and  that  "  in  its  literal  acceptation  it 
might  include  such  rights,  whether  legal  or  equitable,  absolute  or 
contingent,  as  the  railroad  company  had  acquired"  under  the  aid- 
bonds  ;  but  was  of  opinion  that  such  a  construction  of  the  mort- 
gage was  not  imperatively  demanded,  and  was  also  inconsistent 
with  the  intention  of  the  parties,  as  deduced,  according  to  the 
ordinary  rules  established  for  the  interpretation  of  written  instru- 
ments, from  the  addition  of  the  explanatory  phrase,  "  that  is  to 
say,"  and  the  subsequent  enumeration  of  several  specific  kinds  of 
property .2     See  also  §  95. 

§  124.  Protected.  —  In  Wabash,  St.  L.  &  Pac.  R.  Co.  v.  Ham^ 
it  was  contended  by  the  holders  of  certain  unsecured  equipment 
bonds,  issued  by  one  of  the  companies  which  had  entered  into  a 
consolidation  agreement,  that  a  stipulation  in  that  agreement 
that  the  bonds  and  debts  of  the  former  companies  "  shall  be  pro- 
tected by  the  said  consolidated  company  "  created  a  lien  in  their 
favor.  The  court,  however,  declined  to  accept  this  view.  As  the 
agreement  "  to  protect "  expressly  referred  to  the  time  of  pay- 
ment, and  the  effect  of  the  "  equipment  bonds  "  had  been  merely 
to  create  a  personal  and  unsecured  debt  of  one  of  the  former 
companies,  the  words  "  shall  be  protected"  must  be  taken  to  have 
the  same  meaning  which  they  ordinarily  have  in  promises  of  men 
of  business  to  "  protect"  drafts  or  other  debts  not  made  or  con- 
tractf'd  by  themselves,  —  that  is  to  say,  a  personal  obligation  to 
see  that  tlioy  were  paid  at  maturity. 

§  124*7.  Railway.  — A  Canadian  court  has  said  :  "There  is  no 
technical  moaning  in  tlie  term  "  rnilway."  A  tramway  and  street 
railway  are  Ijoth  railways  in  the  sense  of  a  road  constructed  with 

1  Grnnt  y.  ir^utfonl  &  New  Haven  R.  2  Smith   v.    McCullou<,'h    (1881),     104 

Co.  (1876),  <ja  U.  S.  225.  U.  S.   2'>. 

8  114  U.  S.  587  (1885). 


§§  124  6-125  a.]       DEFINITIONS   OF   WORDS   AND   PHRASES.  143 

parallel  lines  of  rails  on  wliich  cars  or  trains  operate.  They 
may  both  be  moved  by  the  same  power,  but  there  the  analogy 
ends."  1 

§  124  6.  Road-bed.  —  This  word,  when  used  in  reference  to  rail- 
ways, means  the  foundation  on  which  the  superstructure  of  the 
railway  rests,  and  the  superstructure  is  the  sleepers  or  ties,  rails 
and  fastenings.  This  includes  the  side  tracks,  which  form  a  part 
of  the  railway.^ 

§  125.  Road  and  Property.  —  A  statute  by  which  certain  bonds 
issued  by  the  State  of  Missouri  were  to  be  a  first  lien  on  a  "  road 
and  its  appurtenances  "  was  amended  so  as  to  make  the  same 
bonds  a  lien  on  the  "  road  and  property  "  of  the  company.  It 
was  held  that  this  alteration  must  be  presumed  to  have  been 
made  advisedly,  and  to  have  been  intended  to  enlarge  the  applica- 
tion of  the  lien.  The  word  "  property  "  was  therefore  taken  to 
comprehend  the  lands  which  had  previously  been  granted  by 
Congress  to  aid  the  construction  of  the  road,  and  by  the  State  to 
the  railroad  company,  and  the  contention  negatived,  that  the  lien  of 
the  State  was  confined  to  the  road  and  such  property  immediately 
connected  with  the  road  as  was  necessary  for  its  operation.^ 

§  125a.  Servant  and  Employee.  —  Words  "servant"  and  "em- 
ployee "  in  act  providing  that  a  court  granting  a  foreclosure  decree 
should  order  that  the  purchaser  should  pay  "  all  sums  due  by 
the  foreclosed  company  to  a  servant  or  employee,"  do  not  include 
a  secretary  of  the  company.'* 

This  decision  was  to  a  great  extent  rendered  out  of  deference 
to  the  supposed  effect  of  a  previous  decision  in  the  State  court.^ 

1  Edison  Gen.  Electric  Co.  v.  Edmonds  S.  602,  where  the  words  "  all  other  prop- 
(1895),  4  Br.  Col.  Rep.  354,  holding  the  erty  "  occurring  in  the  middle  of  an  enu- 
Eailwa}'  Act  of  Canada  not  to  apply  to  meration  of  several  kinds  of  property, 
undertakings  in  the  nature  of  tramways  or  were  construed  on  the  principle  of  cjusdem 
street  railways.  generis,  and  held  not  to  extend  to  lands 

2  Standard  Insurance  Co.  v.  Langstou  which  did  not  fall  within  the  classes  of 
(1895),  60  Ark.    381,    385,    citing  Santa  property  specified.     See  §  95,  "»/^. 

Clara  County  i^.  Southern  Pac.  Ry.  (1886),  *  Wells  v.  Southern  Minn.  Ry.  Co.,  1 

118    U.   S.  394,    413;    San    Francisco    v.  McCrary,  18. 

Central  Pacific  R.  Co.  (1883),  63  Cal.  467,  6  whitehead   v.    Vineyard    (1872),    50 

469  ;  San  Francisco,  etc.  R.  Co.  v.   State  Mo.  30.     There,   after  a  consideration  of 

Board  (1882),  60  Cal.  12,  34  ;  Cass  County  all  the  acts  relating  to  the  lands,  of  the 

1).  Chicago,  B.  &  Q.  R.  Co.  (1889),  25  Neb.  policy    of    the   State    in   regard    thereto, 

348,  3.')3.  and  of  the  contemporaneous  construction 

^  Wilson  V.  Boyce  (1873),  2  Dill.  539,  which  various  officials  appeared  to  have 

affirmed  in  Wilson  i-.  Boyce  (1876),  92  U.  placed  upon  the  legislation,  it  was  deter- 

S.  320.  mined  that  the  lands  were  not  covered  by 

This  case  was  commented  on  and  dis-  the  phrase  in  question, 
tinguished  in  Alabama  v.  Montague,  117  U. 


144  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  V. 

But  the  opinion  of  the  Missouri  court,  as  given  in  a  recent  case, 
is  to  the  effect  that  Whitehead  v.  Vineyard  was  not  intended  to 
have  the  scope  attributed  to  it  by  the  federal  courts,  and,  so  far 
as  the  ruling  of  the  latter  is  a  matter  of  mere  precedent,  its 
authority  is  seriously  shaken.^  ^ 

§  126.  Sinking  Fund. — This  term  signifies  a  fund  created  for 
extinguishing  or  paying   a  funded  debt.^ 

§  127.  stock.  Capital  Stock,  —  The  words  "stock"  and 
"capital  stock"  may  be  defined  as  meaning  the  fund  or  property 
belonging  to  a  firm  or  corporation,  and  used  to  carry  on  its 
business.^ 

When  shares  of  "  stock "  of  a  corporation  or  a  majority  of 
shares  are  spoken  of  in  statutes,  it  usually  refers  to  the  subscribed 
or  issued  or  outstanding  shares.* 

§  128.  Tax.  —  The  State  of  Arkansas  passed  an  act  which 
provided  for  the  issue  of  aid-bonds,  and  declared,  among  other 
things,  that  a  "  tax "  should  be  imposed  from  time  to  time  on 
any  railroad  company,  to  which  the  bonds  should  be  issued,  such 
"  tax  "  to  be  equal  in  amount  to  the  annual  interest  upon  the 
bonds  then  outstanding  and  unpaid,  and  further  that  the  "  taxa- 
tion "  was  to  continue  until  the  amount  of  bonds  issued  to  such 
company  with  the  interest  thereon  should  have  been  paid  by  the 
company,  in  which  case  the  said  road  should  be  "  entitled  to  a 
discharge  from  all  claims  or  liens  on  the  part  of  the  State."  It 
was  held  in  the  Supreme  Court  of  the  United  States  that  the  ex- 
action made  by  the  State,  under  such  circumstances  and  for  such 
purposes,  was  not  a  "  tax,"  although  so  designated,  and  that  the 
statute,  therefore,  did  not  create  any  charge  on  the  property  of 
the  com[)any  which  could  be  enforced  by  the  purchasers  of  the 
bonds,  their  only  remedy  being  against  the  State.  It  was  denied 
that  the  provision  for  the  "  discharging  from  all  claims  or  liens  " 
was  sufiicicnt  of  itself  to  establish  a  lien,  if  the  lien  did  not  other- 
wise attach.  Such  a  provision,  it  was  conceded,  might  be  used  in 
aid  of  construction,  if  there  were  any  doubt;  but,  upon  an  exami- 
nation of  the  rest  of  the  statute,  the  conclusion  reached  was  that 

1  Wilson  V.  Beckwith  (1893),  117  Mo.  Co.  v.  Pyne  (1887),  30  Fed.  Rep. 
61  ;    s.  c.   22  S.   W.   Rep.   639.      In    this     86. 

case  it  was  held  tliat  the  lien  oeated  by  ^  Commonvvenlth    v.    Lehigh    Avenue 

the  act  of  18.^J,  March  3,  did  not  extend  Ry.  Co.  (1889),  129  Pa.  St.  405,  414  ;  s.  c. 

the  StateVs  lien  over  the  railroad's  lands  18  Atl.  Rep.  414,  498  ;  7  Ry.  &  Corp.  L. 

granted  by  Congress  to  the  State  and  by  J.  43. 
the  Slate  to  the  company.  *  Market  Street    TJy.    Co.  v.    Ilellnian 

2  K.-tchum  V.  City  of  Buffalo  (1856),  (1895),  109  Cah  571,  588  ;  s.  c.  42  Pac. 
14   N.  \      356,   379  ;    Chicago   &   I.    R.  Rep.  221. 


§§  129,  129  a.]       DEFINITIONS   OP   WORDS   AND    PHRASES.  145 

there  was  nothing  therein  from  which  the  creation  of  a  lien  might 
be  reasonably  implied.^ 

§  129.  Terms,  Conditions,  and  Limitations.  —  A  mortgage  con- 
tained a  provision  to  the  effect  that,  in  case  of  a  foreclosure  sale, 
and  a  written  request  by  a  majority  of  the  bondholders,  the  trustee 
might  purchase  the  property  for  the  use  and  benefit  of  those  bond- 
holders, after  which  he  might  take  such  lawful  measures  as  he 
deemed  for  the  interest  of  the  said  bondholders,  to  organize  a  new 
company  for  their  benefit,  the  organization  to  be  effected  upon  such 
"  terms,  conditions,  and  limitations,"  and  in  such  a  manner  as  the 
holders  of  a  majority  of  the  outstanding  bonds  secured  by  the 
mortgage  should  direct.  It  was  held  that  the  primary  object  of 
the  deed  being  to  secure  to  the  bondholders  a  prior  right  to  the 
entire  property,  the  subject  of  the  trust,  so  far  as  it  was  needed 
for  the  payment  of  the  bonds,  no  exception  could  be  taken  to  a 
decree  which  fully  preserved  this  right,  and  directed  an  organiza- 
tion of  the  new  company  which  was  for  the  benefit  of  the  bond- 
holders. "The  power"  (to  carry  out  the  reorganization),  said 
Mr.  Justice  Strong,  "  was  coupled  with  a  large  discretion.  The 
majority  was  authorized  to  define  the  '  terms,  conditions,  and 
limitations  '  under  which  the  new  company  should  be  organized. 
What  those  should  be  was  thus  left  to  the  discretion  of  the  donors 
of  the  power.  '  Terms,  conditions,  and  limitations  '  are  broad 
words.  Let  it  be  conceded  that  the  new  organization  must  be 
for  the  benefit  of  the  holders  of  the  first-mortgage  bonds,  how  can 
we  say  it  is  not  for  the  benefit  of  those  holders  that  entirely  sub- 
ordinate interests  are  conceded  to  junior  lien  creditors  and  to  the 
stockholders  of  the  former  corporation  ?  How  can  we  say  that 
such  a  concession  was  beyond  the  discretion  with  which  the 
agents  of  the  bondholders,  that  is  to  say,  the  majority,  were 
clothed  ?  Such  concessions  are  generally  made  in  reorganization 
of  railroad  companies,  and  they  are  regarded  as  beneficial  to  the 
joint  lienholder.2 

§  129  a.  Written  Assent.  —  The  "  written  assent  "  required  by 
the  statute  of  New  York  of  stockholders  to  the  execution  of  a 
mortgage  by  a  corporation  is  accomplished  by  the  adoption  of  a 
resolution  authorizing  the  issue  of  such  a  mortgage  at  a  meeting  of 
stockholders  by  a  vote  of  those  holding  more  than  two-thirds  of  the 
stock,  and  entered  on  the  minutes  and  attested  by  the  secretary .^ 

1  Tompkins  v.  Little  Rock  &  Fort  2  gggg  y.  Central  R.  Co.  (1878),  99 
Smith  R.  Co.  (1887),  125  U.  S.  109  ;  s.  c.     U.  S.  334,  343. 

8  Sup.  Ct.   Rep.    762,   affirming  s.  c.  18  3  Beebe  v.  Richmond  Light,  Heat,   & 

Fed.  Rep.  344.  Power  Co.  (1895),  13  Misc.  Rep.    (N.  Y.) 

737  ;  s.  c.  35  N.  Y.  Suppl.  1. 
10 


146 


RAILWAY   BONDS   AND   MORTGAGES. 


[chap.  VI. 


CHAPTER   VI. 


CONSTRUCTION    CONTRACTS. 


§  130.  Construction  Contracts  violating 
Constitutional  or  Statutory  Pro- 
visions. 
131.  Securities  issued  under  Construc- 
tion Contracts  held  invalid  be- 
cause Directors  were  interested. 


§  132.    Lien  of  Construction  Contracts. 

133.  The  Equities  of  the  Contractor. 

134.  Suits  to  have  Construction  Con- 
tracts declared  invalid. 


It  is  not  of  course  within  the  scope  of  this  work  to  cite  all 
cases  involving  contracts  for  the  construction  of  railroads.  Such 
contracts  generally  provide  for  the  payment  of  the  work  done,  in 
the  securities  of  the  company,  and  only  questions  arising  out  of 
this  feature  of  such  contracts,  with  a  few  exceptions,  are  consid- 
ered here.  Construction  contracts  should  be  entered  into  with 
due  reference  to  any  provisions  of  tlie  constitution  and  statutes 
of  the  State  under  whose  law  the  company  is  created,  or  which 
govern  the  issue  of  securities  provided  for  in  the  contract. 

§  130.  Construction  Contracts  violating  Constitutional  or  Stat- 
utory Provisions.  —  Reference  to  constitutional  provisions  touching 
this  subject  are  given  in  a  note  to  Chapter  1.^ 

Some  constitutions,  as  will  be  seen  by  reference  to  Chapter  I., 
provide  that  "  no  corporation  shall  issue  stock  or  bonds,  except 
for  money,  labor  done,  or  property  actually  received,  and  all 
fictitious  increase  of  stock  or  indebtedness  shall  be  void."  It 
has  been  held  that  the  object  of  such  a  provision  in  the  Pennsyl- 
vania Constitution  was  to  interdict  every  issue  of  stock  or  bonds 
which  does  not,  in  good  faith,  represent  a  consideration  in  labor 
done,  or  property  or  money  received,  substantially  corresponding 
in  value  with  the  face  amount  of  the  issue.  An  issue  of  stock 
and  l)ond8  to  a  contractor,  with  a  face  value  of  more  than  three 
times  tlio  value  of  tlie  labor  and  materials  furnished  by  him,  was 
accordingly  set  aside  at  the  suit  of  the  corporation.^ 

Nor  can  a  construction  contract  stand  which  involves  an  issue 

1  See  supra,  Chap.  L 

2  Kew  Castle  Northern  R.  Co.  v.  Simpson  (1S84),  21  Fed.  Rep.  533. 


§§  131,  132.]  CONSTRUCTION   CONTRACTS.  147 

of  bonds  entirely  disregarding  a  statute  which  enacts  that  railroad 
companies  shall  be  limited  in  their  indebtedness  to  the  amount  of 
the  capital  stock  subscribed,  and  authorizes  an  issue  of  bonds  not 
to  exceed  double  the  amount  actually  paid  up  of  the  stock  sub- 
scribed, with  a  further  provision  tliat  the  indebtedness  cannot  be 
increased  beyond  the  amount  of  stock  subscribed  until  the  sub- 
scriptions shall  have  been  fully  paid  in.^ 

§  131.  Securities  issued  under  Construction  Contracts  held  in- 
valid because  Directors  ■wrere  interested.  —  The  rights  of  the 
holders  of  bonds  issued  in  pursuance  of  a  construction  contract 
are  sometimes  determined  by  an  application  of  the  well-settled 
principle  that  a  transaction  in  which  the  directors  have  a  per- 
sonal interest  opposed  to  the  interest  of  their  company  will  be  set 
aside  at  the  instance  of  parties  interested.  Thus  in  a  case  in 
which  two  directors  were  to  derive  benefit  from  a  construction 
contract,  and  the  construction  company  furthermore  agreed  to 
relieve  twelve  shareholders  in  the  railroad  company  from  paying 
any  subsequent  assessments  on  the  stock  they  had  subscribed  for, 
it  was  held  that  the  contract  could  not  be  enforced  in  equity, 
when  resisted  by  other  shareholders,  and  that  the  mortgage  bonds 
issued  in  pursuance  of  the  contract  to  the  construction  company 
were  voidable  at  the  election  of  those  affected  by  the  fraud,  until 
they  passed  into  the  hands  of  bona  fide  purchasers.^ 

So,  also,  where  bonds  were  issued  to  a  contractor,  and  by  him 
assigned  to  a  director  who  was  concerned  in  awarding  the  con- 
tract, the  court  ordered  them  to  be  delivered  up,  on  the  ground 
that,  if  they  should  pass  into  the  hands  of  an  innocent  holder,  the 
company  would  be  liable  upon  thcm.^ 

§  132.  Lien  of  Construction  Contracts.  —  This  matter  is  impor- 
tant as  affecting  the  relative  rights  of  the  contractor  and  the  bond- 
holders, but  construction  contracts  are  not  generally  intended  to 
give  any  lien  to  the  contractors,  nor  is  it  the  tendency  of  the 
courts  to  endeavor  to  establish  such  liens. 

1  But  it  is  to  be  observed  that  the  general  principle  referred  to  in  the  text  is 
opinion  in  tliis  case  does  not  show  enforced  in  the  following  cases,  among 
whether  the  stocks  and  bonds  received  by  others  :  Twin  Lick  Oil  Co.  v.  Marbury 
the  contractor  were  issued  as  a  payment  (1875),  91  U.  S.  587  ;  Wardell  v.  Union 
for  labor  and  materials.  Pac.  R.  Co.  (1880),  103  U.  S.  651,  affirm- 

2  Thomas  y.  Brownville,  Fort  Kearney,  ing  s.  c.  4  Dill.  3-30,  339;  Gardner  i-. 
&  Pac.  R.  Co.  (1883),  109  U.  S.  522.  Butler  (1879),  30  N.  J.  Eq.  702;  Euro- 
See  also  Barr  v.  New  York,  L.  E.  &  West,  pean  &  N,  A.  R.  Co.  v.  Poor  (1871),  59 
R.  Co.  (1891),  125  N.  Y.  263  ;  s.  c.  9  Ry.  Me.  277;  Great  Luxembourgh  R.  Co. 
Corp.  &  L.  J.  174  ;  26  N.  E.  Rep.  145.  v.    Magenay,   25    Beav.    586  ;    Benson   v. 

3  Flint    &    Maniuette    River    R.    Co.  Heathon,  1  Y.  &  Coll.  326. 
V.    Dewey    (1866),    14   Mich.    477.      The 


148 


RAILWAY  BONDS   AND   MORTGAGES. 


[chap.  VI. 


(a)  Contract  when  not  a  Lien  on  the  Proceeds  of  Bonds.  —  There 
are  no  reported  cases,  it  is  believed,  where  the  construction  con- 
tract has  been  held  to  give  the  contractor  a  lien  upon  the  proceeds 
of  the  bonds.  In  the  absence  of  a  statutory  provision,  the  general 
rule  is  that  unsecured  floating  debts  for  construction  are  post- 
poned to  the  lien  of  a  valid  mortgage  duly  recorded,  and  of  bonds 
secured  thereby  and  held  by  bona  fide  purchasers  for  value.^ 

If,  therefore,  there  is  no  statutory  provision,  the  question 
whether,  in  any  given  case,  the  contractor  has  obtained  a  lien 
upon  the  whole  or  a  specific  part  of  the  company's  property, 
superior  to  that  of  a  subsequent  mortgage,  must  be  determined 
by  general  equitable  principles,  the  rights  of  the  parties  being 
ascertained  by  a  consideration  of  the  mortgage  and  the  construc- 
tion contract.^ 


^  Porter  v.  Pittsburg  Bessemer  Steel 
Co.  (1S87),  120  U.  S.  649  ;  s.  c.  30  Am. 
&  Eng.  R.  R.  Cas.  472.  In  this  case  the 
court  remarked  that  it  was  not  aware  of 
any  well-considered  adjudged  case  that 
sustained  the  contrary  proposition. 

2  In  Dillon  v.  Barnard  (1874),  21 
Wall.  430,  affirming  s.  c.  1  Holmes,  386, 
a  provision  made  the  assent  of  the  trustees 
necessary  "  before  the  expenditure  should 
be  a  charge,  upon  any  of  the  sums  received." 
It  was  argued  that  the  word  charge  was 
here  synonymous  with  lien,  and  that  a 
specific  lien  was  created  in  the  contractor's 
favor  when  the  trustees  had  consented  to 
the  payment  of  his  claim ;  but  the  court 
rejected  this  construction,  being  of  the 
opinion  that  the  context  showed  the  word 
to  have  been  employed  in  the  general 
acceptation  of  a  claim  that  might  be  made 
payable  out  of  the  proceeds,  and  not  in 
any  technical  sense.  The  clause  was  de- 
signed not  for  the  benefit  of  the  contrac- 
tor, but  to  increase  the  security  against 
a  wasteful  expenditure  of  the  proceeds. 
Mr.  Justice  Field  remarked  that  the  case 
was  not  different,  in  its  essential  features, 
from  those  cases  of  daily  occurrence 
where  the  expectation  of  a  contractor 
that  funds  of  his  emjdoyer  derived  from 
Bpecific  sources  will  be  devoted  to  the 
jtayment  of  his  services  or  materials,  is 
disap[)ointed,  an<l  laid  down  the  general 
rule  as  follows:  "  Before  there  can  arise 
any  lien  on  the  fumls  of  the  employer, 
there  must  be,  in  addition  to  an  express 


promise,  upon  which  the  contractor  relies, 
some  act  of  appropriation  on  the  part  of 
the  employee  depriving  himself  of  the 
control  of  the  funds,  and  conferring  upon 
the  contractor  the  right  to  have  them 
applied  to  his  payment  when  the  services 
are  rendered  or  the  materials  are  furnished. 
There  must  be  a  relinquishment  by  the 
employer  of  the  right  of  dominion  over 
the  funds,  so  that  without  his  aid  or  con- 
sent the  contractor  can  enforce  their 
application  to  his  payment  when  his  con- 
tract is  complete."  The  clause  merely 
meant  that,  as  against  the  parties  to  the 
mortgage,  the  contractor  was  not  entitled 
to  any  benefit  except  that,  upon  the  assent 
of  the  trustees  being  given  to  his  contract, 
the  use  of  the  moneys  for  their  payment 
was  permissible.  This  being  the  proper 
construction  of  the  provision,  it  amounted 
practically  to  nothing  more  than  a  condi- 
tion precedent  to  the  use  of  the  proceeds 
of  the  bonds  to  pay  the  contractors.  The 
reporter  cites  in  a  note  several  cases  in 
supi)ort  of  this  general  proposition.  See 
also  Wright  v.  Ellison  (1863),  1  Wall.  16. 
For  a  case  in  which  it  was  ruled  that  the 
priority  of  a  lien  could  not  be  established 
by  mere  implication  from  an  agreement 
by  which  the  owner  of  a  railroad  guaran- 
ties to  the  holders  of  unsecured  contract 
claims  that  in  consideration  of  their 
clearing  off  all  claims  against  the  com- 
j)any  which  may  be  declared  by  the  coui't 
to  be  liens  upon  the;  railroad,  iiai-amount  to 
the  lien  of  a  subsequent  mortgage  and  the 


132.J 


CONSTRUCTION    CONTRACTS. 


149 


(b)  Contract  when  not  a  Lien  on  the  Constructed  Road.  —  In 
Wright  V.  Kentucky  &,  Great  Eastern  Ry.  Co.^  the  court  refused, 
under  the  particular  circumstances  of  the  case,  to  declare  a  lien  in 
favor  of  a  construction  company,  the  terms  of  the  contract  being- 
inconsistent  with  the  idea  of  any  ownership  of  the  completed  road 
by  the  contractors  or  the  possession  by  them  of  any  lien  thereon. 

(c)  Statutory  Lien  of  Construction  Contracts.  —  The  extent  to 
which  a  contractor  or  other  material-man  obtains  by  his  ser- 
vices a  lien  on  the  property  of  the  company  is  a  matter  which, 
in  most  instances,  is  to  be  decided  with  reference  to  the  statutes 
enlarging  the  common-law  rights  of  this  class  of  creditors.  One 
of  the  earliest  of  these  enactments,  the  Pennsylvania  resolution 
of  Jan.  21,  1843,  declared  that  it  should  not  be  lawful  for  a  com- 
pany engaged  on  the  construction  of  a  railroad  or  other  work  of 


bonds  secured  thereby,  "the  claims,  liens, 
and  possible  indebtedness "  to  be  thus 
disposed  of  shall  not  exceed  a  certain 
sum,  see  Porter  v.  Bessemer  Steel  Co.,  120 
TJ.  Sr  649.  Such  a  clause  merely  provides 
for  the  rights  of  the  parties  as  between 
themselves,  in  case  the  court  establishes 
the  priority  referred  to. 

1  117  U.  S.  72  (18S8).  In  this  case 
the  coustruction  company  under  its  con- 
tract was  to  have  all  the  money,  municipal 
bonds,  and  property  issued  or  given  in 
payment  of  subscriptions  to  stock,  and 
all  stock  not  necessary  to  maintain  the 
charter,  or  not  issued  to  municipal  cor- 
porations for  subscrii)tions  to  stock,  and 
also  two  issues  of  bonds,  one  secured  by 
a  mortgage  as  "a  first  lien  "  and  the  other 
secured  by  an  equipment  mortgage.  This, 
it  was  said,  was  tantamount  to  giving  the 
company  everything  except  the  road,  and 
the  railroad  comptfny  was  necessarily  to 
have  and  own  that,  so  as  to  be  able  to 
give  a  mortgage  on  it  as  a  "first  lien." 
It  was  further  held  that  a  provision  in 
the  contract  giving  to  that  company  all 
the  earnings  of  the  road  "  during  con- 
struction" and  "until  accepted"  by  the 
railroad  company,  was  vague  and  indefi- 
nite, and  could  not  be  construed  as  giving 
a  lien,  for  that  would  be  inconsistent  with 
the  whole  tenor  of  the  instrument. 

In  the  same  case  it  appeared  that  the 
construction  company  liad  done  some 
work  on  the  road  jmrchased  by  the  rail- 
road   company,    and   for   this   work   the 


assignees  in  bankruptcy  of  the  former 
claimed  a  lien.  It  was  held  that,  as  the 
contractors  when  they  made  the  contract 
were  aware  that  the  title  by  which  the 
road  was  held  was  conditional  and  liable 
to  be  divested,  upon  a  breach  of  the  con- 
dition, by  the  re-entry  of  the  grantor, 
they  could  not  claim  a  lien  after  the 
grantor  had  exercised  the  rights  reserved 
and  resumed. 

Fifty  miles  of  a  railway  in  Manitoba 
was  built  and  ecjuipped  under  an  agree- 
ment with  a  contractor,  which  entitled 
him  to  a  lien  on  the  same,  and  a  right  to 
hold  possession  of  the  railway  and  the 
franchise,  rolling-stock,  land  grant,  etc., 
which  belonged  to  it,  as  security  for  the 
sum  due  him  for  its  construction.  He  ob- 
tained judgment  for  the  amount  due  for 
the  construction,  and  the  company  was 
given  six  months  by  order  of  the  court  to 
pay  it,  with  interest.  Having  defaulted, 
the  contractor  obtained  a  second  judgment, 
which  ordered  the  possession  of  the  rail- 
way, etc.,  to  be  delivered  to  him,  and  jier- 
petually  restraining  the  company  from  sale, 
negotiation,  or  issue  of  bonds,  and  from 
dealing  with  the  land  grant.  The  Court 
of  Queen's  Bench  for  Manitoba  overruled  a 
demurrer  to  this  bill  of  the  contractor  to 
compel  the  delivery  of  possession,  etc.,  as 
ordered  in  the  court  rendering  judgment 
in  his  favor,  holding  such  an  agreement 
to  be  within  the  power  of  the  company. 
Charlebois  v.  Great  North  West  Central 
Ry.  Co.  (1892),  9  Man.  1. 


150  RAILWAY   BONDS   AND    MORTGAGES.  [CHAP.  VI. 

internal  improvement  to  execute  a  mortgage  or  other  trans- 
fer of  its  property  so  as  to  defeat  the  claims  of  contractors, 
laborers,  and  workmen,  which  were  at  the  time  unpaid.  It  was 
held  in  Fox  v.  SeaP  that  the  lien  thus  given  was  of  indefinite 
duration  ;  that,  in  whatever  shape  the  contractor's  debt  might  be, 
it  retained  the  benefit  of  the  privilege  conferred  on  it  by  the  reso- 
lution ;  and  that  the  lien  was  consequently  not  merged  in  any 
judgment  obtained  by  the  contractor  against  the  company  for  his 
debt,  nor  lost  owing  to  the  fact  that  the  lien  of  such  a  judgment 
was  allowed  to  expire  by  lapse  of  time.  And  if  the  contract 
itself  is  set  aside  as  being  ultra  vires,  and  the  court  allows  the 
contractor  compensation  for  the  work  actually  performed  by  him, 
he  is  entitled,  under  the  same  resolution,  to  a  lien  for  the  sum 
allowed  .2 

The  resolution  of  Jan.  21,  1843,  is  a  protection  to  the  contrac- 
tor only  where  his  claims  accrued  prior  to  the  execution  of  the 
mortgage.^ 

§  133,  The  Equities  of  the  Contractor.  —  The  rule  is  well  settled 
that,  where  a  company  procures  tlie  rescission  of  a  construction 
contract,  on  the  ground  that  it  is  fraudulent,  ultra  vires,  against 
public  policy,  or  in  violation  of  constitutional  or  statutory  pro- 
visions, the  court  will  require  the  complainants,  agreeably  to  the 
principle  that  he  who  seeks  equity  must  do  equity,  to  compensate 
the  contractor  for  what  he  has  done.  He  is  not,  in  such  a  case, 
to  be  put  off  with  a  bare  reimbursement  for  his  actual  outlay,  but 
is  entitled  to  have  the  value  of  his  work  estimated  as  on  a  quantum 
meruit,  without  regard  to  the  prices  fixed  by  the  contract.* 

1  22  "Wall.  424  (1874).  last  case  it  was  also  held  that  interest  on 

2  New  Castle  R.  Co.  r.  Simpson  (18S6),  the  amount  found  to  be  due  at  the  time 
26  Fed.  Rep.  133.  the  work  was  stopped  should  be  given  as 

8  Reed"s   Appeal    (1888),  122   Pa.  St.  part  of  the  compensation.     The  principle 

565  ;  s.  c.  16  Atl.  Rep.  100.     As  to  statu-  here  announced  is  the  same  as  tliat  which 

tory    liens    for    construction    and     their  underlies  the  rulings  of  the  same  court 

priority  over  moi-tgago  bonds,  see  Mcll-  wliich  permit  a  quantum  meruit  recovery 

hen II V!^.    Binz  (1890),  80  Tex.   1;  s.  c.  on    contracts,    although    invalid,    because 

13  S.  W.  Rep.  655.     So  far  as  mechanics'  they  are  icJf.ra  vires.    Pittsburgh  R.  Co.  v. 

and  laborers' liens  have  actually  come  into  Keokuk  &  Hamilton  Bridge  (1889),   131 

conflict  with  liens  of  mortgages,  they  are  U.    S.    371  ;  Pennsylvania  R.    Co.    v.  St. 

treated  in  the  chapter  on  priorities.     See  Louis  R.  Co.  (1886),  118  U.  S.  290;  Cen- 

Chaj..  XL,  post.  tral  Transportation  Co.  v.  Pullman  Palace 

*  Porter  w.  Bessemer  Steel  Co.   (1889),  Car  Co.  (1891),   139  U.  S.  24.     See  espe- 

120  U.   S.   649;    Thomas  v.   Brown villc,  ciiilly  the  remarks  of  Mr.  Justice  Gray  at 

F.  &  K.  &  Pac.  R.   Co.  (1883),   109  IJ.  S.  p.  60  of  the  report  of  the  last  ca.se  for  a 

522  ;    New  Pastle   Northern    Ry.    Co.    v.  statement  of  the  grounds  on  which  such 

SiriiiiMon  (1881),  21  Fed.  Ri-p.  533;  Same  relief  is  granted.     Tiie  recent  case  of  Rarr 

V.  Same  (1885),  23  Fed  Rep.  214.     In  the  v.  New  York,  etc.  R.  Co.  (1891),  125  N.  Y. 


§  134.]  CONSTRUCTION    CONTRACTS.  151 

A  contractor  to  whom  bonds  have  been  issued  may,  under  some 
circumstances,  lose  the  priority  of  his  lien  by  surrendering  them. 
Thus  in  Fidelity  Ins.  Co.  v.  Shenandoah  V.  R.  Co.^  bonds  secured 
by  first  mortgage  had  been  issued  to  a  construction  company 
under  its  contract,  and  were  subsequently  surrendered,  with  an 
agreement  that  it  should  receive  from  the  company  second-mort- 
gage bonds  and  income  bonds,  and  that,  to  carry  on  the  con- 
struction of  the  road,  a  mortgage  constituting  a  first  lien  on  the 
property  should  be  executed  to  secure  the  new  contractors. 

Held,  (1)  that,  the  second  mortgage  never  having  been  executed 
and  delivered,  the  agreement  operated  as  an  equitable  mortgage ; 

(2)  that  the  construction  company  was  therefore  entitled  to  a 
proper   compensation   for   the   bonds    it   was   to  have  received ; 

(3)  that  the  old  mortgage  securing  the  surrendered  bonds  gave 
it  no  lien  for  such  compensation,  but  that  it  was  entitled  to  a  lien 
next  after  that  of  the  mortgage  securing  the  second  contractor's 
bond. 

§  134.  Suits  to  have  Construction  Contracts  declared  invalid.  — 
(a)  B^  the  Company.  —  As  long  as  a  contract  remains  execu- 
tory, the  maxim  in  pari  delicto  does  not  apply.  Hence  a  construc- 
tion contract  which  is  against  public  policy  will  be  rescinded,  even 
though  partially  executed,  at  the  suit  of  the  company.  Nor  is  it 
a  sufficient  reason  for  refusing  to  interfere,  that  all  the  share- 
holders, by  their  approval,  expressly  given,  or  by  acquiescence  in 
what  has  been  done,  under  the  agreement,  have  adopted  the 
transaction.  Even  for  the  officers  of  the  company  who  made  the 
contract  there  is  a  locus  poenitentice.^ 

On  the  other  hand,  if  the  contract  has  been  executed  so  that 
the  company  has  received  its  benefits,  the  courts  will  withhold 

263  ;  s.  c.  9  Ry.  &  Corp.   L.  J.   174,   26  passed   to    bona  fide   holders   and   haviilg 

N.  E.  Rep.   145,  may  also  be  consulted,  been  strictly  used  for  the  purpose  of  com- 

the  court  there  holding  that  a  lessee  could  pletingthe  road.    The  court  distinguished 

not  hold  leased  property  and  refuse  to  pay  the  case  from  those  in  which,  on  equitable 

rent  merely  because  the  lease  was  made  as  grounds,  the  proceeds  of  the  sale  of  the 

a  part  of  a  contract  voidable  because  in  property   of  a   railroad,    as   a   completed 

breach  of  the  judiciary  obligations  of  the  structure,  open  for  travel  and  transporta- 

directors.  tion,  are  to  be  applied  to  restore  earnings 

In  Porter  t).  Bessemer  Steel  Co.,  supra,  which,  instead  of  having  been  applied  to 

a  case  in  which  the  priorities  in  the  dis-  pay    operating    expenses    and    necessary 

tribution  of  a  fund  arising  from  the  sale  repairs,  have  been  diverted  to  pay  interest 

of  a  road  were  to  be  determined,  prefer-  on  mortgage  bonds  and  the  improvement 

ence  was  given  to  the  bonds  of  one  owning  of  the  mortgaged  property, 
most  of  the  stock  of  the  company,  under  ^  33  W.  Va.  761  (1890)  ;  s.  c.  11  S.  E. 

a  construction   contract   to  complete  the  Rep.  58. 

road,  over  other  floating  indebtedness  for  2  Np^^    Castle    Northern    Ry.    Co.    v. 

original  construction,  these  bonds  having  Simpson  (1884),  21  Fed.  Rep.  533. 


152  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  VI. 

affirmative  relief.  Thus  where  a  company,  through  its  board  of  ■ 
directors,  entered  into  a  construction  contract  with  certain  per- 
sons, some  of  whom  were  directors  of  the  company,  and,  in  pursu- 
ance of  such  contract,  issued  bonds  secured  by  a  mortgage  on  its  ■ 
property,  it  cannot,  in  a  suit  to  foreclose  the  mortgage,  maintain 
a  cross-bill  to  set  it  aside  and  cancel  it  as  a  cloud  upon  its  title. 
The  proper  remedy  in  such  a  case  was  to  defend  against  the  con- 
tract on  the  ground  of  its  being  fraudulent,  as  the  other  parties 
would  not  be  in  a  position  to  enforce  it.^ 

(b)  By  Individual  Stockholders.  —  In  Thomas  v.  Brownville, 
Ft.  Kearney,  &  Pac.  R.  Co.^  a  portion  of  the  stockholders  were 
allowed  to  intervene  as  defendants  in  a  suit  to  foreclose  a  mort- 
gage securing  bonds  issued  in  pursuance  of  an  invalid  contract. 

(c)  By  Judgment  Creditors.  —  In  Mosgrove  v.  Kountze  ^  judg- 
ment creditors  of  a  railroad  company  filed  a  bill  against  persons, 
some  of  whom  were  directors  of  the  company,  for  the  purpose  of 
subjecting  to  the  payment  of  their  judgment  certain  real  estate 
acquired  under  a  construction  contract,  affirmed  to  be  void  on  the 
ground  of  its  being  contrary  to  public  policy.  No  question  was 
raised  as  to  their  right  to  file  such  a  bill,  the  only  point  decided 
being  that  leave  could  not  be  granted  them  to  file  a  supplemental 
bill  for  the  purpose  of  setting  up  matters  which  might  by  due 
diligence  have  been  ascertained  and  pleaded  by  way  of  amend- 
ment in  the  original  suit. 

1  Lewis  V.  Meier  (1882),  14  Fed.  Rep.  2  io9  U.  S.  522  (1883).     (Seethe  facts 

311.  of  this  case  in  §  131,  above.) 

3  14  Fed.  Rep.  315  (1882). 


§  135.] 


NOTICE. 


153 


CHAPTER  VII. 


NOTICE. 


135.  Of  what  the  Bond  is  Notice. 

136.  Of  what  the  Mortgage  is  Notice. 

137.  Notice  of  Extrinsic  Circumstances, 

Effect  of. 


§  138.   Statutes  relating  to  Bonds  or  Mort« 
gages  which  Bondholders  are  pre- 
sumed to  have  Notice  of. 
139.    Notice  under  Recording  Statutes. 


§  135.  Of  what  the  Bond  is  Notice. — Whether  the  rights  ac- 
quu'ed  by  the  ownership  of  bonds  are  unqualified  or  not  frequently 
depends,  as  in  the  case  of  other  written  obligations  for  the  pay- 
ment of  money,  upon  the  question  whether  the  holder  has  notice 
of  facts  limiting  or  modifying  the  contract  of  the  obligor.  Broadly 
speaking,  the  rulings  on  this  subject  may  be  divided  into  two 
classes,  —  (1)  those  which  deal  with  the  effect  of  notice  imparted 
to  the  holders  by  the  contents  of  the  bonds  or  mortgages  them- 
selves, and  (2)  those  which  deal  with  the  effect  of  notice  received 
or  presumed  to  have  been  received  from  an  actual  or  imputed 
knowledge  of  certain  extrinsic  facts.^ 

Bonds  are  notice  of  what  appears  on  their  face,  and  of  anything 
that  can  be  ascertained  by  a  perusal  either  of  the  bonds  them- 
selves or  of  the  mortgage  securing  them  ;  and  if  the  bonds  and 
mortgage  are  so  expressed  that  they  lull  and  satisfy  the  inquiry, 
the  purchaser  is  not  bound  to  look  any  further.^ 


^  Some  of  the  cases  cited  in  this  chap- 
ter are  cited  elsewhere,  but  it  has  been 
thought  that  the  grouping  of  these  cases 
under  the  head  of  notice  would  facilitate 
the  practitioner. 

2  Marlor  v.  Tex.  &  Pac.  R.  Co.  19  Fed. 
Rep.  867  (1884),  Stanton  v.  Alabama  & 
Chattanooga  R.  Co.  (1875),  2  Woods,  523, 
where  the  purchasers  were  held  to  be 
affected  with  notice  of  the  contents  of  an 
indorsement  on  the  bonds.  Judge  Woods 
remarked  :  "  Had  they  taken  such  notice, 
they  wo)ild  have  seen  that  the  Governor 
had  indorsed  them,  and  recited  in  his  in- 
dorsement that  he  had  done  so  in  pursu- 


ance of  law ;  that  the  face  of  the  bond 
recited  that  it  was  one  of  a  series  of  num- 
bered bonds  issued  in  accordance  with  the 
laws  of  the  State,  and  secured  by  the  in- 
dorsement of  the  Governor,  affixed  in  pur- 
suance of  the  same  laws,  and  was  a  first 
lien  upon  the  railroad  and  other  property 
of  the  railroad  company  ;  and  that  the 
bonds  bore  the  indorsement  of  the  trustfies 
named  in  the  mortgage  deed  to  the  effect 
that  they  were  the  bonds  described  in  and 
secured  by  said  mortgage.  In  this  instance 
the  very  bonds  and  mortgages  which  put 
the  purchasers  on  inquiry  lulled  and  stu- 
pefied inquiry." 


154  RAILWAY  BONDS   AND   MORTGAGES.  [CHAP.  VII. 

So  also  a  bondholder  may  be  precluded  from  acquiring  a  pi-i- 
ority  over  the  other  holders  by  the  fact  that  the  bonds  gave  him 
explicit  notice  of  the  circumstances  under  which  the  mortgage 
was  executed,  and  that  these  circumstances  were  such  that  his 
lien  was  not  entitled  to  any  special  precedence.^ 

But  the  rights  of  a  purchaser  are  not  to  be  affected  by  con- 
structive notice  unless  it  clearly  appears  that  the  inquiry  sug- 
gested by  the  facts  disclosed  at  the  time  of  the  purchase  would,  if 
fairly  pursued,  have  resulted  in  the  discovery  of  the  defect  exist- 
ing, but  hidden  at  the  time.  The  purchaser  of  a  bond  in  the  open 
market  and  in  the  usual  course  of  business  is  not  bound  to  make 
a  close  and  critical  examination  to  escape  the  imputation  of  bad 
faith  in  the  purchase.  Thus  the  numbers  of  the  bonds  are  not 
an  integral  part  of  the  bonds  themselves,  and  therefore  the  fact 
that  the  numbering  has  been  changed  is  not,  as  a  matter  of  law, 
notice,  or  even  an  intimation,  of  the  larceny .^ 

Nor  is  a  purchaser  in  the  ordinary  course  of  business  bound  to 
inquire  into  the  title  of  his  vendor  merely  because  at  the  time  of 
the  sale  certain  certificates  of  scrip-preferred  stock  which  had 
been  fastened  to  the  bonds  by  a  pin  have  been  detached  from  that 
position  before  the  bonds  are  offered  to  him.^ 

Xor  is  the  question  of  validity  deemed  to  be  raised  for  such  a 
purchaser  by  the  fact  that  the  interest  on  some  of  the  coupons 
has  not  been  paid,  for  such  a  default  docs  not  dishonor  either  the 
bonds  themselves  or  the  other  coupons.*     (See  also  Chapter  II.) 

§  136.  Of  what  the  Mortgage  is  Notice.  —  Where  bonds  ex- 
pressly refer  to  the  mortgage  which  secures  them  (as  is  usually 
the  case),  the  two  instruments  must  be  regarded  as  one  obligation 
and  construed  together.  A  purchaser  of  railroad  bonds  is  bound 
to  take  notice  of  all  statements  contained  in  any  part  not  only  of 
the  ])onds,  but  also  of  the  mortgage,  whereby  the  promise  of  the 
obliiror  may  be  qualified.^     (See  also  Chapter  II.) 

Thus  a  mortgage  provision  giving  priority  to  some  bondholder 
secured  by  it  over  other  bonds  of  the  same  issue  would  be  notice 
to  the  bondholders  that  they  were  not  all  on  the  same  footing.^ 

1  Tiivlor  V.  Atlantic  &  Great  Western  *  State  ex  rel.  Plock  v.  Cohb  (1879), 
R.  Co.  (1S78),  57  How.  Pr.  26  ;  Skiddy  64  Ala.  127,  161  ;  s.  c.  7  Am.  &  Eng.  R. 
V.   Atl.,  Miss.   &   Ohio  R.  Co.  (1879),    3     II.  Cas.  147. 

Hualip",  320,  ospeoially  p.  356.  ^  Marlor  w.  Tex.  &  Pacific  R.  Co.  (1884), 

2  Birdsall  v.  Rnssdl  (1864),  29  N.  Y.     19  Fed.  Rep.  867,  869. 

220.  «  McMurray  v.  Moran  (1889),- 134  U.  S. 

8  Hotchkiss  V.  National  Banks  (ISTn,  150.  tlie  case  heing  here  put  hypotlietically 

21  Wall.  354,  359,  afTlrniint;  Hotchkiss  v.  by  Mr.  Justice  Harlan,  arguendo,  and  dis- 

Tradcsman's  Nat.  I'.ank  (1873),  10  lilatchf.  posed  of  as  perfectly  clear. 
384. 


§  187J  NOTICE.  155 


Illustrations  of  this  principle  are  also  found  in  those  cases 
where  the  bonds  of  a  certain  issue  recite  that  they  are  subject  to 
the  lien  of  a  prior  mortgage  on  the  same  property ,i  or  to  a  prior 
equitable  lien  of  preferred  stock.'^ 

So  where  a  railroad  company  issues  certain  bonds  designated 
"  Consolidated  First-Mortgage  Bonds,"  and  reference  is  made 
therein  to  a  mortgage  from  which  it  appears  that  the  intention 
was  to  substitute  a  portion  of  the  bonds  for  first-mortgage  bonds 
already  issued  upon  the  road,  and  to  devote  the  remainder  thereof 
to  the  extension  and  the  completion  of  the  line,  the  use  of  the 
word  "consolidated"  is  sufficient  to  put  a  purchaser  upon  inquiry. 
Since  these  bonds  referred  to  the  mortgage,  the  purchaser  was 
bound  by  the  statement  contained  therein,  and  it  was  his  duty  to 
ascertain  whether  or  not  the  holders  of  the  old  bonds  were  willing 
to  make  the  exchange  contemplated  by  the  transaction.^ 

So  also  if  a  mortgage  has  been  recorded  in  full,  and  its  provi- 
sions require  that  the  trustees  should  have  an  estate  in  fee  simple 
in  order  to  execute  them,  the  record  is  notice  that  the  mortgage 
was  intended  to  pass  a  fee.* 

§  137.  Notice  of  Extrinsic  Circumstances,  Effect  of.  —  The  gen- 
eral principle  that  any  one  dealing  with  a  corporation  is  bound  to 
take  notice  of  the  extent  of  its  powers  is  applicable  to  the  case  of 
the  purchase  of  bonds  of  one  railroad  company  guarantied  by 
another,  but  if  it  is  within  the  corporate  powers  of  the  latter  to 
guaranty  bonds  held  in  the  usual  course  of  business,  the  fact 
that  the  guaranty  was  made  for  a  purpose  not  authorized  by  the 
charter  will  not  debar  a  bona  fide  assignee  of  the  company  from 
recovering  on  the  contract.^  This  principle  is  developed  at  greater 
length  in  Chapter  11. 

The  circumstances  from  which  notice  is  inferred  may  be  such 
as  should  have  put  the  purchaser  of  the  bonds,  as  a  prudent  man, 
upon  inquiry  regarding  the  regularity  and  validity  of  their  issue ; 

1  Bronson  v.   La  Crosse    Railroad  Co.  24    Ind.    457,    citing   with    approval    the 

(1862),  2  Wall.  283,  311;  Coev.  Columbus,  ruling  of  Chancellor  Walworth  in  Stoney 

Piqua,  &  Indiana  R.  Co.    (1859),  10  Ohio  v.    American    Life    Lis.    Co.    (1845),    11 

St.  372.  Paige  Ch.    635,   that   the   negotiable   se- 

'^  Skidd}'  V.  Atlantic,  Miss.  &  Ohio  R.  curity  of  a  corporation  which  upon  its  face 

Co.  (1379),  3  Hughes,  320,  356  (1879).  appears  to  have  been  duly  issued  by  such 

^  C'aylus  V.   New  York,    Kingston,    &  corporation,  and  in  conformity,  is  valid  in 

Syracuse  R.  Co.  (1877),  10  Hun,  295  ;  see  the   hands   of  a  bona  fide  holder  thereof 

also  Taylor  v.  Atlantic  &  Great  Western  without  notice,  although  such  security  was 

K.  Co.  (1878),  57  How.  Pr.  26.  in  fact  issued  for  a  purpose  and  at  a  place 

*  Randolph  v.   New  Jersey  West  Line  not  authorized  by  the  charter  of  the  com- 

R.  Co.  (1877),  28  N.  J.  Eq.  49.  pany,  and  is  in  violation  of  the  laws  of  the 

^  Madison  R.  Co.  v.  Norwich  San.  Soc.  State  where  it  was  actually  issued. 


156  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  VII. 

as  where  the  trustee  whose  proper  functions  and  duty  are  not  to 
deal  with  purchasers,  but  to  act  for  the  bondholders  and  to  enforce 
their  security,  sells  the  bonds,  and  even  sells  them  for  a  very  in- 
adequate price.i 

So  far  as  the  application  of  this  rule  is  concerned,  it  can  of 
course  make  no  difference  that  the  lien  so  recognized  is  an  equi- 
table one  merely.^ 

Other  cases  are  controlled  by  more  special  considerations,  as 
where  a  company  induced  a  bank  to  buy  its  bonds  by  agreeing 
that  they  would  be  issued  only  to  a  certain  amount  on  each  mile 
of  the  constructed  road.  Here  it  was  held  that  the  lien  of  persons 
taking  any  bonds  subsequently  issued  in  violation  of  this  agree- 
ment must  be  declared  inferior  to  the  lien  of  the  bank,  if  they 
had  notice  of  the  agreement ;  but  that  the  holders  of  such  bonds 
without  notice  of  it,  whether  taking  them  originally  from  the  com- 
pany or  by  purchase  from  one  who  took  with  knowledge,  were 
entitled  to  share  with  the  bank  in  the  distribution  of  the  proceeds 
of  the  foreclosure  sale,^ 

In  Blair  v.  St.  Louis  R.  Co.*  it  was  argued  that  the  doctrine 
of  constructive  notice  should  be  applied  to  cases  in  which  an 
inspection  of  the  corporate  records  would  have  disclosed  the  ex- 
istence of  facts  constituting  a  prior  equity  against  the  company  ; 
but  this  contention  did  not  prevail. 

§  138.  Statutes  relating  to  the  Bonds  or  Mortgages  -which  Bond- 
holders are  presumed  to  have  Notice  of.  —  But  bona  fide  holders 
have,  on  the  other  hand,  a  right  to  presume  that  all  the  precedent 
requirements  of  a  statute  authorizing  the  indorsement  of  the  bonds 
they  hold  have  been  complied  with,  and  that  if  the  statute  author- 
izes the  indorsement  of  first-mortgage  bonds,  there  are  no  prior 
liens  on  the  property.  Under  such  circumstances  they  eannot  be 
charged  with  constructive  notice  that  the  bonds  thus  indorsed  were 
not  first-mortgage  bonds.^ 

On  analogous  principles  it  is  held  that  a  bondholder  cannot 
procure  the  rescission  of  a  contract  for  the  exchange  of  unpaid 
coujjons  for  the  preferred  stock  of  a  railroad  company  on  the 
ground  of  fraud,  where  the  only  facts  alleged  are  that  the  com- 
pany liad  no  authority  to  issue  such  stock,  and  that,  if  it  had  such 
authority,  the  certificates  were  invalid  for  want  of  the  common 

1  Ri^^'s  V.  Pennsylvania,  etc.  R.  Co.  ^  McMurray  v.  Moran  (1889),  134 
(1883),  16  Fed  Rep.  804,  80!).                            U.  S.  1.^.0. 

2  Stanton   v.   Alabama  &  Cliattanooga  <  2.5  Fed.  Rep,  684  (188.')). 

R.  Co.  (1875),  2  Woods,  523.  ''  Vnuntr  v.  Montgomery  R.  Co.  (1875), 

2  Woods,  606. 


§  138.]  NOTICE,  157 

seal  of  the  company.  Such  question  depends  on  the  general  stat- 
utes of  the  State  or  the  charter  of  the  company. 

Shice  the  pi'ovisions  of  a  statute  regulating  any  given  trans- 
action are  regarded  as  an  integral  part  of  it,  the  existence  of  any 
enactments  which  make  the  validity  of  the  bond  dependent  upon 
the  doing  of  some  particular  tiling  in  a  specified  manner  (as  in 
this  case  the  attaching  of  the  common  seal  of  the  company)  must 
be  reckoned  among  those  extrinsic  facts  and  circumstances  of 
Avhich  a  bondholder  is  presumed  to  have  notice.^ 

Thus  if  a  company  has  been  granted  the  power  to  mortgage  its 
property  subject  to  the  State's  right  of  forfeiture  in  case  the  road 
is  not  completed  at  a  certain  date,  every  purchaser  of  the  bonds 
issued  under  the  authority  of  the  act  must,  at  his  peril,  take 
notice  of  this  restriction,^  so  far  as  that  law  imposes  restrictions 
upon  the  powers  of  the  corporation,  the  general  rule  being  that, 
even  in  the  case  of  negotiable  instruments,  a  party  contracting 
with  an  agent  must  inquire  into  his  authority,  since  a  corporation 
is  bound  only  when  its  agents  keep  within  the  limits  of  their 
authority.^ 

A  void  statute,  however,  is  not  constructive  notice  of  anything 
to  anybody.* 

So  also  the  mortgagees  under  a  mortgage  made  after  the  passage 
of  two  acts,  one  charging  the  earnings  of  a  railroad  with  a  lien  in 
favor  of  a  county  in  case  it  should  avail  itself  of  the  power  granted 
by  the  same  act  of  lending  money  to  the  company,  and  the  other 
reciting  that  the  loan  was  then  unpaid,  are  affected  with  notice  of 
the  existence  of  this  prior  lien.^ 

The  same  principle  holds  in  regard  to  a  special  act  fixing  upon 
the  property  an  earlier  lien  than  the  mortgage  securing  the  bonds, 
or  regulating  the  manner  in  which  the  bonds  are  to  be  indorsed  by 
the  Statc.6 

The  priority  of  the  lien  of  bonds  may  also  be  made  to  depend  on 
the  knowledge  imputed  to  holders  respecting  the  functions  and 
duties  of  railroad  companies  as  quasi  public  corporations.     This 

1  Coddington  v.  Railroad  Co.  (1880),  119,  cited  in  Zabriskie  i-.  Cleveland,  Col.  & 
103  U.  S.  409.  Cincinnati  R.  Co.  (1859),  23  How.  381. 

2  Silliman  v.  Fredericksburg,  Orange,  *  Young  v.  Montgomery  &  Eufaula  R. 
&  Charlottesville  R.  Co.   (1876),  27  Gratt.  Co.  (1875),  2  Woods,  606. 

119,  citing  with  approval  Gould  v.  Town  &  Ketchum  v.  Pacific  R.  Co.    (1877),  4 

of  Sterling  (1801),  23  X.  Y.  456,  and  the  Dill.  78. 

Floyd  Acceptances  Ca.se  (1868),   7  Wall.  6  Ketchum  v.  Pacific  R.  Co.   (1877),  4 

666,  680.  Dill.  78  ;  State  ex  rcZ.  Plock  y.  Col .h  (1879), 

3  Silliman  v.  Frederickslnirg,  Orange,  64  Ala.  127  ;  s.  c.  7  Am.  &Eng.  R.  R.  Cas. 
&  Charlottesville  R.  Co.   (1876),  27  Gratt.  147. 


158  RAILWAY   BONDS   AND    MORTGAGES.  [CHAP.  VII. 

was  the  basis  of  the  ruling  in  Douglass  v.  Cline,^  in  which  case 
wages  of  employees  were  given  a  preference  over  the  claims 
of  bondholders  in  the  distribution  of  proceeds  of  a  foreclosure 
sale.  Bondholders,  it  has  been  said,  accept  their  securities  with 
knowledge  that  the  railroad  company,  though  technically  a  pri- 
vate corporation,  is  under  obligation  to  the  State  to  render  certain 
important  public  services.  They  know  that  the  railroads  are  in 
a  certain  sense  public  highways,  and  that  whoever  holds  them  in 
pledge  is  bound  to  see  that  they  are  at  all  times  to  operate  as  to 
observe  the  public  interest.^ 

§  139.  Notice  under  Recording  Statutes.  —  Bondliolders  are 
affected  with  notice  of  any  adverse  claims  evidenced  by  a  writing 
which  is  entitled  to  record  under  the  laws  of  the  State  in  which 
the  debtor  corporation  was  organized.^ 

A  deed  of  trust  is  such  a  writing  under  the  laws  of  Georgia,* 
and  presumably  of  other  States  also. 

This  rule  is,  of  course,  to  be  taken  subject  to  the  limitation  that 
the  registry  of  such  a  deed  is  not  of  itself  notice  to  parties  subse- 
quently dealing  with  the  mortgaged  property,  unless  it  is  executed 
in  such  a  manner  as  to  entitle  it  to  be  recorded, ° 

As  a  result  of  the  registration  laws,  the  bondholders  under  sub- 
sequent mortgages  have  implied  notice  of  the  rights  and  statutory 
remedies  of  the  beneficiaries  of  older  mortgages  and  deeds  of 
trust.^ 

And  if  the  prior  mortgage  is  not  properly  acknowledged,  the 
later  mortgages  will,  nevertheless,  be  postponed  to  earlier,  if  the 
junior  mortgage  is  expressly  made  subject  to  the  prior  one.^ 

The  same  consequence  follows  if  the  junior  mortgagee  has  actual 
knowledge  of  the  existence  of  the  prior  mortgage,  even  if  it  has 
not  been  so  acknowledged  as  to  be  entitled  to  record  ;  ^  or  actual 
knowledge  of  an  agreement,  whereby  the  company  stipulated  with 
a  bank,  as  part  of  the  consideration  for  the  latter's  acquisition  of 
its  bonds,  that  it  would  issue  bonds  only  to  a  certain  amount  for 
each  mile  of  its  constructed  road.^ 

1  12  Bush,  608  (1876).  ^  Newport  &  Covington  Bridge  Co.  v. 

2  Tliis  and  similar  preferences  are  dis-     Douglass  (1877),  12  Bush,  673. 

cussed  at  length  in  Chap.  XXVIII.,  ;«.«<.  "<  Coe  v.  Columbus,   Piqua,   &  Ind.  R. 

8  Newport  &  Cincinnati  Bridge  Co.  v.  Co.  (1859),  10  Ohio  St.  372  ;  Bronson  v. 

Douglass  (1877),    12  Bush,  673;    Coe  v.  La  Cros.se  Railroad  (1863),  21   Wall.  283, 

ColurnlMis,  Piqua,  &  IndianaK.  Co.  (1859),  311. 

10  Oliio  St.  372.  8  Willink  r.   Morris  Canal  &  Banking 

*  Branch   v.   Atlantic  &   Gulf  R.    Co.  Co.  (1843),  4  N.  J.  Kq.  377. 

(1879),  3  Woods,  481.  »  McMurray  v.  Moran  (1889).  134  U.  S. 

6  Branch   v.   Atlantic   &   Gulf   R.  Co.  1.^)0.    In  this  case  the  parties  taking  honds 

(187!').  .")  Wdoils,  181.  sulispriuently   issued   in    violation   of  the 


§  139.] 


NOTICE. 


159 


The  State  is  not  prejudiced  by  the  non-registration  of  a  mort- 
gage executed  in  pursuance  of  a  statute  to  secure  a  loan  ))y  it.  In 
such  a  case  the  statute  is  n(jtice  to  all  the  world  that  the  property 
is  subject  to  the  lien  of  the  mortgagee.^ 


agreement,  and  having  notice  thereof,  were 
held  entitled  to  share  in  the  proceeds  of  a 
foreclosure  sale  only  after  the  funds  had 
been  applied  to  the  bonds  held  by  the 
bank.  Those  taking  bonds  without  notice 
of  the  agreement  were  placed  on  an  equal 
footing  with  the  bank. 

1  Memphis  &  Little  Rock  R.  Co.  v.  State 
(1881),  37  Ark.  632.  A  statute  authorized 
the  issue  of  aid  bonds  to  the  C.  &  T.  R. 
Co.,  and  provided  that  no  part  of  the  bonds 
should  be  issued  until  the  company  signi- 
fied its  acceptance  by  filing  a  receipt  there- 
for with  the  secretary  of  state,  and  that, 


when  recorded  in  the  office  of  that  function- 
ary, each  certificate  should  be  a  mortgage 
on  the  road.  It  was  held  that  all  persons 
claiming  under  a  deed  of  trust  executed  by 
the  company  under  the  powers  conferred 
by  a  previous  act,  the  said  deed  reciting 
that  it  was  subject  to  the  lien  of  the  State 
created  under  the  later  act,  took  subject  to 
all  the  certificates  previously  filed  with  the 
secretary  of  state,  although  the  statutory 
mortgage  had  not  been  recorded  in  the 
counties  in  which  the  company's  lands 
were  situated.  Wilson  v.  Beckwith  (1893), 
117  Mo.  61 ;  s.  c.  22  S.  W.  Rep.  639. 


160 


RAILWAY  BONDS  AND   MORTGAGES.  [CHAP.  VIII. 


CHAPTER  VIII. 


MORTGAGES   AND   THEIR   VALIDITY. 


General  Statement. 
Art.  I.  —  Validity  of  Railway  Mort- 
gages AS  DEPENDENT  ON  THE 

Power  to  Mortgage. 

A.  Mortgages  of  Corporate  Prop- 

erty generally. 
§  140.    Commou-law    Power    to    mort- 
gage all  Corporate  Property. 

141.  Common-law    Power    to   mort- 

gage when  implied  from  Statu- 
tory Powers. 

142.  Common-law    Power    to    mort- 

gage when  limited  by  Impli- 
cation. 

143.  General  Implications  from   Ex- 

press Grants  of  Power  to  mort- 
gage. 

144.  Implications    from     Grant      of 

Power  to  Mortgage  for  a  Par- 
ticular Purpose. 

145.  Power  to  execute  Mortgage  im- 

plies Power  to  insert  Provi- 
sions for  enforcing  it. 

146.  Power     to    mortgage     not     re- 

stricted by  Statute  declaring 
Lien  in  Favor  of  State. 

147.  Power    of     Consolidated    Com- 

panies to  mortgage  their  Prop- 
erty. 

148.  Legislative  Ratification. 

B.  Power  to  mortgage  Franchises. 

149.  General     Principles     respecting 

Power  to  mortgage  Fran- 
chises. 

150.  Franchise   to  be  a  Corporation 

placed  by  some  Courts  on  a 
Different  Footing  from  other 
Fianchisps. 

151.  Existence  of  Pow(!r  to  mortgage 

Corporate  Existence  not  usu- 
ally iiifi'rred. 


§  152.    Power   to   mortgage   Franchises 
implied  from  Grant  of  Power 
to  sell  them. 
C.    Power    to    mortgage    After-ac- 
quired Property. 

153.  Power   expressly    conferred    by 

Statute. 

154.  Power   implied  from  Enumera- 

tion of  the  Kinds  of  Property 
which  may  be  mortgaged. 

155.  Power     to    mortgage    Uncalled 

Capital. 

156.  Limits  of  the  Power  to   mort- 

gage After-acquired  Property. 

157.  Effect  of  the  Want  of  Power  to 

hold  the  Property  attempted 
to  be  mortgaged. 
Art.  II.  —  Validity  of  Railway  Mort- 
gage      AS      AFFECTED      BY 

THE  Manner  and  Circum- 
stances of  its  Execution. 
§  158.    Formal  Requisites. 

(a)  Witnesses. 

{h)  The  Oath. 

(f)  Acknowledgment. 

{d)  Seal. 

(e)  Delivery. 

(/)  Special  Requirements. 

159.  When  a  Mortgage  executed  by 

a  Corporate  Agent  is  the  Deed 
of  the  Corporation. 

160.  When  a  Mortgage  is  not  vitiated 

by  Vagueness  of  Descriptive 
Clause. 

161.  Authority  of  Corporate  Officers 

generally  to  execute  a  Mort- 
gage binding  on  the  Corpora- 
tion. 

162.  Authority  of  Individual  Officers. 
(r()  Directors. 

(/;)  President. 

(c)  Superintendent. 


§  li'M 


MORTGAGES    A^D    THEIR    VALIDITY. 


161 


§  1G3.    K('([uisite     Consent     of    Stock- 
lioldei's. 

164.  Notice  of  Meeting. 

165.  Place  .of   Execution,    Acknowl- 

edgment, or  Autliorization. 

166.  Bondholders    entitled     to    pre- 

sume that  the  Mortgage  has 
been  regularly  executed. 

167.  Mortgages  validated  b)"^  Fiatifica- 

tioii. 
16S.    Improper    Application    of    the 
Proceeds  of  the  Bonds,  Trust- 
deed  not  Invalidated  by. 

169.  Fraud    inferred    fiom    Personal 

Interest  in  Contract  of  which 
the  Mortgage  is  a  Part. 

170.  Constructive  Fraud  as  to  Credit- 

ors and  Preferences. 

171.  Effect   of  the  Chattel-mortgage 

Acts. 

172.  Mortgage  to  secure  Future  Ad- 

vances, when  not  invalid. 
Art.  III.  —  Partial  Invalidity  of  Cox- 
tract,  Effect  of. 


§  173.  Invalidity  of  Part  of  the  Ponds 
secureil,  Validity  of  Mortgage 
not  affected  by. 

174.  Mcjrtgage   may    be  Valid  as   to 

Part     of    the    Subject-matter 
and  Void  as  to  Residue. 

175.  Mortgage  of  Franchises  may  be 

Valid  as  to  Part  of  them. 

176.  Excess    of    Power    by  Agent  as 

regards  Part  of  the  Mortgage. 

177.  Defective   Execution   as  to  Une 

Kind  of  Property,  Effect  of. 
Art.  IV.  —  Who  may  and  who  may  not 
Question  the  Validity  of 
THE  Mortgage. 
§  178.    The  Mortgagor  Company. 

179.  The  Stockholders  individually. 

180.  Junior  Mortgagees. 

181.  General  Creditors  of   the  Com- 

pany. 

182.  Eeceivers. 

183.  Purchasers  at  Foreclosure  Sale. 

184.  The  State. 


General  Statement.  —  The  validity  of  a  corporate  mortgage  may 
be  considered  with  reference  (1)  to  the  capacity  of  the  company 
to  execute  it,  or  (2)  to  the  circumstances  and  objects  of  its  ex- 
ecution. A  corporation  being  the  creature  of  the  legislature,  the 
question  of  its  capacity  to  execute  any  given  mortgage  is  neces- 
sarily dependent  upon  the  laws,  whether  general  or  special,  under 
which  it  has  been  organized.  Assuming  a  corporation  to  have 
the  legal  power  to  mortgage,  there  may  be  circumstances  raising 
a  question  as  to  the  enforceability  of  the  particular  mortgage. 
Tliese  circumstances  may  be  such  as  might  arise  in  the  case  of  a 
mortgage  by  a  natural  person,  or  such  as  arise  from  the  peculiar 
limitations  which  the  artificial  constitution  of  a  corporate  body 
imposes  upon  it. 


Article  T.  —  Yalidity  as  dependent  on  the  Power  to 
execute  the  mortgage. 

A.  Mortgages  of  Corporate  Projjerti/  generally/. 

§  140.  Common-la-w  Pow^er  to  mortgage  all  Corporate  Property.  — 
The  general  rule  as  to  the  extent  of  the  common-law  power  of  a 
corporation  to  alienate  its  property  is  thus  succinctly  stated  by 
Chancellor  Kent :  "  Independent  of  positive  law,  all  corporations 
have   tlie  absolute  jus  disponendi  of  lands  and  chattels,  neither 

11 


162  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  VIII. 

limited  as  to  objects  nor  circumscribed  as  to  quality.  They  may 
execute  a  mortgage  to  secure  a  debt."  ^ 

The  application  of  tliis  rule  to  railway  companies  has  been 
repeatedly  recognized.  "  It  is  now  to  be  regarded  as  settled  be- 
yond any  proper  ground  of  question  that  a  corporation  may  con- 
tract debts  necessary  for  the  accomplishment  of  the  purposes  of  its 
creation,  and  may  give  valid  security  for  their  payment  by  pledge 
or  mortgages  of  any  property  or  interests  in  property  that  are 
subject  to  its  disposal,  by  virtue  of  the  implied  power  existing  in 
it,  and  without  any  express  provisions  of  statute  to  that  effect, 
provided  it  be  not  restricted  by  statute  in  this  respect."  ^ 

"  Corporations  created  for  the  construction  of  railroads,  in  the 
absence  of  limitation  or  restraint  by  statute,  have  power  at  com- 
mon law  to  borrow  money  and  to  make  bills,  bonds,  and  promis- 
sory notes  for  its  repayment,  and  may  mortgage  their  real  and 
personal  property  to  secure  debts  thus  created."^ 

"■  There  is  no  doubt  that  such  a  corporation,  like  any  other 
trading  company,  may  convey,  either  absolutely  or  upon  condition, 
all  property  which  it  is  authorized  to  hold,  or  which  is  essential 
to  carrying  on  the  business  for  which  it  was  designed."  * 

"  Generally  corporations  have  the  power  at  common  law  to  sell 
and  convey  their  property  as  they  think  proper.  The  power  of  a 
corporation  to  sell  and  convey  its  property,  and  to  borrow  money, 
and  to  make  contracts,  implies  power  to  mortgage  its  property, 
real  or  personal,  to  secure  the  payment  of  its  debts."  ^ 

1  2  Kent's  Comm.  231.  See  note  Law  River  Railroad  (1862),  44  N.  H.  127. 
Rep.  Ann.  142;  32  Can.  L.  J.  N.  S.  167.  "  Tliese  principles,"  added  the  court,  "are 

2  MLUer  v.  Rutland  &  Washington  R.  regarded  as  so  well  settled  by  author- 
Co.  (1863),  36  Vt.  452.  ity  and  by  the  common  sentiment  of  the 

3  Kelly  v.  Trustees,  etc.  (1877),  58  community  as  to  require  no  discussion" 
Ala.  489  ;  21  Am.  Ry.  l?ep.  138  ;  followed  The  following  cases  were  cited  :  Gordon  c. 
in  Sav.  &  Memphi.s"  R.  Co.  v.  Lancaster  Preston  (1833),  1  Watts,  385  ;  Teadwell 
(1878),  62  Ala.  555.  See  also  ISickford  v.  Salisbury  Mfg.  Co.  (1856),  7  Gray,  393, 
i'.  Grand  Junction  Ry.  Co.,  1  S.  ('.  Rep.  404  ;  Haxtun  v.  Bishop  (1829),  3  Wend, 
(an.)  696;  followed  in  Charlebois  v.  13;  De  Ruyter  v.  St.  Peter's  Church 
Great  North  West  Cent.  Rv.  Co.  (1892),  (1848),  3  Barb.  Ch.  119,  124;  3  Comst. 
9  Man.  1  ;  Win.  &  H.  B.  Co.  ?>  Mnnn,  7  238,  240  (1849)  ;  Despatch  Line  of  Pack- 
Man.  81  ;  Itoliison  v.  Coal  Cliff  Co.,  12  ets  Co.  r.  Bellamy  Manufg.  Co.  (1841),  12 
Now  South  Wales  L.  K.  E(|.  293  ;  Haley  N.  H.  205  ;  Pierce  i;.  Emery  (1856),  32 
V.  Halifax  Street  Ky.  Co.,  25  Nova  Scotia  N.  H.  484  ;  Jackson  v.  Brown  (1830),  5 
L.  1!.  140;  Thompson  v.  Erie  R.  Co.,  11  Wend.  590,  594.  See  also  Sus(iuehanna 
AV>1).  Pr.  N.  S.  188.  See  note  26  Am.  &  Bridge  &  Bank  Co.  v.  General  Ins.  Co. 
Eng.  i;.  R.  Cas.  661;  Comm.  Bank  v.  (1852),  3  Md.  305,  and  Grinnell  v.  Trus- 
Great  Western  R.  Co.,  13  L.  T.  105.  tees,  etc.  (Ohio  Ct.  of  Common  Pleas),  2 

♦  McAllister  v.  Plant  (1876),   54  Miss.     Redf.    l>aw  of   Railways,    497,   as   to   the 

106  :  s.  c.  17  Am.  Ry.  Iicyi.  389.  point   that   the  power  of  a  corporation  to 

^  Richards  v.  Merrimack  &  Connecticut     borrow  money  carries  with  it,  as  an  inci- 


§  1^1-] 


MORTGAGES    AND    THEIR    VALIDITY. 


1C3 


A  corporation  de  facto  can  make  any  contracts,  including  mort- 
gages of  future-acquired  property,  which  the  law  authoi-izes  cor- 
porations to  make.^ 

§  141.  Common-law  Power  to  mortgage  when  implied  from 
Statutory  Powers.  —  The  power  to  mortgage  corporate  property 
will,  of  course,  be  still  more  strongly  implied  if  the  legislature 
bestows  upon  the  corporation,  in  addition  to  the  ordinary  powers 
which  such  bodies  are  usually  endowed  with,  the  right  to  effect 
such  a  disposition  of  their  property,  or  to  enter  into  such  contracts 
regarding  it,  that  the  intention  to  permit  a  mortgage  or  pledge  of 
the  property  is  a  natural  and  reasonable  inference.  Thus  the 
power  to  sell  ordinarily  includes  the  power  to  mortgage.^ 

It  has,  however,  been  held  in  Illinois  that  this  doctrine  is  not 
applicable  to  stock  subscriptions,  especially  if  the  statute  confer- 
ring the  right  to  mortgage  corporate  property  enumerates  several 
kinds  of  property,  and  omits  such  securities  from  the  list.  Hence, 
although  a  railroad  company  may  assign  a  claim  for  unpaid  stock 


dent,  and  without  an  express  grant  in  its 
charter,  the  power  to  secure  the  loan  by  a 
mortgage. 

In  view  of  these  authorities  the  state- 
ment of  the  Illinois  court,  that  "it  would 
seem  the  power  of  a  corporation  to  mort- 
gage its  real  estate  might  he  regarded  as  a 
necessary  incident  to  the  power  to  acfjuire 
and  hold  real  estate,"  is  needlessly  cau- 
tious. See  Agricultural  Society  v.  Pad- 
dock (1875),  80  111.  263  ;  West  u.  Madison 
County  Agri.  Board  (1876),  82  111.  205  ; 
see  article  in  19  Am.  L.  Rev.  440  (1885), 
on  "The  Power  of  a  liaih'oad  Company  to 
mortgage  its  Property  and  Franchises." 
See  article  on  "  Railroad  Mortgages  of 
ruture-ac(|uired  Property,"  annotated 
case  by  Redtield,  3  Am.  L.  Reg.  N.  S. 
18.  See  article  on  "  Railroad  Mortgages 
—  to  the  State  or  Individuals,  Validity 
of,"  in  28  All).  L.  Jour.  92.  See  article 
on  "Conveyances  of  Franchises  by  Rail- 
road Companies,"  in  20  L.  Reg.  301,  361. 
On  power  to  issue  debentures  in  Eng- 
land, see  note  at  end  of  this  chapter. 

1  McTighe  v.  Macon  Construction  Co. 
(1893),  94  Ga.  306  ;  s.  c.  21   S.  E.  Rep. 

.701. 

2  McAllister  v.  Plant  (1876),  54  Mi.ss. 
106  ;  17  Am.  Ry.  Rep.  389  ;  Branch  v. 
Atl.  &  Gulf  R.'Co.  (1879),  3  Woods, 
481  ;    Hendee    v.     Pinkerton    (1867),  14 


Allen,  381.  In  the  last-mentioned  case 
the  court  said  (p.  386):  "We  entertain 
no  doubt  that  the  Grand  Junction  Rail- 
road and  Depot  Company  could  lawfully 
sell  and  convey  the  lands  embraced  in  this 
bill.  The}'  were  not  acquired  to  enable 
the  corporation  to  carry  on  the  business 
which  it  was  chartered  to  do  for  the  bene- 
fit of  the  public,  nor  needed  or  used  for 
that  purpo.se.  Their  alienation  in  no  wise 
impaired  or  affected  the  usefulness  of  the 
company  as  a  railroad,  or  its  ability  to 
exercise  any  of  its  corporate  franchises. 
In  the  absence  of  any  exy)ress  or  implied 
legi-slative  prohibition,  this  corporatinn 
possessed  all  the  ordinary  rights  of  owner- 
ship over  these  lands,  and  could  convey 
them  away  absolutely,  or  mortgage  them 
to  secure  any  valid  indebtedness.  The 
recent  cases  in  which  railroad  mortgages 
have  been  adjudged  invalid  by  this  court 
do  not  countenance  any  doubt  of  the  power 
of  a  railroad  company  to  sell  and  convey 
whatever  property  it  may  hold,  not 
acquired  under  the  delegated  right  of 
eminent  domain,  or  so  connected  with  the 
franchise  to  operate  and  manage  a  railroad 
that  the  alienation  would  tend  to  disable 
the  corporation  from  performing  the  pub- 
lic duties  imposed  upon  it,  in  consider- 
ation of  which  its  chartered  privileges 
have  been  conferred." 


1G4  RAILWAY   BONDS   AND    MORTGAGES.  [CHAP,  VIII. 

subscriptions,  like  any  other  cliose  in  action,  they  cannot  be 
mortgaged.^ 

A  power  to  execute  "  such  securities  in  amount  and  kind  "  as 
the  company  may  deem  expedient  has  been  held  to  authorize  a 
mortgage  of  the  entire  road,  with  its  franchises  and  all  its  prop- 
erty, including  all  future  acquisitions  for  the  use  of  its  road.^ 

§  142.  Common-laTv  Poorer  to  mortgage  when  limited  by  Impli- 
cation. —  The  power  of  a  corporation  to  alienate  its  property  is 
sometimes  said  to  be  plenary,  except  in  so  far  as  it  is  limited  by 
express  legislation.  This  way  of  stating  the  rule,  however,  is  not 
strictly  correct.  Ordinarily,  it  is  true,  an  intention  to  restrict  the 
jus  dispo7iendi  will  not  be  ascribed,  by  implication,  to  the  legisla- 
ture. Thus  the  fact  that  the  charter  contains  a  clause  providing 
that  the  shares  shall  not  be  assessed  over  one  hundred  dollars, 
and  that,  if  more  money  is  necessary,  it  shall  be  raised  by  the 
creation  of  new  shares,  will  not  curtail  the  power  to  mortgage.^ 

But  the  inference  drawn  will  be  just  the  opposite  wherever  the 
exercise  of  the  right  of  alienation  would  be  incompatible  with  the 
attainment  of  the  objects  for  which  the  corporate  franchises  were 
bestowed.  It  is  well  settled,  therefore,  that  this  right  is  limited 
by  the  purposes  for  which  the  corporation  is  created,  and  the 
nature  of  the  duties  and  liabilities  imposed  by  its  charter.* 

This  principle  is  applied,  in  the  case  of  railway  companies  and 
other  quasi  public  corporations,  to  property  which  is  essential  for 
the  performance  of  the  duties  owed  to  the  State,  or,  as  it  is  some- 
times expressed,  for  the  exercise  of  its  franchises.^ 

Such  property,  it  is  universally  held,  cannot  without  legislative 
nuthority  be  alienated  either  voluntarily  or  by  a  forced  sale.^ 

1  Morris  v.  Cheney  (1869),  51  111.  451.  Co.  (Lim.),   1895,   16  New  South  Wales 

"The  purpose  of  the  mortgage,"  said  the  L.  R.  Eq.  38.     See  §  155,  2Mst. 
court,  "  was  to  enalile  the  company  to  raise  ^  Pierce  v.  Milwaukee  R.  Co.   (1869), 

money  to  build  ami  equip  the  rond.    Would  24  Wis.  551. 

it  not,  then,  be  a  frustration  of  the  object  ^  Richainls  v.  Merrimack  &  Connecticut 

if  they  should  sell  their  cash  means  ?  "  River  Railroad  (186-2),  44  N.  H.  127. 

In    Englaiid,   however,  a   mortgage  of  *  Treadwidl     v.    Salisbury     Mfg.    Co. 

unpaid-up  cajntal   is  valid,  provided  the  (1856),  7  Gray,  393,  401  ;  Commonwealth 

power  is  reserved  by  apt  language  in  the  v.  Smith  (1865),  10  Allen,  448. 
articles   of  association.     7,V    Pyle    Works  ^  Richnrds  v.  Merrimack  &  Connecticut 

(C.  A.),    I,.   R.    44    Ch.   D.    .534    (1890).  River  Railroad  (1862),  44  N.  H.  127. 
The    point    emidiasized    by    the    Illinois  ^  Coe  v.  Columbus,  Pi([ua,  &  Indiana 

court  does  not  .seem  to  have  been  relied  R.  Co.  (1859),  10   Oliio  St.  372  ;  Vouiig- 

upon  either  in  the  argument  of  coun.sel  or  man   v.    Elmira   &    Williamsport    R.    Co. 

by  the  Lords  Justices.     See  also  Ansted  (1874),    65    Pa.   St.    278,    286;    Western 

V.   Land  Co.  of  Australia  (1893),  14  New  Pennsylvania  1?.  Co.  v.  Johnston  (1868), 

Soutli  Wales  L,  R.  Eq.  330  ;  In  re  Anglo-  59  Pa.  St.  290,  294  ;  Leedom  v.  Plymouth 

Auxtndi.iii    Invstnient   Finance  &   Land  R.   Co.    (1843),   5   Watts  &   Serg.    265; 


§   142.]  MOIiTGAGES    AND    TUEIU    VALIDITY.  IGo 

111  determining  the  practical  effect  of  this  principle,  the  courts 
have  drawn  some  distinctions  which  appear  to  be  scarcely  jus- 
tiliable  on  logical  grounds.  The  alienability  of  such  property  has 
usually  been  discussed  in  connection  with  the  validity  of  execu- 
tion sales,  and  the  courts  have  very  generally  assumed  that  the 
protection  of  the  rule  is  conhned  to  the  real  estate  and  fixtures  of 
the  corporation.  While,  therefore,  the  rolling-stock  of  a  railroad, 
when  not  in  actual  use,  is  liable  to  execution,^  even  if  it  is  covered 
by  a  mortgage,^  it  is  held  in  many  Htates  that  the  road-bed  and 
fixtures  of  a  railroad  company  or  a  turnpike  company,  the  canal 
and  a|)piirtenances  of  a  canal  company,  the  market-house  of  one 
holding  a  market  franchise,  and  the  plant  of  a  water  company 
cannot  be  levied  upon,  unless  the  legislature  has  provided.^ 

If  the  interest  which  the  public  has  in  the  discharge  of  the 
duties  undertaken  by  the  coi-poration  is  the  foundation  of  the  doc- 
trine as  to  the  inalienability  of  a  portion  of  the  corporate  property, 
it  is  difficult  to  see  any  valid  reason  why  the  road-bed  and  rails 
should  bo  protected,  and  the  cars,  without  which  the  road-bed  and 
rails  are  of  no  utility  whatever,  should  be  subject  to  execution. 
Both  rolling-stock  and  track  are  indispensable  agencies  in  the 
work  of  transportation,  which  is  the  special  function  of  a  railroad, 
one  not  being  more  indispensable  than  the  other.  There  would 
seem,  therefore,  to  be  much  inconsistency  in  placing  them  in  dif- 

Heiidee  v.   Piiikertoii    (1867),    14    Allen,  3  Plymouth  R.   Co.  v.  Colwell   {1S61\ 

381  ;  Richards  v.  Merrimack  &  Coniiecti-  39  Pa.  St.  337;  Western  Pennsylvania  R. 

cut  River  Railroad  (1862),  44  N.  H.  127;  Co.  v.  Johnston  (1868),  59   Pa.  St.  290, 

Susijuehanna  Canal  Co.  v.  Bonliani  (1845),  294  ;  Coe  v.  Columbus,  Piqua,  &  ludian- 

9    Watts  &  Serg.   27  ;    Gue  v.  Tidewater  apolis  R.  Co.   (1859),   10    Ohio   St.   372  ; 

Canal  Co.  (1860),  24  How.  257  ;  Black  v.  Youngman   v.    Elmira  &  Williamsport  R. 

Delaware  &  Raritan  Canal  Co.  (1871),  22  Co.  (1874),  65  Pa.  St.  278,  286;  Leedom  v. 

N.  J.  Eq.  130,  399  ;  Central  Transporta-  Plymouth  R.  Co.  (1843),  5  Watts  &  Serg. 

tiou  Co.  y.  Pullman  Palace  Car  Co.  (1891),  265;  Ammant  v.   New  Alexandria  Turn- 

139  U.  S.  24;  Ammant  v.  New  Alexan-  pike  Co.  (1825),   13  Serg.   &  Rawle,  210; 

dria    Turnpike   Co.    (1825),    13    Serg.    &  Winchester     Turnpike     Co.     v.     Yiinont 

Rawie,   210;  Winchester  Turnpike  Co.;;.  (1844),    5    B.    Monr.    1;    Steiner's    Aj)p. 

Viniout   (1883),    5   B.    Mon.    1;  Steiner's  (1856),  27  Pa.  St.  313;  Baxters.  Nash- 

App.    (1856),     27    Pa.    St.    313;    Foster  ville  Turni.ike  Co.  (1882),   10  Lea,  488  ; 

V.   Fowler  (1868),   60   Pa.  St.    27  ;    City  Gue   v.  Tidewater  Canal   Co.   (1860),    24 

of   Palestine   v.    Barnes   (1878),   50    Tex.  How.    257  ;    Susquehanna   Caual    Co.   v. 

538.  Bonham    (1845),    9    Watts  &   Serg.    27  ; 

1  Boston,  Concord,  &  Montreal   R.  v.  City   of  Palestine   v.    Barnes   (1878).    50 

Gilniore  (1858),  37  N.  H.  410.  Tex.  588  ;  Louisville  Water  Co.  v.  Hamil- 

-  C>'  V.  Columbus,  Piqua,  &  Indiana  ton  (1883),  81  Ky.  517.  But  an  aban- 
R.  Co.  (IS"9),  10  Ohio  St.  372  ;  Union  doned  road-bed,  not  in  use  for  any  pur- 
Trust  Co.  V.  Morrison  (1888),  125  U.  S.  pose  of  public  service,  is  not  exempt  from 
591 ;  s.  c.  33  Am.  &  Eng.  R.  R.  Cas.  33.  execution.  Benedict  v.  Heineberg  (1870), 
But,  of  course,  the  execution  sale  is  made  43  Vt.  231. 
subject  to  the  mortgage.     See  2Mst. 


1G6  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  VIII. 

ferent  categories  as  regards  their  liability  to  be  appropriated  to 
pay  the  debts  of  the  corporation.  The  theory  that  the  line  which 
divides  property  susceptible  of  a  voluntary  or  forced  alienation 
from  property  not  susceptible  of  such  alienation  is  identical  with 
that  which  divides  realty  from  personalty,  involves  the  assumption 
that  the  personalty  of  a  railroad  is  not  indispensable  to  the  exer- 
cise of  its  franchises,  and  such  an  assumption  evidently  begs  the 
very  question  at  issue.  The  practical  importance  of  the  subject, 
however,  is  much  diminished  both  in  consequence  of  the  compre- 
hensive legislation  by  which  the  disposition  of  railroad  property 
is  now  regulated  in  the  various  States,  and  also  by  reason  of  the 
fact  that,  as  the  personal  property  of  railroad  companies  is  almost 
invariably  subject  to  the  lien  of  a  mortgage,  the  right  to  levy  upon 
it  is  now  most  commonly  discussed  with  reference  to  the  protec- 
tive effect  of  the  "  after-acquired  property  "  clause,  and  not  wnth 
reference  to  its  indispensability  or  otherwise  for  the  exercise  of  the 
corporate  franchises. 

§  143.  General  Implications  from  Express  Grants  of  Po'wer  to 
mortgage.  —  A  railroad  company  having  a  general  express  power 
to  mortgage  its  road  may  mortgage  any  part  of  it,i  or  any  exten- 
sions which  may  subsequently  be  constructed,  no  fresh  legislative 
authority  being  necessary  in  this  case  to  supplement  the  general 
grant  of  power.^ 

So  also  it  has  been  held  that  the  grant  of  a  power  to  mort- 
gage "  property  and  income  "  confers  a  power  which  is  plenary  as 
regards  both  real  and  personal  property.^ 

If  the  power  conferred  is  to  mortgage  the  corporate  property  to 
secure  a  debt  incurred  by  the  borrowing  of  money  to  complete  and 
operate  a  raih-oad,  an  already  existing  debt  incurred  for  tliat  pur- 
pose may  be  secured  by  such  a  mortgage.^ 

A  coi-j)oration  of  one  State  clothed  with  authority  by  the  stat- 
utes of  that  State  to  mortgage  its  property  carries  that  power  into 
every  State  in  wliich  it  owns  property,  and  a  mortgage  of  such 
])r<)perty  by  the  corporation  in  any  State  will  be  valid  unless 
there  is  some  special  provision  in  laws  of  the  latter  State  to 
pi-(jhibit  it.^ 

1  Piillan  V.  Cin.  &  Chicago  Air  Line  *  Duncomb  v.  New  York,  Housatoiiic, 
R.  Co.  (186.'i),  4  Biss.  35.  &  Northern  K.  Co.  (1881),  84  N.  Y.  190  ; 

2  Oloninger  v.  Pittsburg   &  Connells-  Green sburgli,  Milfonl,    &  Hope  Turnpike 
ville  H.  Co.  (1S!)0),  139  Pa.  St.  13  ;  s.  c.  Co.  r.  JhCorniick  (1873),  45  Ind.  239. 
21   AtL   Rep.   497.     See   also   Hendee  v.  '^  American   Water  Works  Co.  of  Illi- 
Pinkerton,  14  AHen  (Mass.),  381.  nois  ef,  al.  v.  Farmer!?' Loan  &  Trust  Co. 

8  Covey  V.  Pitlsbuig  &  Counellsvillc  11.  (1 896),  73  Fed.  Rep.  95n.  The  New  York 
Co.  (1858),  3  Pliil.  173.  act  of  lS(i4  (ch.  517,  as  amended  by  the 


§  144.]  MORTGAGES   AND   THEIR   VALIDITY.  167 

§  144.  Implications  froxa  Grant  of  Power  to  mortgage  for  a  Par- 
ticular Purpose.  —  Whether  a  i^rant  of  authority  to  mortgage 
raUroad  property  for  a  particular  purpose  is  to  be  construed  as 
restricting  the  power  of  the  company  to  that  extent  depends  upon 
whether  the  grant  purports  to  augment  its  common-law  powers, 
or  is  merely  declaratory  of  the  common  law  in  regard  to  one  of 
the  purposes  for  which  a  corporation  is  deemed  to  be  capable  of 
pledging  its  property.  Thus  it  has  been  held  that  where  a  com- 
pany is  authorized  to  "  borrow  money  .  .  .  and  to  pledge  the  prop- 
erty to  pay  such  loans,"  there  is  nothing  to  induce  the  supposition 
that  the  legislature  intends  to  take  away  the  general  power  of  the 
corporation  to  create  liens  for  any  other  purpose.  As  regards  the 
exercise  of  that  general  power,  the  mode  in  which  the  debt  is 
created  is  quite  immaterial.^ 

On  the  other  hand,  a  provision  in  the  charter  of  a  Tennessee 
railroad  company  allowing  it  to  "  increase  its  capital  to  a  sum 
sufficient  to  complete  its  road  and  to  stock  it  with  everything 
necessary  to  give  it  full  operation  and  effect,  either  by  opening 
books  for  new  stock  or  by  borrowing  money  on  the  credit  of  the 
company  and  on  the  mortgage  of  its  charter  and  works,"  has  been 
held  to  give  only  the  limited  power  to  the  company  to  issue  bonds 
and  mortgage  its  property  to  complete  and  equip  its  road,  and  for 
no  other  purpose.^ 

These  cases  are,  it  will  be  observed,  fairly  reconcilable  on  the 
ground  that  the  Alabama  court  was  virtually  asked  to  recognize 
the  doctrine  that  the  general  power  of  a  corporation  to  mortgage 
its  property  may  be  restricted  by  implication,  —  a  doctrine  which, 
as  we  have  seen,  is  not  countenanced  by  the  authorities,  except  in 
regard  to  property  essential  to  the  exercise  of  its  franchises, — 
while  the  Tennesee  court  was  dealing  with  a  charter  whicli 
granted,  for  certain  specified  purposes,  a  power  unknown  to  the 
common  law,  and  was  therefore  applying  a  perfectly  familiar 
principle  of  statutory  construction  in  holding  that,  as  the  power 
in  question  originated  with  the  statute,  it  ought  not  to  be  ex- 
tended beyond  the  express  provisions  of  that  statute.^ 

act  of  1871,  ch.  481),  authorizing  mami-  stnied  in  Astor  r.  Westchester  Gas  Light 

facturing  corporations  to  mortgage  their  Co.  (1884),  33  Hun,  333. 

property  to   secure  the    payment  of  any  l  Allen  v.   Montgomery  &  West  Point 

debt  which  may  be  contracted  by  it  in  its  R.   Co.   (1847),  11  Ala.  437,  approi'ed   iu 

business,  authorizes  it  to  execute  a  mort-  ]\Iobile  &  Cedar  Point  R.  Co.  v.  Tahium 

gage  to  secure  not  only  antecedent  debts,  (1849),  15  Ala.  472. 

but  debts  contracted  at  the  time  the  se-  ^  Prazier  v.   Railway   Co.    (1889),    88 

curity  is  given.     Lord  v.   Yonkers  Fuel  Tenn.  138  ;  s.  c.  12  S.  W.  Pep.  537. 

Gas  Co.  (1885),   99  N.    Y.  547  ;  s.  c.   2  s  Sutlierland   on    Statutory    Construc- 

N.  E.   Rep.  909.    This  act  is  also  con-  tiou,  §  325. 


168  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  VIII. 

Where  the  provision  in  a  charter  which  confers  the  power  to 
borrow  money  and  secure  the  loan  by  a  mortgage  is  couched  in 
unqualified  language,  the  fact  that  the  charter  contains  another 
provision,  authorizing  the  building  of  a  certain  extension,  does 
not  warrant  the  conclusion  that  the  power  to  mortgage  is  to  be 
exercised  only  for  the  purpose  of  procuring  money  to  build  that 
extension.! 

§  145.  Power  to  execute  Mortgage  implies  Pow^er  to  insert  Pro- 
visions for  enforcing  it.  —  A  company  empowered  to  pledge  its 
income  has  an  implied  authority  to  insert  in  the  mortgage  a 
stipulation  that  the  mortgagee  may  take  possession  and  receive 
the  earnings,  since,  without  such  action,  the  pledge  could  not  be 
made  effectual. ^ 

On  similar  grounds  it  is  held  that  the  legislature,  in  giving  au- 
thority to  a  corporation  to  execute  a  mortgage,  intends  to  invest 
the  mortgagee  with  all  the  power  and  authority  incident  to  an 
instrument  of  that  kind,  and  that,  although  no  express  authority 
is  given  by  the  statute  to  sell  the  premises  by  virtue  of  the  mort- 
gage, a  power  of  sale  is  to  be  inferred  from  the  authority  to 
mortgage.^ 

§  146.  PoTwer  to  mortgage  not  restricted  by  Statute  declaring  Lieu 
in  Favor  of  State.  —  A  statute  by  which  the  State,  upon  indorsing 
the  bonds  of  a  railroad  company,  obtains  a  lien  upon  the  property 
of  such  company  prior  to  all  other  liens  cannot  be  construed  as 
forbidding  the  creation  of  a  lien,  by  mortgage  or  otherwise,  in 
favor  of  the  bondholders,  to  coexist  with  the  lien  of  the  State, 
nor  as  operating  to  restrain  or  abrogate  the  power  which  the 
company  would  otherwise  have  to  execute  a  mortgage  as  a  se- 
curity for  the  payment  of  its  bonds.'* 

^  147.  Power  of  Consolidated  Companies  to  mortgage  their  Property. 
—  The  general  rule  is  that  the  power  to  mortgage  possessed  by  a 
company  formed  by  the  legally  consummated  consolidation  of  two 
companies,  organized  under  the  laws  of  different  States,  is  coex- 
tensive with  the  powers  ])Ossessed  by  the  constituent  companies 
before  the  consolidation,  under  the  laws  of  their  respective  States.^ 

To  nsccrtain  whether  the  consolidation  is  valid,  reference  must 
be  had  to  the  laws  of  those  States.*^ 

1  Brown  v.  Maryland  &  Annai)oli.s  &  *  Kelly  v.  Trustees,  etc.  (1877),  58 
Elkton  M.  Co.,  62  Md.  4.39.  Ala.  -189  ;"  s.  c.  21  Am.  Ry.  Rep.  138. 

2  SfiVicrt  V.    Minneapolis  &   St.   Louis  ''  Mead   v.  New  York,   Hou.satonic,   & 
Ry.  Co.   (1893),  52  Minn.  246  ;  s.  c.   53  Northern  R.  Co.  (1877),  45  Conn.  199. 
N.  W.  Rep.  n51.  «  Taylor  v.  Atlantic  &  Great  Western 

3  Willink  V.  Morris  Canal   &  IJkg.  Co.  R.  Co.  (1878),  57  How.  I'r.  26. 
(181:;),  4  N.  J.  I'>i.  377. 


I 


I 


§  148.]  MORTGAGES   AND   THEIR    VALIDITY.  169 

But  even  if  the  constituent  companies,  in  making  the  contract 
foi-  consolidation,  fail  to  pursue  the  terms  of  their  charters,  an 
act  passed  by  the  legislature  of  one  of  the  States,  for  the  purpose 
of  confirming  the  consolidation,  will  have  the  effect  of  validating 
a  subsequent  mortgage  on  the  property  of  the  consolidated  com- 
pany in  that  State.^     (See  following  section.) 

As  railroad  companies  cannot  consolidate  without  legislative 
permission,  the  power  granted  to  consolidated  companies  to  make 
mortgages  may  be  restricted  and  qualilied  in  any  manner  which 
the  legislature  deems  proper.^ 

Where  corporations  have  consolidated  under  the  statute  of 
New  Jersey,  P.  L.  1893,  p.  121,  ch.  G7,  authorizing  domestic  cor- 
porations to  merge  and  consolidate  their  corporate  franchises 
and  other  proj)crty,  the  new  corporation  has  power  to  execute 
a  corporate  mortgage  to  secure  bonds  which  are  intended  for 
use  in  paying  indebtedness  of  the  constituent  corporations  and 
securing  advances  of  money  for  the  use  and  purposes  of  their 
business.^ 

§  148.  Legislative  Ratification.  —  Subsequent  ratification  by  the 
legislature  will  have  the  effect  of  validating  a  morto-age  which 
would  otherwise  be  invalid.^ 

Such  ratification  will  be  inferred  from  an  act  authorizing  the 
mortgage  trustees  to  sell  the  road  covered  by  the  mortgage.^ 

So  also  if  a  trust  mortgage  is  invalid  in  so  far  as  it  purports  to 
convey  the  franchises  of  the  road,  but  otherwise  valid,  and  the 
legislature  prior  to  the  sale  thereunder  authorizes  the  president 
of  the  company  to  transfer  the  franchises  to  the  purchasers,  tiie 
latter  will  acquire  a  good  title  to  the  franchises  by  the  execution 
of  a  deed  in  accordance  with  the  enabling  statute.^ 

So  also  where  an  instrument,  purporting  to  be  the  mortgage  of 
the  company,  executed  prior  to  the  passage  of  an  act  authorizing 
such  companies  to  mortgage  their  property,  but  the  bonds  se- 
cured thereby  are  not  issued  till  after  the  passage  of  that  act,  it 

1  Racine  &  Mississippi  R.  Co.  v.  Farm-  If)l  ;  Shaw  v.  Norfolk  County  Railroad 
ers'  Loan  &  Trust  Co.  et  al.  (1868),  49  111.  Co.  (1855),  5  Gray,  162  ;  Galveston  Rail- 
331.  road   Co.    v.    Cowdrey    (1870),    11    Wall. 

2  Frazier  v.  East  Tennessee,  V.  &  G.  459 ;  Slieplev  v.  Atlantic  &  St.  Lawrence 
Ry.  Co.  (1889),  88  Tenn.  138;  s.  c.  12  R.  Co.  (1867),  55  Me.  395;  Racine  & 
S.  W.  Rep.  537.  Mississipjn   R.    Co.   v.    Farmers'  Loan   & 

3  Camden  Safe  Deposit  &  Trust  Co.  v.  Trust  Co.  (1868),  49  111.  331. 
Burlington  Carpet  Co.  et  al.  (N.  J.  E(i.,  "  Hicliardsv.  Merrimack  &  Connecticut 
1895),  33  Atl.  Rep.  479.  River  Railroad  (1862),  44  N.  H.  127. 

*  Hall  V.  Sullivan  Railroad  Co.  (1857),  e  Hatcher  v.   Toledo,  ^Yahash,  &  Wes- 

21    Law    Rep.    138;   Graham    v.    Boston,     ton   R.    Co.    (1872),    62   111.    477;  s.  C.    6 
Hartford,  &  Erie  R.  Co.  (1886),  118  U.  S.     Am.  Rv.  Rep.  405. 


170 


RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  VIII. 


will  be  regarded  as  operating  upon  the  transaction  so  as  to  cure 
any  invalidity  which  arises  from  the  want  of  legislative  au- 
thority.^ 

B.  Power  to  mortgage   Franchises. 

§  149.  General  Principles  respecting  Power  to  mortgage  Franchises. 
—  Mortgages  of  that  portion  of  the  property  of  a  corporation 
which  consists  in  its  franchises  have  very  generally  been  con- 
sidered to  stand  upon  a  different  footing  from  mortgages  of  its 
other  properties  and  rights.  The  great  preponderance  of  au- 
thority is  in  favor  of  the  view  that  franchises  cannot  be  mort- 
gaged without  the  express  permission  of  the  legislature.  The 
fact  that  a  mortgage  contemplates,  in  certain  contingencies,  a 
sale  of  the  thing  mortgaged  necessarily  brings  a  mortgage  of 
franchises  within  the  reach  of  the  general  rule  that  franchises 
cannot  be  transferred  without  the  consent  of  the  sovereign 
grantor,  the  mode  in  which  the  transfer  is  sought  to  be  effected 
being  quite  immaterial.  The  authorities  for  this  general  rule  are 
very  numerous,  as  the  subjoined  note  shows.^ 


1  Miller  v.  Rutlaud  &  Washington  R. 
Co.  (1863),  36  Vt.  452. 

2  Commonwealth  v.  Smith  (1865),  10 
Allen,  448  ;  East  Boston  Freight  R.  Co. 
V.  Eastern  R.  Co.  (1866),  13  Allen, 
422  ;  Brasliu  v.  Summerville  Horse  R. 
Go.  (1888),  145  Mass.  64  ;  s.  c.  13  N.  E. 
Rep.  65  ;  Hendee  v.  Pinkerton  (1867),  14 
Allen,  381  ;  East  Boston  Freight  R.  Co. 
i;.  Hubbard  (1865),  10  Allen,  459;  Rich- 
ardson V.  Sibley  (1865),  11  Allen,  65; 
Troy  k  Rutland  R.  Co.  v.  Kerr  (1854),  17 
Barb.  581 ;  Troy  «&  Boston  R.  Co.  v.  Boston, 
H.  T.,  etc.  R.'Co.  (1881),  86  N.  Y.  107; 
Abbott  V.  Johnstown,  G.  &  K.  Horse  R.  Co. 
(1880),  80  N.  Y.  27  ;  People  v.  Albany  & 
Vermont  R.  Co.  (1879),  77  N.  Y.  232  ;  Lau- 
nian  v.  Lebanon  Valley  R.  Co.  (1858),  30 
Pa.  St.  42  ;  Ammant  v.  New  Alexandria 
Turnpike  Co.  (1825),  13  Serg.  &  Rawle, 
210;  Bayard's  Appeal  (1872),  72  Pa.  St. 
453  ;  Pittsburg,  etc.  R.  Co.  v.  Alleghany 
Co.  (1869),  63  Pa.  St.  126  ;  Roper  v.  Mc- 
Whorter  (1883),  77  Va.  214;  Cop  v.  Co- 
lumbus, l'it|ua,  &  Ind.  R.  Co.  (1859),  10 
Ohio  St.  372  ;  Black  v.  Delaware  &  Rari- 
tnn  Canal  Co.  (1873),  24  N.  J.  Eq.  455, 
465  :  Stockton  v.  T'cntrnl  R.  Co.  d  a/. 
(18!i2).  .'')0  N.  .T  Ki|.  52:  Randolph  v. 
J>aiiicd  (1876),  27  N.  J.  E.].  557  ;  Wood  v. 


Truckee  Turnpike  Co.  (1884),  24  Cal.  474  ; 
Clarke  v.  Omaha  &  S.  W.  R.  Co.  (1876), 
4  Neb.  458  ;  Bruffett  i-.  Great  Western  R. 
Co.  (1861),  25  111.  353 ;  Gulf,  Col.  &  S.  F. 
R.  Co.  V.  Morris  (1887),  67  Tex.  692; 
James  v.  Pontiac  &  Grovesdale  Plank 
Road  Co.  (1860),  8  Mich.  91  ;  Ragan  v. 
Aiken,  9  Lea  (Tenn.),  609 ;  Pullan  r. 
Cincinnati,  etc.  R.  Co.  (1865),  4  Biss.  35; 
Hall  V.  Sullivan  R.  Co.  (1857),  2  Redf. 
Am.  Ry.  Cus.  621  ;  Gue  v.  Tidewater 
Canal  Co.  (1860),  24  How.  257  ;  Pennsyl- 
vania R.  Co.  V.  St.  Louis,  Alton,  &  T.  H. 
R.  Co.  (1886),  118  U.  S.  290  ;  Stewart  v. 
Jones  (1867),  40  Mo.  140.  In  McAllister 
V.  Plant  (1876),  54  Miss.  106,  it  was 
doubted  whether  franchises  could  be  mort- 
gaged without  legislative  authority,  al- 
though it  had  been  pieviously  decided  in 
that  State  that  a  railroad  company  could 
not,  without  special  authority,  mortgage  its 
franchises  and  the  ])ro])erty  essential  to 
the  exercise  thereof.  Arthur  v.  President 
of  Commercial  Rank  (1848),  9  Sm.  &  M. 
394  ;  New  Oi'leans,  Jackson,  &  Great 
Northern  R.  Co.  v.  Harris  (1854),  27 
Miss.  517.  See  note  46  Am.  &  Eng. 
R.  R.  Cas.  661  ;  State  v.  Morgan,  28  La. 
Ann.  482  ;  Houston  &  Tex.  Cent.  R.  Co. 
V.  Shirley,  54  Tex.  125  ;  Atkinson  v.  Mari- 


§  140.]  MORTGAGES   AND   THEIR    VALIDITY.  171 

One  of  the  most  forcible  presentations  of  the  reasons  on  which 
the  rule  is  founded  is  contained  in  the  following  passage  from  the 
opinion  in  Commonwealth  v.  Smith,^  in  which  the  impossibility  of 
finding  any  foundation,  either  of  logic  or  public  policy,  for  con- 
ceding the  quality  of  assignability  as  to  some  franchises  and 
denying  it  as  to  others  is  very  clearly  shown. 

"  But  in  the  case  of  a  railroad  company,  created  for  the  express 
and  sole  purpose  of  constructing,  owning,  and  managing  a  rail- 
road ;  authorized  to  take  land  for  this  public  purpose  under  the 
right  of  eminent  domain ;  whose  powers  are  to  be  exercised  by 
officers  expressly  designated  by  statute ;  having  public  duties,  the 
discharge  of  which  is  the  leading  object  of  its  creation  ;  required 
to  make  returns  to  the  legislature,  —  there  are  certainly  great  and, 
in  our  opinion,  insuperable  objections  to  the  doctrine  that  its  fran- 
chise can  be  alienated,  and  its  powers  and  privileges  conferred  by 
its  own  act  upon  another  person  or  body,  without  authority  other 
than  that  derived  from  the  fact  of  its  own  incorporation.  The 
franchise  to  be  a  corporation  clearly  cannot  be  transferred  by  any 
corporate  body,  of  its  own  will.  Such  a  franchise  is  not,  in  its 
ovvii  nature,  transmissible.  The  power  to  mortgage  can  only  be 
coextensive  with  the  power  to  alienate  absolutely,  because  every 
mortgage  may  become  an  absolute  conveyance  by  foreclosure. 
And  although  the  franchise  to  exist  as  a  corporation  is  distin- 
guishable from  the  franchises  to  be  enjoyed  and  used  by  the  cor- 
poration after  its  creation,  yet  the  transfer  of  the  latter  differs 
essentially  from  the  mere  alienation  of  ordinary  corporate  prop- 
erty. The  right  of  a  railroad  company  to  continue  in  being 
depends  upon  the  performance  of  its  public  duties.  Having  once 
established  its  road,  if  that  and  its  franchise  of  managing,  using, 
and  taking  tolls  or  fares  upon  the  same  are  alienated,  its  whole 
power  to  perform  its  most  important  functions  is  at  an  end. 
A  manufacturing  company  may  sell  its  mill,  and  buy  another ; 
but  a  railroad  company  cannot  make  a  new  railroad  at  its 
pleasure."  2 

Some  courts  have  expressed  their  dissent  from  this  doctrine  in 
more  or  less  unqualified  terms.  In  Maine  the  theory  that  fran- 
chises could  not  be  mortgaged  has  been  thought  to  be  "little 

etta  &  C.  R.  Co.,  15  Ohio  St.  21  ;   Naglee  the  public  streets  is  an  ordinary  nianufac- 

V.  Altix.  &  Fred.  R.  Co.,  83  Va.  707;  s.  c.  taring   corporation  which  may  mortgage 

32  Am.  &  Eng.  R.  R,  Cas.  401  ;  P.  «&  C.  R.  its  property,   and  not  a   public  or  qunsi 

Co.  V.  Allegheny  County,  63  Pa.  St.  126.  public  corporation  which  the  public  ])olicy 

1  10  Allen,  448  (1865).  of  Massachusetts  prohil)its  from  so  doing. 

2  A  corporation  organized  to  supply  Evans  v.  Boston  Heating  Co.  (1892),  157 
heut   to   buildings  through  pipes  laid  in  Mass.  37  ;  s.  c.  31  N.  E.  698. 


172 


RAILWAY   BONDS   AND    MORTGAGES. 


[chap. 


VIII. 


better  than  practical  repudiation,"  and  to  have  "  little  to  commend 
it,  and  much  to  condemn  it,"  ^  though  it  may  be  remarked  that 
the  point  was  not  practically  involved  in  the  case  in  which  these 
expressions  were  used,  as  the  legislature  had  ratified  the  mortgage. 


1  Shepley  v.  Atlantic  &  St.  Lawreuce 
E.  Co.  (1S67),  55  Me.  395.  The  sweep- 
ing conileoination  of  the  common  view 
was  supported  by  the  following  reason- 
ing:  "The  whole  aigument  seems  to 
have  no  greater  force  than  this,  that  it 
is  dangerous  to  the  public  interests  to 
have  the  powers  and  privileges  con- 
ferred by  a  railroad  franchise  trans- 
ferred from  the  original  corporators  to  a 
new  body.  But  when  we  consider  how 
little  importance  is  attached  to  the  per- 
sons of  the  original  corporators,  how  soon 
death  must,  and  other  ciicumstances  niay, 
remove  them  from  all  participation  in  the 
afi'airs  of  the  road,  how  constantly  those 
who  have  the  active  management  of  it 
are  in  fact  being  changed,  we  shall  see 
how  little  practical  merit  this  argument 
has.  At  the  beginning  the  corporators 
undoubtedly  have  a  conti'oUing  influence, 
but  afterwards  the  diiectors  are  elected  by 
the  stockholders,  and  are  often  changed. 
Is  there  any  reason  to  suppose  that  if  a 
mortgage  should,  by  foreclosure,  transfer 
the  franchise  to  new  hands,  that  as  capable 
men  would  not  be  appointed  to  manage 
the  road  as  before  ?  Would  not  the  bond- 
holders be  as  interested  and  as  capable  of 
appointing  suitable  managers  as  the  stock- 
holders f  Does  any  one  fear  that  the  pub- 
lic interest  would  not  be  as  safe  with  the 
former  as  with  the  latter  ?  Why,  then,  is 
it  dangerous  to  the  public  interests  to  al- 
low such  a  transfer  ?  " 

But  this  view  was  approved  in  a  later 
case  in  the  same  State.  Kennebec  k, 
Portland  R.  Co.  v.  Portland  &  Kennebec 
K.  Co.  (1871),  59  Me.  9.  Much  stress  was 
there  laid  upon  the  fact  that  such  an 
objection  to  the  validity  of  the  mortgage 
rested  solely  on  public  policy,  and  was, 
therefore,  rather  for  the  State,  than  any  of 
tlie  parties  in  interest,  to  raise.  Upon  an 
examination  of  the  various  enactments  of 
the  legislalnre  in  regard  to  railroads  the 
court  concluded  that  the  State  could  not, 
and  did  not,  object  to  the  mortgage.  It 
wa.s  also    pointed  out   tliat   as   a   statute 


had  conferred  upon  the  bondholders  power 
to  organize  as  a  corporation,  after  fore- 
closure, with  all  the  powers  of  the  former 
corporation,  and  in  eilect  to  assume  a  new 
franchise  and  act  under  it,  the  question 
what  became  of  the  old  franchise  was  of 
little  practical  importance.  A  late  de- 
cision by  the  Maine  court  seems  to  indi- 
cate very  strongly  that  its  earlier  views 
have  been  modified  so  as  to  bring  them 
into  a  closer  conformity  with  the  general 
current  of  authorities.  In  the  case  of 
Brunswick  G.  L.  Co.  v.  United  Gas,  etc. 
Co.,  85  Me.  532,  it  was  held  that  a  qwisi 
})ublic  corporation  is  not  allowed  to  sell  or 
lease  its  corporate  powers  or  franchises 
without  legislative  authorit}',  the  reason 
assigned  being  the  usual  one,  that  "  if  they 
were  able  to  do  so,  they  might  thereby 
disable  themselves  from  the  performance 
of  their  public  duties,  and  thus  escape 
from  the  power  of  the  courts  and  of  the 
legislature  to  enforce  their  performance." 

It  is  true  that  the  same  case  also  de- 
clares the  law  of  Maine  to  be  that  the 
franchise  of  a  corporation  having  the  right 
to  receive  tolls  may  be  lost  by  an  execu- 
tion sale,  or  the  foreclosure  of  a  mortgage. 
But  unless  this  doctrine  is  intended  to  be 
based  on  the  existence  of  a  statute  ex- 
pressly permitting  these  modes  of  transfer, 
—  a  point  which  the  opinion  does  not 
show,  —  it  cannot  be  reconciled  with  the 
opinion  expressed  as  to  the  illegality  of  an 
unauthorized  sale  or  lease.  Ko  distinction 
can  be  drawn  between  voluntary  and  in- 
voluntary transfers.  "A  mortgage  trans- 
ferring a  title,  which,  upon  the  happening 
of  a  certain  contingency,  may  be  made 
absolute  by  sale  or  foreclosure,  has  the 
effect,  as  soon  as  it  becomes  of  any  value 
to  secure  the  purpose  for  which  it  was 
made,  to  accomplish  as  complete  a  transfer 
of  the  corporate  franchise  and  property, 
and  the  means  of  pei'forming  the  corpo- 
rate duty,  as  if  it  had  been  originally  an 
outright  sale."  Richardson  v.  Sibley,  11 
Allen,  05  (per  Gray,  J.). 


§  149.]  MORTGAGES    AND    THEIR    VALIDITY.  173 

Similar  views  have  been  thus  expressed  by  another  New  Eng- 
land court :  "  It  is  assumed  by  the  court  that,  if  a  corporation 
would  entitle  itself  to  the  enjoyment  of  its  franchises,  it  must 
comply  with  the  provisions  and  requirements  of  its  charter,  both 
express  and  implied,  so  far  as  its  duty  to  the  public  is  concerned. 
It  must  act  under  its  charter  for  the  accomplishment  of  the  pur- 
poses designed  by  it.  But  it  is  at  the  option  of  the  corporation 
whether  it  will  do  so  or  not.  The  only  remedy  in  favor  of  the 
public  is  by  a  proceeding  to  enforce  a  forfeiture  of  the  charter. 
The  corporation  cannot  be  compelled  either  to  make  or  operate  a 
railroad.  Whether  it  will  do  so  or  not  depends  on  the  expecta- 
tion of  its  being  a  feasible  and  prosperous  enterprise.  If  it 
should  find  it  to  be  a  losing  undertaking,  it  would  be  likely  to 
cease  to  prosecute  it.  If  it  should  Iind  or  expect  it  to  be  a  profit- 
able one,  it  would  be  likely  to  continue  its  prosecution.  If  tlie 
corporation  should,  for  prudential  considerations,  see  fit  to  trans- 
fer to  others  its  property,  with  the  franchises  appertaining  to 
such  property,  the  same  motives  would  operate  upon  the  assignees, 
and  to  the  same  intents,  as  upon  the  corporation.  The  assignees 
would  hold  subject  to  the  obligations  and  duties  to  the  public 
which  rested  upon  the  corporation,  and,  in  order  to  take  any 
benefit  from  the  assignment,  would  find  it  necessary  to  answer  to 
those  obligations  and  duties.  Tlie  same  remedy  would  be  as  effec- 
tual, so  far  as  rights  depending  on  the  franchises  of  the  cor{)ora- 
tion  were  concerned,  upon  the  assignees  as  upon  the  corporation. 
The  assignees  could  no  more  pervert  the  roadway  to  other  nses 
than  could  the  corj)oration.  Thoy  could  no  more  turn  to  any 
other  account  than  the  operating  of  a  railroad  any  of  the  corpo- 
rate rights  and  privileges,  than  could  the  corporation.  So  far  as 
property  held  in  absolute  title  is  concerned,  the  corporation  and 
the  assignees  could  equally  dispose  of  it  as  they  should  see  fit, 
whether  such  property  was  essential  to  the  operating  of  the  rail- 
road or  not.  So  long  as  the  rights  and  privileges  conferred  upon 
the  corporation  should  be  exercised  in  accomplishment  of  the  pur- 
poses for  which  they  were  conferred,  there  would  seem  to  be  not 
only  no  occasion,  but  no  right,  on  the  part  of  the  public  to  inter- 
pose between  the  corporation  and  its  assignees,  —  certainly  not 
by  way  of  taking  a  forfeiture  of  the  charter ;  and,  as  it  seems  to 
us,  equally  none  on  the  part  of  individuals,  by  way  of  questioning 
the  validity  of  the  assignment  on  the  score  of  public  policy. 

"The  idea  of  a  particular  confidence  reposed  in  the  particular 
persons  who  compose  the  corporation,  for  the  service  of  the  public 
interests  involved  in  the  making  and  operating  of  the  proposed 


174  RAILWAY    BONDS    AND    MORTGAGES.  [CHAP.  VIII. 

railroad,  seems  to  us  altogether  fanciful  and  theoretical.  In  fact, 
there  is  no  such  confidence.  From  the  nature  of  the  case  there 
could  not  be.  For  who  shall  compose  the  corporation  at  any 
given  time  depends  on  who  owns  shares  of  the  capital  stock, — 
one  set  of  men  to-day,  another  to-morrow ;  some  citizens  of  the 
State,  some  foreigners.  The  true  idea  is  that  the  public  relies 
for  its  assurance  that  its  rights  will  be  duly  answered  upon  the 
fact  that  they  must  be,  in  order  that  the  conferred  privileges  may 
be  held  and  enjoyed  by  the  corporation,  of  whomsoever  composed  ; 
not  upon  any  personal  confidence  which  the  legislature  has  in 
an  indiscriminate  body  of  persons,  —  men,  women,  and  children, 
citizens  and  foreigners,  —  daily  changing,  who  may  become  or 
cease  to  be  stockholders  at  their  own  pleasure  and  without 
restraint."  ^ 

The  arguments  adduced  in  these  passages  are  rather  in  the 
nature  of  reasons  why  the  legislature  should  permit  the  transfer 
of  franchises  than  a  refutation  of  the  commonly  received  rule. 
To  show  that  that  rule  may,  for  many,  or  even  most  purposes,  be 
practically  evaded  by  the  sale  of  each  corporator's  interest  in  the 
franchise  does  not  prove  that  the  rule  itself  does  not  exist,  or  that 
it  should  be  entirely  abrogated.  Besides,  it  should  be  noticed 
that  these  courts  have  misapprehended,  or  at  least  misstated,  the 
real  foundation  of  the  doctrine  which  is  combated.  The  transfer 
of  franchises  without  legislative  authority  is  illegal,  not  because 
the  charter  creates  a  personal  trust  or  confidence  in  the  original 
members  of  the  corporation,  but  because  (1)  the  charter  of  a  cor- 
poration is  the  measure  of  its  powers,  and  the  enumeration  of 
these  powers  excludes  all  others ;  and  (2)  because  a  grant  of 
franchises,  like  any  other  grant,  creates  a  contract  between  the 
sovereign  grantor  and  the  corporation,  as  a  corporation,  by  which 
the  latter  obligates  itself  to  discharge  certain  functions ;  and  this 
contract  is  necessarily  violated  if  the  corporation  undertakes  to 
deprive  itself  of  that  possession  of  the  franchise  without  which 
performance  of  the  coutract  is  impossible.^ 

The  relation  ci'cated  by  a  grant  of  franchises,  therefore,  is  no 
more  one  of  personal  confidence  than  the  relation  created  by  any 
other  contract,  and  an  argument  based  wholly  upon  the  theory 
that  a  grant  has  the  effect  attributed  to  it  by  the  courts  of  Maine 
and  Vermont  is  unsound. 

A  business  corporation  oi'gnnized  un(l(>r  the  law  of  New  York, 
eh.  (Ill,  N.  Y.  Laws,  1875  (now  repealed),  though    it  might  at 

1   MilliTf.  I.'iill.iiid  &  Wiisliiiigtiiii  R.  -  Sco  the   Icailiiir;   ense  of  Thomas  v. 

Co.,  36  Vt.  452,  4'Jl.  Kailroad  Co.  (187i)),  101  U.  S.  71. 


§  150.]  MORTGAGES    AND    THEIR    VALIDITY.  175 

common  law  mortgage  its  property  at  will  the  same  as  natural 
persons/  was  subject  to  the  restrictions  of  the  statute,  and,  unless 
authorized  by  statute,  could  not  mortgage  its  franchises.  There 
was  no  such  authority  under  the  act  of  1875.^ 

§  150.  Franchise  to  be  a  Corporation  placed  by  some  Courts  on 
a  Different  Footing  from  other  Franchises.  —  In  regard  to  the  power 
to  mortgage  franchises  some  courts  have  drawn  a  distinction, 
though  not  on  the  same  grounds,  between  the  franchise  to  be  a 
corpoi-ation  and  other  franchises.  According  to  one  view  "  a  cor- 
poration being  an  artificial  being,  cannot  transfer  its  own  exist- 
ence into  another  body ;  nor  can  it  enable  natural  persons  to  act 
in  its  name,  save  as  its  agents,  or  as  members  of  the  corpora- 
tion,  acting  in  conformity  with  the  modes  required  by  or  allowed 
in  its  charter.  But  the  franchises  to  build,  own,  and  manage  a 
railroad,  and  to  take  tolls  thereon,  are  not  necessarily  corporate 
rights ;  they  are  capable  of  existing  in  and  being  enjoyed  by 
natural  persons;  and  there  is  nothing  in  their  nature  inconsistent 
with  their  being  assignable.  The  franchise  to  be  a  corporation, 
therefore,  is  not  a  subject  of  sale  or  transfer,  unless  the  law,  by 
some  positive  provision,  has  made  it  so,  and  pointed  out  the 
modes  in  which  such  sale  and  transfer  may  be  made  efl'ectual."  ^ 

In  Bardstown  &  Louisville  R.  Co.  v.  Metcalfe*  a  further  refine- 
ment on  this  doctrine  was  introduced,  and  it  was  held  that  a 
railroad  company  authorized  by  its  charter  to  borrow  money  to 

1  See    Barry   v.   Mereliants'    Exchange  rule   seems    to   have    no   bearing   on   the 

Co.  (1844),  1  Saiidf.  Ch.  280.  question  whether  the  party  undertaking  to 

■■^  Beebe   v.  Rielunond    Light,    Heat,   &  make    the  grant  has  the  power  to  do  so. 

Power  Co.    (1895),    13    Misc.   Rep.    737  ;  In  Peter  v.  Kendal  the  controversy  arose 

s.  c.  3.T  N.  Y.  Suppl.  1,  citing  as  author-  out  of  the  lease  of  a  ferry  franchise,  but 

ity  Carpenter  v.  Black  Hawk  Co.  (1875),  there  was  no  question  as  to  the  power  to 

65  N.  Y.  43,  50.  make  the  lease.     Moreover,  the  franchise 

•^  Hall  V.  Sullivan  Railroad  Co.  (1857)>  was  held  by  an  individual,  and  not  by  a  cor- 

1  Bruuner  Coll.  Cases,  613;  21  Law  Rej).  poration, — a  circumstance  which  renders 

138  ;  11   Fed.  Cas.  257  (^1857).     Compare  this  case  still  less  pertinent,  if,  as  seems 

Miller  V.   Rathxml  &  Washington  R.  Co.  most  consistent  with   general    principles, 

(1863),  36  Yt.  452  ;    Bank  of  Middlebury  the  validity  of  a  transfer  of  franchises  by 

V.  Edgerton  (1858),  30  Vt.  182.  a  corporation  resolves  itself  in  every  in- 

In  the  first  of  chese  cases  Mr.  Justice  stance  into  a  tjuestion  of  the  express  or 
Curtis  cited  in  support  of  the  doctrine  implied  powers  of  that  artificial  body. 
CoMiyns's  Digest,  "  Grants,"  C,  and  Peter  So  far  as  our  researches  extend,  it  does  not 
V.  Kendal,  6  B.irn.  &  C  703.  It  may  be  appesir  that  the  Eiigli.sh  courts  recognize 
fairly  (piestioned  whether  either  of  these  the  distinction  made  by  Mr.  Justice  Cur- 
authorities  is  properly  in  point.  In  the  tis.  See  also  the  passaj;e  cited  from  Com- 
former,  franchises  are  tnerely  enumerated  monwealtlw.  Smith,  §  149,  .^//prre,  which  is 
as  being  among  the  various  subjects  of  a  a  weighty  authorit)'  against  admitting  any 
grant.  In  other  words,  they  "lie  in  qualification  of  the  general  rule, 
grant"  and  not    "in  livery."     But  this  ■*  4  Mete.  (Ky.),  199  (1862). 


176  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  VIII. 

complete  the  road,  but  not  expressly  authorized  to  make  a  mort- 
gage on  its  property  and  franchises  to  secure  the  bonds  evidencing 
the  loan  effected  for  that  purpose,  has  an  implied  power  to  make 
such  a  mortgage,  but  cannot  mortgage  its  corporate  existence  or 
any  prerogative  francliise  conferred  upon  it. 

Another  theory  has  also  been  formulated.  "  The  franchise  to 
be  a  corporation,"  it  is  said,  "is  not  strictly  a  corporate  fran- 
chise," or  "  a  franchise  of  the  corporation  "  at  all.  It  is  a  fran- 
chise of  the  individual  corporators,  or  the  natural  persons  who  are 
shareliolders  of  the  capital  stock,  and  pertains  to  them  as  such 
corporators ;  and  the  corporation  itself,  as  such,  in  its  collective 
capacity,  or  by  its  board  of  directors,  has  no  more  power  to  sell 
tliis  franchise  thus  pertaining  to  the  corporators  individually  than 
it  has  to  sell  their  paid  shares  of  capital  stock. ^ 

§  151.  Existence  of  Power  to  mortgage  the  Corporate  Existence  not 
usually  inferred.^  —  Whatever  is  the  essential  distinction  between 
the  franchise  to  be  a  corporation  and  the  corporate  franchises,  the 
authorities  are  very  clear  as  to  existence  of  a  general  rule  of  con- 
struction which  requires  the  courts  to  lean  strongly  against  the 
inference  that  the  legislature  intended  in  any  particular  instance 
to  grant  the  power  to  mortgage  the  former  franchise.  In  an  early 
Alabama  case  ^  the  court,  in  passing  upon  the  effect  of  a  statutory 
provision  by  which  the  president  and  directors  of  a  company  were 
empowered  "  to  borrow  money  to  carry  into  effect  the  objects  of 
the  charter,  to  issue  certificates  or  other  evidence  of  such  loans, 

1  Meyer  i'.  Johnston  (1S75),  53  Ala.  portance.  It  may  be  questioned,  there- 
237;  s.  c.  15  Am.  Ry.  Rep.  467,  per  fore,  whether,  in  view  of  this  alternative, 
Manning,  J.;  Memphis  &  Little  Rock  R.  it  is  not  preferable  to  fall  back  upon  the 
Co.  V.  Commissioners  (18S4),  112  U.  S.  simple  principle  in  support  of  which  this 
609.  This  doctrine  is  certainly  not  free  rather  subtle  theory  has  been  enunciated  ; 
from  objections.  If  the  franchise  to  be  a  viz.,  that  while  the  existence  of  a  power 
corporation  is  private  property  in  the  same  to  mortgage  the  corporate  existence  is 
sense  as  shares  of  stock,  why  should  it  not  never  inferred  except  from  words  specially 
be  capable  of  transfer  by  the  collective  importing  a  grant  of  that  power,  the  ex- 
consent  of  all  the  ])arties  in  interest  ?  On  istencc  of  a  power  to  mortgage  the  other 
the  other  liand,  if  the  legislature  has  franchises  may  be  deduced  from  the  general 
authorized  the  body  organized  as  the  cor-  tenor  of  the  enactment  under  which  the 
poration  to  assign  the  franchise  in  the  corporation  has  been  organized.  See  the 
manner   in    which   corporate   property   is  following  section. 

usually  assigned,  it  seems  clear  that  the  ^  The    subject-matter   of   this   section 

corporators    must    be    assumed    to    have  should  be  read  in  connection  with  those 

taken  their  shares  of  stock  subject  to  the  which  deal  with  the  question  what  passes 

contingency  that  the  franchise  may  in  this  to  the  ]nirchasors  at  the  Ibreclosure  sale, 

way  pass  from  them.     Under  such  circum-  See  Chap.  XXXVI. 

stances,   the    fact   that    the    franchise    is,  ^  Allen  v.  Montgomery  &  West   Point 

technically     speaking,     their     individual  II.  Co.  (1817),  11  Ala.  437. 
[Moperty,  would  appear  to   be   of  no  im- 


§  151.]  MORTGAGES   AND    THEIR    VALIDITY.  177 

and  to  pledge  tlie  jjrojyerty  of  the  company  for  the  pa3'ment  of 
such  loans,"  considered  it  unnecessary  for  the  purposes  of  the 
decision  to  inquire  whether  authority  was  thus  granted  to  pledge 
the  franchise  of  the  corporation,  in  common  with  its  other  prop- 
erty, but  at  the  same  time  considered  it  not  unlikely  that  this  was 
the  intention  of  the  legislature.  The  expression  "franchise"  as 
used  by  the  court  was  somewhat  ambiguous.  If  the  court  in- 
tended to  suggest  that  the  provision  in  question  authorized  a 
mortgage  of  the  franchise  to  be  a  corporation,  that  view  is  not 
sustainable  in  the  light  of  more  recent  decisions,  in  which  the 
point  was  raised  and  passed  upon.  Thus  it  has  been  held  in  an 
oft-cited  case  ^  that  under  a  power  to  pledge,  "  by  mortgage  or 
otherwise,  the  entire  road,  fixtures,  and  equipments,  with  all  the 
appurtenances,  income,  and  resources  thereof,"  the  company  could 
mortgage  all  its  franchises  except  that  of  its  corporate  exist- 
ence. A  similar  ruling  has  been  made  in  regard  to  a  power  to 
mortgage  "  the  road,  income,  and  other  property,"  ^  and  a  power 
to  mortgage  the  company's  "  means,"  property,  and  effects.^ 

Nor  is  a  mortgage  of  a  corporate  franchise  validated  by  the  fact 
that,  in  the  general  law  to  which  the  charter  is  expressly  made 
subject,  provisions  are  inserted  requiring  the  class  of  corporations 
to  which  the  mortgagor  belongs  to  make  annual  reports  showing, 
among  other  things,  the  number  of  mortgages  on  road  and  fran- 
chises, "  and  on  any  other  property  of  the  corporation,  and  the 
increase  or  decrease  of  mortgage  debt  during  the  year."  ^ 

1  Coe  V.  Columbus,  Piqua,  &  Ind.  R.  the  president  of  the  conipaiij'  to  execute  a 
Co.  (1859),  10  Ohio  St.  372.  In  Joy  v.  deed  for  that  purpose.  Whether  eh.  43  of 
Jackson  Plank  Road  Co.  (1863),  11  Mich.  Iowa  Code  of  1851,  which  gave  railroad 
150,  it  was  held  that  where  a  mortgage  companies  the  power  to  incumber  their 
was  executed  in  pursuance  of  a  special  act,  real  and  personal  property,  implied  the 
empowering  a  plank  road  company  to  grant  of  a  power  to  mortgage  its  franchise, 
mortgage  the  road  and  other  property  of  was  a  question  raised  but  not  answered  in 
the  company,  the  franchise  of  taking  tolls  Dunham  v.  Isett  (1863),  15  Iowa,  284. 
was  to  be  understood  as  included  with  the  3  Meyer  v.  Johnston  (1875),  53  Ala. 
road  and  its  fixtures.  237  ;  s.  c.  15  Am.  Ry.  Kep.  467,  in  which 

2  Pullan  V.  Cincinnati  &  Chicago  Air  case  Eldridge  v.  Smith,  34  Vt.  484,  is  re- 
Line  R.  Co.  (1865),  4  Biss.  35.  In  Hatcher  viewed.  In  Alabama,  however,  the  pur- 
V.  Toledo,  Wabash,  &  Western  R.  Co.  chasers  of  a  railroad  are  enabled  by  statute 
(1872),  62  111.  477,  however,  it  is  denied  to  constitute  themselves  into  a  body  cor- 
that  the  right  to  mortgage  the  "  road,  porate,  and  have  all  the  rights  and  fran- 
property,  and  income "  can  be  construed  chises  in  respect  to  it  with  which  the 
to  confer  the  right  to  mortgage  any  of  the  company  was  vested,  and  a  power  to  sell  a 
franchises,  the  transfer  of  the  franchises  road.  Branch  Sons  &  Co.  v.  Atlantic  & 
to  the  purchasers  at  the  sale  under  the  Gulf  R.  Co.  et  al.  (1879),  3  Woods,  481. 
power  in  the  trust  deed  under  discussion  *  Pichardsonf.  Sibley  (1865),  11  Allen, 
being  held  effectual  only  because  the  legis-  65.  In  this  case  there  was  the  additional 
lature,  prior  to  the  sale,  had   authorized  feature   that   the   same   statute   had   also 

12 


178  EAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  VIII, 

Authority  to  borrow  money  "  on  the  credit  of  the  company  and 
on  the  mortgage  of  its  charter  and  works  "  does  not  confer  upon 
the  company  power  to  convey  to  the  bondholders  the  franchise  to 
be  a  corporation  in  such  a  sense  that  they  will  have  the  right  to 
organize  under  the  act  as  successor  to,  and  substitute  for,  the 
original  company. ^ 

Power  to  mortgage  the  corporate  franchise  is  necessarily 
implied  where  the  company  is  authorized  to  mortgage  all  its 
franchises.^ 

§  152.  Power  to  mortgage  Franchises  implied  from  Grant  of 
Power  to  sell  them.  —  If  the  power  is  conferred  in  unqualified 
terms  to  sell  the  corporate  franchises,  the  company  must  neces- 
sarily have  the  power  to  mortgage  them.^ 

C.    Power  to  mortgage  After-acquired  Property.^ 

§  153.  Power  expressly  conferred  by  Statute.  —  The  power  of  a 
railroad  company  to  mortgage  its  after-acquired  property  is  often 
based  upon  the  terms  of  a  statute  explicitly  conferring  that 
power.^ 

In  Louisiana,  railroad  companies  are  specially  privileged  in  this 
respect,  as  the  prohibition  of  the  Code  of  that  State  against 
mortgaging  future  property  is  levelled  against  private  persons 
merely.^ 

Book  debts  of  the  company  are  its  "  property "  within  the 
meaning  of  a  power  to  raise  money  by  mortgage  of  any  of  its 
"  property."  "' 

§  154.  Pow^er  implied  from  Enumeration  of  the  Kinds  of  Property 
which  may  be  mortgaged.  —  Some  decisions  rest  on  the  principle 
that,  as  a  matter  of  verbal  construction,  and  in  view  of  the  objects 

decisively  negatived  the  inference  thus  ^  See,  for  example,  the  statutes  con- 
rejected  by  providing  that  no  such  corpo-  strued  in  Dunham  v.  Isett  (1863),  15  Iowa, 
ration  should  "lease  or  sell  its  road  or  284;  City  of  Quincy  u.  Chicago,  Burliug- 
property,  unless  authorized  so  to  do  by  its  ton,  &  Quincy  R.  Co.  (1880),  9-1  111.  537. 
charter  or  special  act  of  the  legislature."              ^  Bell  v.  Chicago,  St.   Louis,  &  N.   0. 

1  Memphis  &  Little  Rock  R.  Co.  v.  R.  Co.  (1882),  34  La.  Ann.  785;  Parker 
Commissioners  (1884),  112  U.  S.  609.  v.  New  Orleans,  B.  R.  &  V.  R.  Co.  (1888), 

2  First  Division  of  St.  Paul,  etc.  R.  Co.  33  Fed.  Rep.  693.  The  former  case  con- 
V.  Parcher  (1869),  14  Minn.  297.  tains  a  full  review  of   the    statutes   and 

^  Willamette  R.  Co.  v.  Bank  of  British  case  laws  of  Louisiana  in  regard  to  this 

Columbia  (1880),  119  U.  S.  191.  subject.     In  Minnesota  it  is  also  provided 

*  For  a  general  discussion  of  the  ques-  that  after-acquired  property  may  be  niort- 

tion  whfither  a  chattel  mortgage  can  cover  gaged  :  Stat,  at  Large,  1873,  p.  431;  and 

after-acquired  firoperty,  see  two  papers  in  in  many  other  States  not  necessary  to  be 

21    Albany  L.   J.,  pp.  227  and  346,    the  enumerated  here. 

\n.ttcs  dealing  mainly    wilii   the   law   in  ''  Bloomer   v.    Union     Coal,    etc.    Co. 

Mississippi.  (1873),  L.  R.  16  E(i.  383. 


§  154.]  MORTGAGES   AND   THEIR   VALIDITY.  179 

for  which  railroad  mortgages  are  sanctioned,  some  expression 
which  occurs  in  the  statutory  enumeration  of  the  various  things 
which  may  be  mortgaged  should  be  held  to  embrace  future  acqui- 
sitions. Thus  it  has  been  held  that  the  use  of  the  comprehensive 
term  "  property  "  in  such  enumeration  will  authorize  a  mortgage 
which  purports  to  cover  after-acquired  rolling-stock  and  other 
property  essential  to  the  use  of  the  road.  Judge  Sharswood 
stated  the  views  of  the  court  as  follows :  "  But  the  principal  con- 
tention here  has  been  that  the  mortgage  by  this  corporation,  so 
far  as  it  included  subsequent  acquisitions,  was  ultra  vires,  —  be- 
yond the  power  conferred  upon  them  by  the  legislative  grant. 
The  act  authorized  them  to  mortgage  all  their  '  property,'  a  word 
of  very  large  extent.  Property  (proprietas)  is  whatever  is  a  man's 
own  (proprius).  His  future  acquisitions,  though  subject  to  a  con- 
tingency, are  his  own,  and  if,  as  we  have  seen,  they  can  be  granted 
or  assigned,  they  are  his  present  property,  valuable  now  to  him 
because  they  can  be  enjoyed  or  used  by  anticipation.  There  is 
no  refinement  in  this  reasoning  as  applied  to  the  construction  of 
this  statute.  The  legislature  evidently  intended  it.  Every  law  is 
to  be  interpreted  according  to  its  subject-matter.  This  act 
relates  to  a  railroad  and  its  usual  necessary  appurtenances.  The 
words  are  'road, property,  rights,  liberties,  and  franchises,'  includ- 
ing the  road  and  its  adjuncts.  The  very  objects  of  the  loan  and 
of  the  mortgage  to  secure  it  as  expressed  in  the  act  was  '  for  the 
purpose  of  constructing  and  equipping  the  road.'  It  evidently 
contemplated  a  condition  of  things  in  the  future.  The  bare  road, 
only  then  constructed  in  part,  without  any  rolling-stock  or  equip- 
ments, would  have  '  been  no  security,'  or  a  very  inadequate  one. 
Had  the  road  even  been  fully  equipped  at  the  date  of  the  mort- 
gage, can  it  be  doubted  that  the  legislature  meant  that  it  should 
confine  everything  subsequently  acquired  to  replace  old  and  worn- 
out  materials,  and  to  maintain  and  keep  up  the  equipment  ?  No 
money  would  have  been  loaned  on  a  security  daily  deteriorating, 
and  which  must  eventually  perish  entirely."  ^ 

So  also  has  it  been  held  that  authority  to  mortgage  "  per- 
sonalty "  conferred  the  power  to  mortgage  personalty  acquired 
after  the  execution  of  the  mortgage.^ 

1  Philadelphia,  Wilmington,  &  Balti-  conferred  authority  to  mortgage  after- 
more  R.  Co.  V.  AVoelpper  (1870),  64  Pa.  acquired  property.  The  court,  however, 
St.  366.  does  not  give  any  reasons  for  its  opinion, 
Compare  Hodder  v.  Kentucky  E.  Co.,  and  it  is  not  apparent  upon  what  precise 
7  Fed.  Piep.  793,  where  it  was  held  that  grounds  the  ruling  was  made, 
authority  to  mortgage  the  "  pi'operty,  "^  Williamson  v.  New  Jersey  Southern 
franchises,"  etc.,  of  the  railroad  company  R.  Co.  (1875),  26  N.  J.  Eq.  398. 


180  RAILWAY  BONDS   AND   MORTGAGES.  [CHAP.  VIII. 

As  the  power  to  grant  the  product  of  property  incUides,  by 
reasonable  implication,  the  power  to  grant  the  means  by  which 
that  product  is  brought  into  existence,  the  reasons  for  holding 
that  the  company  may  mortgage  future  acquisitions  are  stronger 
when  it  is  authorized  to  borrow  money  on  the  security  of  its 
"  property  and  income,"  than  when  the  "  property "  alone  is 
mentioned  as  the  permissible  subject-matter  of  the  pledge.^ 

In  Coe  V.  Columbus,  Piqua,  &  Ind.  R.  Co.^  the  same  words 
were  construed  in  the  same  manner  for  the  same  reasons.  "  The 
pledge,"  said  the  court,  "  is  to  be  of  the  property  and  income. 
The  income  intended  must  have  been  the  future  income,  and 
was  to  have  been  produced  by  property  in  possession  and  to  be 
acquired.  If  this  future  product  can  be  conveyed,  why  not  that 
by  which  it  is  to  be  created  ?  " 

And  in  a  recent  case  in  the  Circuit  Court  of  Appeals  it  was 
held  that  a  railway  company  might,  under  this  Ohio  statute, 
mortgage  its  road  and  any  subsequent  accessions  or  accretions 
properly  appurtenant  thereto,  whether  acquired  by  itself  or  its 
successor  in  title,  and  whether  the  road,  at  the  time  the  new 
property  is  acquired,  is  maintained  by  virtue  of  tlie  original 
franchises,  or  of  franchises  newly  conferred  by  the  State.  The 
compan}',  therefore,  may  make  a  mortgage  the  lien  of  which  will 
attach  to  a  terminal  depot  subsequently  acquired  by  a  consoli- 
dated company  formed  by  the  several  companies  of  which  the 
mortgagor  is  one.^ 

Power  to  pledge  the  franchises  and  rights  of  the  corporation 
includes  by  necessary  implication  the  power  to  pledge  everything 
that  is  necessary  to  the  enjoyment  of  those  franchises.  Cuiciin- 
que  aliquis  quid  concedlt,  concedere  •vldetur  et  id  sine  quo  res  ipsa 
esse  non  potuit.  A  grant  of  such  power,  therefore,  will  render 
valid  a  mortgage  of  after- acquired  property.^ 

1  Ludlow  V.  Hard  (1857),  1  Disn.  includes  the  power  to  pledge  future 
(Ohio)  552 ;  Covey  v.  Pittsburg,  Ft.  acquisitions."' 
Wayne,  &  Chicago  R.  Co.  (1858),  3  riiil.  ^  iq  Ohio  St.  372  (1859). 
173.  In  the  last-cited  case  Agnew,  P.  J.,  The  view  of  the  Ohio  court  as  to  the 
said  :  "  In  giving  the  power  to  borrow  effect  of  the  statute  of  that  State  was  inci- 
and  pledge,  it  must  be  supposed  the  power  dentally  sanctioned  in  Pennock  v.  Coe,  23 
was  given  to  its  fullest  extent  in  order  '  to  How.  117,  where,  although  an  express  de- 
carry  into  effect  the  objects  of  the  incorpo-  cision  on  this  point  was  not  rendered,  for 
ration.'  But  if  any  doubt  remains,  tlie  the  reason  that  it  had  not  been  raised  by 
power  to  ])ledge  the  'income'  as  well  as  counsel,  the  opinion  was  expressed  that  the 
the  j)ro|)prty  wouhl  banish  it.  Income  is  authority  to  mortgage  after-acquired  j)rop- 
necessarily   an    after-acquisition,    and    is  erty  was  ample. 

brought  into  existence  by    future  efforts  ^  Coniptoni;.  Jesup  (C.  C.  A.,  1R05),  68 

and  tlic  tise  of  accruing  [U'oiiei'ty.     Il  is  Fed.  Rep.  263. 

]iotcntial    and    dci)endeiit.       It    is    a    fair  *   I'hillips    r.    "Winslow    (1^57),    IS   B. 

inference    that    tlie    power    to    pledge    it  Mon.  (Ky.)  1-!1. 


§  155.] 


MORTGAGES    AND   THEIR   VALIDITY. 


181 


A  mortgage  of  a  railroad  not  yet  built,  or  of  property  not  yet 
acquired,  is  not  forbidden  by  the  policy  or  the  letter  of  a  statute 
limiting  the  amount  of  bonds  which  may  be  issued  and  secured 
by  mortgage  to  tlie  amount  of  the  capital  actually  paid  in  at  the 
time  of  the  issue.^ 

§  155,  Power  to  mortgage  Uncalled  Capital.  —  The  power  to 
mortgage  uncalled  capital  has  been  discussed  in  numerous  Eng- 
lish cases,  and  the  doctrine  now  accepted  may  be  shortly  stated 
as  follows  :    Future  calls  are  not  "  property  of  the  company,"  ^ 

For  this  reason  a  power  which  merely  extends  to  the  mortgage 
of  property  will  not  authorize  a  mortgage  of  uncalled  capital."^ 

But  there  is  nothing  in  the  Companies  Act  of  1862  and  its 
amendments  which  either  expressly  or  by  necessary  implication 
prohibits  a  company  from  executing  such  a  mortgage.* 

The  question  whether  the  company  possesses  the  power  is 
merely  one  of  the  proper  construction  of  the  memorandum  and 
articles  of  association.^ 


1  Baker  v.  Guarantee  T.  Co.  (N.  J.  Eq., 
1895),  31  Atl.  Rep.  174. 

2  Bank  of  South  Australia  v.  Abrahams, 
L.  R.  6  P.  C.  562. 

2  Bank  of  South  Australia  v.  Abrahams, 
L.  R.  6  P.  C.  562  (company  empowered 
to  charge  property)  ;  Stanley's  Case,  4 
DeG.,  J.  &  S.  407  (company  empowered 
to  charge  property  and  funds).  These 
cases  were  distinguished  in  Howard  v. 
Patent,  etc.  Co.,  L.  R.  38  Ch.  Div.  156 
(1883),  where  a  mortgage  of  future  calls 
was  held  valid  under  a  power  to  mortgage 
the  "  property  and  rights  "  of  the  company. 
It  has  been  held  that  the  existence  of  such 
a  power  cannot  be  inferred  from  the  use  of 
the  word  *'  effects "  in  addition  to  the 
word  "  property  "  in  the  enabling  act.  In 
re  Sankey  Brook  Coal  Co.  (1870),  L.  R. 
10  Eq.  381.  In  this  case  Vice-Chancellor 
James  took  the  broad  ground  that  "  prop- 
erty" means  a  tiling  actually  existing,  a 
position  which  seems  difficult,  if  not  im- 
possible, to  reconcile  with  the  opinion  of 
the  Supreme  Court  of  Pennsylvania  above 
referred  to. 

Under  an  assignment  of  "  all  the  lands, 
tenements,  and  estates  of  the  company, 
and  all  their  undertaking,"  future  calls, 
whether  to  be  made,  or  already  made  and 
not  yet  paid,  will  not  pass.  King  v.  Mar- 
shall, 33  Beav.  565. 

But  the  capital  of  the  company  is  not 


covered  by  the  lien  of  a  debenture  in  which 
the  directors  pledge  "  the  property  belong- 
ing to  us,  witli  all  the  buildings  and  stock 
on  and  connected  with  our  said  propertj', 
and  all  the  receipts  and  revenues  to  arise 
tlieref'rom,"  and  in  which  the  debeature 
loan  is  declared  to  be  a  first  charge  on  our 
undertaking  and  property,  and  receipts  and 
revenues  aforesaid."  Tire  declaration  of 
such  a  charge,  therefore,  is  not  2dtra  vires. 
In  re  Marine  Mansion  Co.  (1867),  L.  R.  4 
Eq.  601. 

1  III  re  Pyle  Works  (1890),  L.  R.  44  Ch. 
Div.  534,  per  Cotton  and  Lindley,  L.JJ. 

^  See  the  following  cases  in  illustration 
of  this  rule  :  Stanley's  Case  (1864),  4 
DeG,,  J.  &  S.  407  ;  In  re  Phcenix,  etc. 
Steel  Co.  (1875),  44  L.  J.  Ch.  683  ;  In 
re  Sankey  Brook  Coal  Co.,  L.  R.  9  Eq, 
721  ;  10  Eq.  381  ;  In  re  Colonial  Trust 
Corporation,  L.  R.  15  Ch.  D.  465  ;  Bank 
of  South  Australia  v.  Abrahams,  L.  R.  6 
P.  C.  265  ;  Howard  v.  Patent,  etc.  Co., 
38  Ch.  Div.  156  ;  In  re  Pyle  Works 
(1890),  L.  R.  44  Ch.  Div.  534. '  The  last- 
mentioned  case  contains  an  elaborate  re- 
view of  the  authorities.  Hulme  v.  Gold 
Syndicate,  13  Rep,  346  ;  Newton  v.  Anglo- 
Australian  Co,,  72  L.  T.  305  ;  Page  v.  In- 
ternational Co.,  68  L.  T.  435;  Fowler  u. 
Broad's  Night-Light  Co.,  1  Ch.  724.  See 
§  141,  ante,  and  also  In  re  Streatham  Co. 
(1897),  1  Ch.  D.  15. 


182  EAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  VIII. 

§  156.    Limits  of  the  Power  to  mortgage  After-acquired  Property. 

—  In  some  States  the  power  to  mortgage  is  expressly  limited  by 
the  legislature,  in  accordance  with  the  doctrine  which  will  be 
developed  below  in  discussing  the  extent  of  the  mortgage  lien ; 
viz.,  that  nothing  is  covered  by  an  after-acquired  clause  couched 
in  general  terms  except  what  is  acquired  for  railroad  purposes. 
Thus  in  Florida  it  is  provided  that  a  corporation  may  mortgage 
or  otherwise  convey  such  real  and  personal  estate  as  the  purposes 
of  the  corporation  shall  require,  not  exceeding  the  amount  limited 
in  the  articles  of  incorporation,  and  the  special  statute  relating  to 
railroad  mortgages  enumerates,  as  the  permissible  subject-matter 
thereof,  various  kinds  of  property,  tangible  and  intangible,  all 
growing  out  of  or  used  in  connection  with  the  business  of 
transportation,  and  concludes  with  the  general  term  "  appurte- 
nances used  in  connection  with  such  railroad."  ^ 

But  by  most  of  the  enabling  statutes  the  company  may  pledge 
its  corporate  "  property  and  franchises,"  a  form  of  phraseology 
which,  according  to  the  doctrine  of  the  cases  cited  in  the  last 
section,  confers  authority  to  mortgage  any  after-acquired  property 
which  the  company  is  empowered  to  hold,  and  leaves  the  actual 
scope  of  the  lien  to  be  determined  by  the  principles  of  construc- 
tion which  are  illlustrated  below. 

A  mortgage  by  a  business  corporation  to  a  trustee,  for  the 
security  of  bondholders,  of  its  real  and  personal  property,  though 
it  purport  to  cover  future-acquired  property,  will  not  be  construed 
to  cover  personal  property  other  than  that  held  at  the  time  the 
mortgage  was  executed  and  recorded,  and  such  additions  to  it  as 
have  become  part  and  parcel  of  the  original  articles,  and  incapable 
of  a  separate  identification.^ 

A  provision  in  a  mortgage  of  a  business  corporation  for  the 
security  of  its  bondholders  that  it  covers  all  future-acquired 
property  is  regarded  by  the  courts  only  as  an  executory  agree- 
ment to  do  what  is  competent  and  necessary  to  give  a  lien  upon 
such  personal  property  as  the  corporation  may  afterwards  acquire 
as  it  comes  into  existence.  It  has  no  force  against  subsequent 
liens  by  attachment  and  execution  creditors  or  mortgagees,  unless 
such  lion  bo  actually  offcctcd  prior  to  their  lions.-'' 

§  1  ")7.  Effect  of  the  Want  of  Power  to  hold  the  Property  attempted 
to  be  mortgaged.  —  Such  want  of    power  may  be  owing  to  the 

1  liush's    I)i^'.    (1872),  p.    105  ;    Laws  »  Beehe  v.   llichmond  Light,   Heat,  & 

1874,  c.h.  Ui87,  §  9,  par.  10.  Power  Co.  (189.''j),  13  Misc.  Rep.  737  ;  s.  c. 

2Bf.f;ho  r.  Kicliinoiid  Lij,'lit,  Heat,  &  3.5  N.  Y.  Supj)!.  1  (189.5),  citing  as  author- 
Power  Co.  (189.'')),  13  Misc.  Ri-p.  737  ;  8.  C.  ity  Rocliester  Distilling  Co.  v.  Kasey 
35  N.  Y.  Siippl.  1.  (1894),  142  N.  Y.   570. 


§  157.]  MORTGAGES   AND   THEIR   VALIDITY.  183 

absence  of  a  direct  legislative  authorization.  Thus  where  a  char- 
ter empowering  the  company  to  acquire  and  hold  such  real  prop- 
erty "  as  might  be  necessary  and  convenient  for  the  construction, 
maintenance,  and  management  of  the  road,"  and  also  to  acquire 
"  any  steamboats,  piers,  wliarves,  and  the  appurtenances  thereto 
belonging,  that  the  directors  may  deem  necessary,  pi'oHtable,  and 
convenient  for  the  corporation  to  own,  use,  and  manage  in  con- 
nection with  said  railroad,"  it  was  held  that  property  bought  of 
an  opposition  steamship  line,  not  with  a  view  of  employing  it  in 
the  business  of  the  road,  but  to  withdraw  it  from  business,  thereby 
preventing  competition,  was  not  property  which  the  company  was 
authorized  to  acquire,  and  therefore  could  not  be  mortgaged.^ 

So  although  a  company  whose  powers,  as  regards  the  acquisition 
of  land,  are  restricted  to  such  lands  as  are  "  necessary  and  con- 
venient "  for  the  purposes  of  the  railroad,  may  purchase  and  hold 
other  lands  temporarily,  when,  by  doing  so,  they  can  acquire  lands 
within  the  scope  of  their  charter  powers  at  a  smaller  cost  than 
they  could  otherwise  have  been  obtained,  it  cannot  hold  these  sur- 
plus lands  permanently,  nor  subject  them  to  a  mortgage  which 
contemplates  a  prolonged  ownership.^ 

A  similar  result  follows  if  the  acquisition  of  the  property  is 
invalid,  because  made  without  observing  the  conditions  prescribed 
by  the  legislature  for  such  a  transaction.  Hence  if  the  company 
is  empowered  to  purchase  other  lines,  provided  the  purchase  is 
assented  to  by  a  majority  in  value  of  its  stockholders,  the  mort- 
gage will  not  cover  a  line  of  railroad  which  was  not  a  part  of  the 
system  at  the  time  the  mortgage  was  executed,  and  was  purchased 
without  procuring  the  necessary  concurrence  of  the  stockholders.^ 

Even  if  the  power  to  hold  lands  is  given  in  general  terms,  a 
court  may  be  justified,  from  a  consideration  of  the  policy  of  the 
State  as  disclosed  by  its  legislation,  in  holding  that  only  such 
lands  as  are  necessary  for  railroad  purposes  are  intended  to  be 
embraced  in  the  power.  But  if  by  a  later  statute  railroad  com- 
panies are  given  the  right  to  receive  lands,  without  limitation  as 
to  amount,  in  payment  of  stock  subscriptions,  provided  they  are 
disposed  of  in  a  reasonable  time,  a  mortgage  on  lands  so  acquired 
which  creates  a  lien  not  inconsistent  with  such  a  statute  as  re- 
spects duration,  amount,  and  purpose  will  be  valid.* 

1  Morgan  &  Raynor,  Trustees,  v.  Dono-  3  Hodder  v.  Kentucky  &  Great  Eastern 
van  (1877),  58  Ala.  241  ;  s.  c.  21  Am.  Ry.     R.  Co.  (1881),  7  Fed.  Rep.  793. 

Rep.  109  (1877).  *  Taber  v.   Cincinnati,    Logansport,  & 

2  Boston  &  New  York  Air  Line  R.  Co.  Chicago  R.  Co.  (1860),  15  Ind.  4.59.  Tlie 
V.  Coffin  (1882),  50  Conn.  150;  s.  c.  12  court  in  this  case  expressly  waived  the 
Am.  &  Eng.  R.  R.  Cas.  375.  question  whether  a  lien  which  did  not  au- 


18:1 


RAILWAY   BONDS   AND    MORTGAGES.  [CHAP.  VIII. 


So  where  the  company  at  the  time  of  the  execution  of  the  mort- 
gage has  no  power  under  its  charter  to  accept  a  grant  of  lands 
from  the  United  States,  and  no  such  acquisition  was  contem- 
plated, the  lands  obtained  by  such  a  grant  will  not  pass  under  the 
*•'  after-acquired  property  clause."  ^ 

Similarly  if  a  company  has  no  power  to  consolidate  with  an- 
other at  the  date  of  the  mortgage,  but  subsequently  does  so  by 
the  consent  of  the  legislature  expressly  given  for  that  purpose, 
the  property  of  the  second  company  is  not  covered  by  the  after- 
acquired  clause  of  the  mortgage.^ 

A  like  rule  applies  to  branch  roads ^  or  extensions^  which 
the  company  was  not  authorized  to  build  when  it  made  the 
mortgage. 

On  the  other  hand,  a  general  after-acquired  clause  covers  a  pur- 
chased road  if  within  the  chartered  limits  of  the  company  ;  ^  and 


swer  the  above  description  would  have  been 
invalid.  As  the  existence  of  the  mortgage 
would  not  in  any  way  affect  the  power  of 
the  company  to  sell  the  land,  or  disable  it 
from  complying  with  the  provisions  of  the 
statute,  it  is  dilficult  to  see  any  ground  for 
supposing  that  lands  acquired  under  such 
circumstances  might  not  be  subjected  to 
every  kind  of  lien.  It  surely^  can  make  no 
dilfereuce,  so  far  as  the  policy  of  the  stat- 
ute in  question  is  concerned,  whether  the 
company  receives  a  part  of  the  jniee  of 
the  land  as  an  advance  on  the  security  of 
the  mortgage,  and  the  rest  when  it  is  sold 
subject  to  the  mortgage,  or  receives  the 
whole  price  at  one  time. 

1  Meyer  v.  Johnston  (1875),  53  Ala. 
237  ;  s.  c.  15  Am.  Ry.  Rep.  467. 

2  Gibert  v.  Washington,  Va.  Mid.  & 
Gt.  So.  R.  Co.  (1880),  33  Gratt.  586.  The 
court  decided  this  case  partly  on  the  ground 
stated  in  the  text,  and  partly  on  the  more 
general  ground  that  the  term  "after-ac- 
quired property  "  applies  only  to  "  such 
necessary  accretions  as  are  requisite  to  keep 
up  the  road,  such  as  new  rails,  cross-ties, 
depots,  rolling-stock,  machinery,  and,  it 
may  be,  real  estate  acquired  for  the  legiti- 
mate purposes  of  the  corporation."  Tin's 
limitation  of  the  meaning  of  the  words 
seems  scarcely  justified  by  the  authori- 
tii'S.  If  a  leaseliold  interest  in  another 
road  will  pass  under  the  mortgage,  it 
is  diflicult  to  see  why  another  road  ac- 
quired in  lull  ownership  should  not  also 


pass,  provided  the  acquisition  is  author- 
ized. This  latter  condition,  it  is  submitted, 
is  the  onlj'  one  necessary  to  be  fulfilled  in 
regard  to  such  property  as  a  purchased 
road. 

^  Meyer  v.  Johnston  (1875),  53  Ala. 
237  ;  s.  c.  15  Am.  Ry.  Rep.  467. 

^  Randolph  v.  New  Jersey  R.  Co.  (1877), 
28  N.  J.  Eq.  49  ;  Alexandria  &  Freder- 
icksburg R.  Co.  V.  Graham  et  al.  (1879), 
31  Gratt.  769.  In  Randolph  v.  Wilming- 
ton &  Reading  R.  Co.,  11  Phil.  502  (U. 
S.  C.  Ct.,  1876),  where  it  was  held  that 
if  a  mortgage  is  executed  of  a  rail- 
road, as  then  made  or  to  be  made,  and 
under  authority  of  a  subsequent  act  a 
later  mortgage  is  executed  on  an  extension 
of  the  original  road,  — the  special  act 
providing  that  the  later  mortgage  should 
be  a  first  lien  on  the  extension,  —  a  sale 
under  the  original  mortgage  must  be 
exclusive  of  the  branch.  No  reasons  are 
given  for  this  ruling,  but  from  the  state- 
ment of  the  case  it  is  to  be  presumed  that 
the  company  would  have  had  no  power  to 
build  the  extension  without  the  second 
statute.  Under  tliese  circumstances  the 
ext(nisioTi  came  into  their  hands  burdened 
with  the  lien  declared  by  the  legislature, 
and  they  took  it  cum  oncre. 

6  Branch  v.  Jesup,  106  U.  S.  468; 
Branch  v.  Atlantic  &  Gulf  R.  Co.  (1879), 
3  Woods,  481  ;  Williamson  v.  New  Jersey 
Southern  R.  Co.  (1874),  25  N.  J.  Etj. 
13. 


§  158.]  MORTGAGES    AND   THETR   VALIDITY.  185 

an  extension,  provided  its  construction  has  been  authorized  either 
by  its  original  charter  or  an  act  subsequently  passed  for  that 
purpose  at  some  time  before  the  execution  of  the  mortgage.^ 

Article  II.  —  Validity  of  the  Mortgage  as  affected  by  the 
Manner  and  Circumstances  of  its  Execution. 

§  158.    Formal  Requisites. 

(a)  Witnesses  are  not  necessary  to  the  validity  of  a  mortgage 
executed  by  a  corporation  in  Connecticut,  the  laws  of  that  State 
being  sufficiently  complied  with  where  the  instrument  is  signed 
by  the  president  and  sealed  with  the  corporation  seal.^ 

(b)  Oath.  —  A  mortgage  of  the  personal  property,  if  actually 
sworn  to  by  the  agents  who  executed  it,  is  not  invalid  in  New 
Hampshire,  for  the  reason  that  the  signatures  affixed  by  them  to 
the  oath  do  not  purport  to  have  been  subscribed  on  behalf  of  the 
corporation,  provided  the  instrument  throughout  purports  to  be 
the  deed  of  the  corporation,  and  is  executed  in  the  corporate 
name.^ 

(c)  Acknowledgment.  —  Under  a  Tennessee  statute  providing 
the  following  formula  for  the  acknowledgment  of  deeds :  "  Per- 
sonally appeared  before  me  .  .  .  the  within  named  bargainor, 
with  whom  I  am  personally  acquainted,"  etc.,  it  has  been  held 
that  where  the  mortgage  of  a  Tennessee  railroad  company  was 
executed  in  New  York,  and  the  officer  taking  the  acknowledg- 
ment of  tbe  grantors,  the  president  and  secretary  of  the  company, 
certified  that  each  of  them  was  "  personally  known  "  to  him,  a 
suffi'cient  compliance  with  the  statute  was  shown,  the  expressions 
"  to  be  personally  acquainted  with  "  and  "  to  know  personally  " 
being  in  such  certificates  regarded  as  equivalent  phrases.^ 

(d)  Seal. — For  the  general  rules  as  to  necessity  of  affix- 
ing the  corporate  seal  to  its  written  contracts  the  reader  will  refer 
to  works  on  corporation  law.^ 

(e)  Deliver  I/.  —  Where  a  mortgage  has  been  duly  executed, 
acknowledged,  and  recorded,  and  treated  as  a  valid  lien  by  the 

1  Willink  V.  Morris  Canal  &  Bkg.  Co.  Tennessee  as  to  the  execution  and  acknowl- 
(1843),  4  N.  J.  Eij.  377.  edgment   of  deeds  by   a  coi-poration,  the 

2  Nichols  V.  Mase  (1883),  94  N.  Y.  officer  who  affixes  the  corporate  seal  to  a 
160  ;  s.  c.  17  Am.  &  Eng.  R.  R.  Cas.  deed  is  the  party  executing  it,  within  the 
230.  meaning  of  the  statute  requiring  deeds  to 

8  Richards  v.  ^Merrimack  &  Connecticut  be  acknowledged  by  the  grantor. 
River  R.  Co.  (1862),  44  N.  H.  127.  ^  See  Thompson  Corp.,  §§  5044  et  seq. 

*  Kelly  V.   Calhoun   (1878),   95  U.  S.  Some  cases  as  to  the  authority  of  corpo- 

710.     It  was  also  held  in  the  same  case  rate  agents  to  affix  a  seal  to  mortgages  are 

that,  as  there  was  no  statutory  provision  in  cited  in  §§  162,  166,  post. 


186  RAILWAY   BONDS   AND    MORTGAGES.  [CHAP.  VIII. 

company,  the  fact  that  the  trustee  has  not  had  manual  possession 
of  the  instrument  does  not  affect  its  validity. ^ 

A  mortgage  given  to  secure  bondholders  does  not  go  into  opera- 
tion until  the  bonds  are  delivered  to  the  bondholders.^ 

(f)  Special  Requirements.  —  An  affidavit  of  the  secretary  of  a 
consolidated  corporation  attached  to  a  mortgage,  "  that  the  true 
consideration  of  the  above  mortgage  is  the  issue  of  four  hundred 
thousand  dollars  (i^400,000)  in  the  bonds  of  the  mortgagor,  for 
the  purpose  specially  set  forth  in  the  mortgage,"  has  been  held 
sufficient  to  relieve  the  mortgage  from  being  declared  void  under 
the  requirements  as  to  an  afiidavit,  etc.,  contained  in  Supp.  B-ev., 
N.  J.,  p.  491,  par.  11.3 

§  159.  When  a  Mortgage  executed  by  a  Corporate  Agent  is  the 
Deed  of  the  Corporation.  —  A  mortgage  executed  by  the  presi- 
dent cannot  take  effect  as  the  deed  of  the  corporation  unless  it 
was  executed  by  or  in  the  name  of  the  corporation,  even  though 
the  action  of  the  president  was  taken  in  pursuance  of  the  votes 
of  the  corporation,  and  the  instrument  was  designed  to  take  effect 
as  its  deed.* 

But  the  corporation  will  be  bound  by  a  mortgage  executed  in 
these  words  :  "  In  testimony  whereof  the  said  party  of  the  first 
part  have  caused  these  presents  to  be  signed  by  their  president, 
and  their  common  seal  to  be  thereto  affixed.  A.  B.,  President," 
and  seal.  Such  an  instrument  purports  to  be  the  deed  of  the 
corporation  to  which  they  have  caused  their  seal  to  be  affixed,  not 
to  be  the  deed  of  the  agent  executed  by  him  in  behalf  of  the 
principal,  and  it  therefore  conveys  the  company's  title.^ 

§  160.  When  Mortgage  is  not  vitiated  by  Vagueness  of  its  Descrip- 
tive Clause. —  An  agreement  construed,  under  the  circumstances, 
to  operate  as  an  equitable  mortgage,  has  been  held  not  to  be  invalid 
for  the  reason  that  it  pledged  the  real  and  personal  estate  of  the 
company  without  specification,  and  did  not  state  the  amount  to 
be  secured. *" 

§  161.  Authority  of  Corporate  OfBcers  generally  to  execute  a 
Mortgage  binding  on  the  Corporation.  —  A  corporation  can  act 
only  by  its  agents,  and  in  order  to  bind  the  cor])oration  the 
authority  of  the  agent  must  appear.     This  need  not  be  shown 

1  McCurdy's  A[)peal  (1870),  65  Pa.  St.  *  Miller  v.  Paitland  &  Washington  R. 
290.  Co.  (18G2),  36  Vt.   452. 

2  Wade  r.  Doiiau  Rrewinp;  Co.  (1894),  ^  Haven  v.  Adams  (1862),  4  Allen, 
10  Wash.  284  ;  s.  c.  38  Pac.  Rep.  1009.  80. 

3  Camden  Safe  Deposit  &  Trust  Co.  v.  "  Mobile  &  Cedar  Point  R.  Co.  v. 
Bnrlin;,'ton   Carpet  Co.  et  al.  (N.  J.  Eq.,  Talman  (1849),  15  Ala.  472. 

18'J.';),  33  Atl.  Kep.  479. 


§  161.]  MORTGAGES   AND    THEIR   VALIDITY.  187 

by  any  resolution  of  the  board  or  other  written  evidences  ;  it  may 
be  iraphed  from  facts  and  circumstances. ^  And  the  presumjjtion 
being  that  such  persons  are  rightfully  in  oflice,  it  is  not  incumbent 
on  the  party  claiming  under  their  acts,  unless  some  evidence  is 
offered  on  the  subject,  to  show  that  they  were  properly  elected. ^ 

The  authority  to  execute  a  mortgage  of  the  corporate  property 
may,  as  in  other  cases  of  agency,  be  shown  either  by  evidence  of 
the  acts  of  the  corporation  prior  to  the  time  of  the  execution,  or 
by  acts  subsequent  to  such  execution  from  which  a  ratification 
may  be  inferred.^     (See  section  below  as  to  ratification.) 

Where  a  mortgage  covering  property  of  a  railroad  in  two  States 
has  been  regularly  foreclosed  in  a  federal  court  of  one  of  the 
States,  concurred  in  by  the  federal  court  in  the  other,  and  regu- 
larly entered  there,  the  court  decreeing  the  foreclosure  will  not 
consider  afterwards  the  question  of  the  validity  or  invalidity  of 
the  mortgage.'* 

If  it  appears  that  acts  like  the  one  in  question  would,  under 
ordinary  circumstances,  be  within  the  authority,  a  presumption 
arises  that  the  necessary  circumstances  did  exist,  and  that  the 
act  in  question  was  authorized.^ 

Thus  where  a  contract  purporting  to  be  sealed  with  the  seal  of 
a  corporation  is  proven  to  have  been  signed  and  executed  by  the 
proper  agents,  the  presumption  is  that  the  seal  was  regularly 
affixed  by  the  proper  authority ;  and  a  contract  under  seal  exe- 
cuted by  an  agent  within  the  scope  of  his  appointed  power  will  be 
held  valid  and  binding  on  the  corporation  until  evidence  to  the 
contrary  has  been  introduced.^ 

The  presumption  of  authority  to  affix  the  seal  of  the  corpora- 
tion to  a  contract  will  not  be  overcome  by  the  mere  fact  that  no 
vote  of  the  directors  authorizing  it  is  shown.^ 

1  Northern  Central  R.  Co.  v.  Bastian  Co.  (1890),  122  N.  Y.  165  ;  s.  c.  25  N.  E. 
(1859),  15  Md.  494.  Eep.  303  ;  9  Ry.  &  Corp.  L.  J.   15  ;  Lin- 

2  Susquehanna  Bridge  &  Bkg.  Co.  v.  coin  v.  Iron  Co.  (1880),  103  U.  S.  412  ; 
General  Ins.  Co.  (1852),  3  Md.  305.  Farmers'  &  Mechanics'  Bank  v.  Butchers' 

3  Despatch  Line  of  Packets  v.  Bellamy  &  Drovers'  Bank  (1857),  16  N.  Y.  125. 
Mfg.  Co.  (1841),  12  N.  H.  205  ;  Cheever  ^  ^ng.  &  Ames  on  Corp.,  §  224  ;  Fi- 
V.  Rutland  R.  Co.  (Vt.,  1869),  4  Am.  Ry.  delity  Ins.,  Trust,  &  Safe  Deposit  Co.  v. 
Rep.  291  ;  Hervey  v.  111.  Midi.  Ry.  Co.  Shenandoah  Valley  R.  Co.  (1889),  32 
(1884),  28  Fed.  Rep.  169,  175  ;  Claflin  v.  W.  Va.  244;  s.  c.  9  S.  E.  Rep.  180;  38 
South  Car.  Ry.  Co.   (1880),  8  Fed.  Rep.  Am.  &  Eng.  R.  R.  Cas.  577. 

118,  135.  T  Waterman  on  Corp.,  §  96;    North- 

*  Central  Trust  Co.  of  New   York  v.  em  Central  R.  Co.  v.  Bastian  (1859),  15 

Marietta    &    North    Ga.    Ry.   Co.    et   al.  Md.  494  ;    Fidelity    Ins.,    Trust,    &   Safe 

(Morse,  Intervener)  (1896),  73  Fed.  Rep.  Deposit  Co.  v.  Shenandoah  Valley  R.  Co. 

589.  (1889),  32  W.  Va.   244  ;  s.  c.  38  Am.  & 

8  ilartin  v.  Niagara  FaUs  Paper  Mfg.  Eng.  R.  R.  Cas.  577  ;  9  S.  E.  Rep.  180. 


188  RAILWAY   BONDS    AND   MORTGAGES.  [CHAP.  VIII. 

Thus  the  seal  of  a  corporation  may  be  attached  to  a  mortgage 
of  its  property  by  a  person  recognized  by  its  president  and  board 
of  directors  as  its  secretary,  although  he  is  not  de  jure  secretary. ^ 

The  official  acts  of  persons  who  are  de  facto  officers  of  a  cor- 
poration, and  hold  themselves  out  to  the  world  as  such,  bind  the 
corjjoration  and  all  who  claim  under  it.^ 

General  Corporation  Act,  N.  J.,  §  16,  providing  for  the  manage- 
ment of  the  business  of  corporations  by  directors  who  are  share- 
holders, does  not  apply  to  the  directors  for  the  first  year  of  a 
corporation  consolidated  under  P.  L.  N.  J.,  1893,  p.  121,  ch.  67, 
and  a  mortgage  of  the  property  of  the  corporation  executed  by  the 
directors  for  the  first  year  who  are  not  stockholders  is  valid. ^ 

§  162.  Authority  of  Individual  Officers.  (a)  Directors.  —  When 
the  by-laws  of  a  private  corporation  confer  upon  the  directors 
power  to  act  in  behalf  of  such  corporation,  and  do  not  put  any 
special  limitation  on  the  manner  in  which  that  power  is  to  be 
exercised,  a  majority  of  the  board  may  act  within  the  scope  of 
the  authority  conferred,  either  when  there  is  a  consultation  of 
the  whole  body  and  a  concurrence  of  the  majority,  or  there  is  a 
regular  meeting  at  which  all  the  directors  might  be  present,  and 
a  majority  are  actually  in  attendance,  and  act  by  virtue  of  a  note 
given  by  the  majority  of  tliose  present.* 

A  statute  empowering  tlie  directors  to  "  manage  the  affairs  of 
the  company,  make  and  execute  contracts  of  whatsoever  kind  fully 
and  completely,  to  carry  out  the  objects  and  purposes  of  the  cor- 
poration in  such  way  and  manner  as  they  think  proper,  and  to 
exercise  generally  the  corporate  powers  of  the  company,"  has 
been  construed  as  merely  declaratory  of  the  common-law  prin- 
ciple, though  the  statute  also  states  that  the  company  "  shall  have 
power  to  borrow  from  time  to  time,  on  the  credit  of  the  corpora- 
tion, and  under  such  regulations  and  restrictions  as  the  directors 
thereof,  by  unanimous^  concurrence,  may  impose,  such  sum  of 
money  as  they  may  deem  necessary  for  constructing  and  com- 
pleting their  railroad."^ 

If  the  by-laws  of  a  corporation  provide  that,  in  the  management 
of  its  affairs,  the  directors  shall  have  all  the  powers  which  the 

1  Aufjnsta  T.  &  G.  R.  Co.  v.  Kittel  *  Despatch  Line  of  Packets  v.  Bellamy 
(1802),  (,2  Fed.  Rep  63;  2  C.  C.  A.  615.  Manufg.  Co.  (1841),  12  N.  H.  205.  The 
See  Davies  v.  Bolton  &  Co.,  3  Ch.  679.  transaction  discussed  iu  this  case  was  a 

2  Porter  v.    Pittsburg   Bessemer  Steel  mortgage. 

Co.  (1SS6),  120  U.  S.  649.  6  McLane  v.  Placerville  &  Sacramento 

3  Camden  Safe  Deposit  &  Trust  Co.  v.  Valley  R.  Co.  (1885),  66  Cal.  606  ;  s.  c. 
r.urliiigton  Carpet  Co.  d  ul.  (N.  J.  Eq.,  6  Pac.  Rep.  748;  26  Am.  &  Eng.  R.  R. 
181/.'.),  SA  Atl.  Rep.  479.  Cas.  404. 


§  162.]  MORTGAGES   AND   THEIR   VALIDITY.  189 

corporation  itself  possess  not  incompatible  with  the  provisions  of 
the  by-laws  and  the  laws  of  the  Connnonwealth,  and  there  is 
nothing  in  the  by-laws  incomj)atible  with  the  exercise  by  the 
directors  of  the  power  to  borrow  money,  issue  bonds,  or  convey 
in  mortgage  the  bonds  of  the  corporation  as  security  therefor,  the 
directors  may  exercise  such  power. ^ 

The  effect  of  a  section  of  a  charter  which  places  full  power  in 
the  board  of  directors  to  manage  the  property,  business,  and  affairs 
of  the  company,  and  authorizes  the  issue  and  sale  of  the  coupon 
bonds  and  the  execution  of  a  mortgage  or  deed  of  trust  to  secure 
their  prompt  payment,  is  not  restricted  by  the  fact  that  the  direc- 
tors could  do  cei'tain  other  things  only  with  the  consent  of  the 
stockholders.^ 

The  original  charter  of  an  Alabama  railroad  company  author- 
ized the  borrowing  of  money  and  the  execution  of  a  mortgage  to 
secure  the  loan  by  a  majority  vote  of  the  board  of  directors,  the 
number  of  that  board  being  fixed  at  nine  members.  By  an  amend- 
ment to  the  charter,  the  number  of  the  members  was  afterwards 
changed  to  eleven,  inclusive  of  the  president.  Tlie  powers  of  the 
board  were  to  be  the  same  as  under  the  original  charter,  but  it 
was  provided  that  six  members  should  constitute  a  quorum.  It 
was  contended  that  a  mortgage  executed  by  six  members,  in  the 
absence  of  the  president,  was  not  valid ;  but  the  court  held  that 
the  mention  of  the  president  in  the  amended  charter  must  be 
construed  to  mean  that  he,  if  present,  would  make  one  of  the  six 
constituting  the  quorum,  and  not  that  he  was  thereby  made  an 
integral  part  of  the  corporation,  without  whose  presence  it  was 
impossible  to  complete  the  quorum.  The  mortgage  was  therefore 
sustained.^ 

Under  the  provisions  of  the  Arkansas  statute  (Mansf.  Dig., 
§§  9G1,  969)  providing  that  the  business  of  a  corporation  must 
be  transacted  by  a  majority  of  its  directors  convened  according  to 
its  by-laws,  a  mortgage  for  past  indebtedness  and  for  a  present 
loan  executed  by  a  majority  of  the  directors  at  a  special  meeting 
is  void,  where  the  bj'-laws  of  the  corporation  contain  no  provision 
for  a  special  meeting,  and  one  of  the  directors  temporarily  absent 
from  the  State  had  no  actual  notice  of  the  meeting.^ 

1  Hemlee  v.  Pinkerton  (1867),   14  Al-  237,  approved  in  Savannah  &  Memphis  R. 

h-n,  3S1.     The  same  rule  prevails  under  Co.  v.  Lancaster  (1878),  62  Ala.  555. 
tlie  statutes  of  Pennsylvania.     McCurdy's  *  Bank  of    Little   Rock   v.    McCarthy 

Appeal  (1870),  65  Pa.  St.  290.  (1892),    55   Ark.    473  ;    s.    c.    18    S.    W. 

^  Hodder  V.  Kentucky  &  Great  Eastern  Rep.    759.       See    also   Davies   v.    Bolton 

Ky-  Co.  (1881),  7  Fed.  Rep.  793,  797.  &   Co.,   3  Ch.    679,    disqualified   director 

8  Meyer  v.    Johnston  (1875),  53  Ala.  voting. 


190  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  VIII. 

The  fact  that  a  trust  deed  differs  from  that  authorized  by  its 
board  of  directors  does  not  destroy  its  validity  where  the  changes 
are  recognized  and  approved  by  the  board,  and  the  bonds  secured 
thereby  are  directed  to  be  sold.^ 

But  where  the  president  and  secretary  of  a  corporation  are 
directed  by  a  meeting  of  directors  at  which  a  quorum  are  not 
present,  and  of  which  no  notice  has  been  given,  to  execute  a 
mortgage,  and  exceed  their  authority  by  inserting  an  unusual  pro- 
vision, tlie  fact  that  the  deed  is  ratified  at  a  full  meeting  of  the 
board  will  not  operate  as  an  adoption  of  that  provision  where  the 
directors  have  no  knowledge  of  the  actual  contents  of  the  mort- 
gage, except  as  indicated  by  the  order  for  its  execution  in  the 
records  of  the  corporation.- 

(b)  President.  —  The  president  of  a  railroad  company,  under  a 
resolution  of  the  directors  authorizing  him  to  execute  a  mortgage 
on  "  all  the  real  estate  and  personal  property  now  or  hereafter 
belonging  to  the  company,"  may  create  a  specific  lien  upon  the 
mcome,  profits,  and  earnings  of  the  road.^ 

And  a  resolution  authorizing  the  mortgage  of  "  the  road  and  its 
property,  etc.,"  will  authorize  a  mortgage  of  the  road  with  all  its 
rights  and  privileges.  The  expression  "  etc.,"  it  was  thought, 
could  apply  to  nothing  but  the  franchises,  and  should,  therefore, 
be  regarded  as  embracing  them.* 

On  the  other  hand,  as  a  corporate  mortgage  is  usually  so  drawn 
as  to  provide  a  foreclosure  for  the  whole  debt  on  default  of  pay- 
ment of  principal  or  interest,  the  implied  authority  of  the  officer 
wlio  executed  such  a  mortgage  extends  to  the  insertion  of  a  pro- 
vision to  that  effect.^     Compare  §  145,  ante. 

If  his  authority  is  given  in  general  terms,  he  may  insert  in  the 
mortgage  any  usual  provisions,  but  not  unusual  ones.^ 

Thus  a  note  of  the  directors  authorizing  the  president  to  execute 
a  mortgage  to  secure  the  payment  of  a  specific  debt  does  not 
authorize  him  to  insert  in  the  instrument  a  contract  binding  the 
corporation  to  pay  the  mortgagee  an  attorney's  fee  in  case  legal 
proceedings  are  taken  to  enforce  the  licn.'^ 

1  First  National  Bank  ?;.  Sioux  City  ^  Savannah  &  Memphis  R.  Co.  v.  Lan- 
Terminal  Ry.  &  Warehouse  Co.  (1895),  caster  (1878),  62  Ala.  555.  See  also 
G9  Fed.  Rep.  441.  Fanners'  Loan  &  Trust  Co.  r.  Iowa  Water 

2  Pacific  Rollins  Mill  v.  Dayton,  Sheri-  Co.  (1897),  78  Fed.  Rep.  881. 

clan,  &  Grande  Ronde  Ry.  Co.  (1881),  5  «  Jcsup  v.  City  IJank  of  Racine  (1861), 

Fed.  Rep.  852.  14  Wis.  331. 

3  Kelly  w.  Alabama  R.  Co.  (1877),  58  '  Pacific  Rolling  Mill  y.  Dayton,  Sheri- 
Aln.  489  ;  .s.  r.  21  Am.  Ry.  Rep.  138.  dan  &   Grande    Konde  R.    Co.    (1881),    5 

*  Bardstown   &    Louisville   R.    Co.    v.     Fed.  Rep.  852. 
Metcalfe  (1802),  4  Mete.  (Ky.)  199. 


§  163.]  MORTGAGES   AND   THEIR   VALIDITY.  191 

If  the  president,  in  executing  a  mortgage,  should  add  something 
b.eyond  his  authority,  the  excess  will  not  vitiate  those  provisions 
of  the  instrument  which  can  stand  without  the  invalid  portion.-^ 

And  even  if  his  action  was  not  authorized  by  the  original  resolu- 
tion under  which  he  acted,  the  subsequent  approval  of  the  board 
will  be  sufficient  to  give  it  validity .^ 

No  authority  to  mortgage  the  property  of  the  company  can  be 
inferred,  where,  under  the  general  incorporation  law  of  a  State, 
the  president  is  merely  authorized  to  preside  at  the  meetings  of 
the  directors,  and  "  to  perform  such  other  special  duties  as  the 
directors  may  authorize,"  nor  is  any  such  power  implied  from 
the  fact  that,  under  the  by-laws  of  the  company,  he  is  appointed 
its  "  business  and  financial  agent."  ^ 

(c)  Superintendent.  —  No  power  to  execute  a  mortgage  is 
vested  in  an  agent  appointed  by  the  directors  merely  for  the 
purpose  of  superintending  and  carrying  on  the  business  of  the 
corporation,'* 

§  163.  Requisite  Consent  of  Stockholders.  —  The  Concurrence  of 
the  stockholders  is  not  necessary  to  authorize  the  execution  of  a 
mortgage,  where  the  charter  empowers  the  company  to  issue  and 
sell  bonds,  and  execute  a  mortgage  to  secure  the  same,  and  vests 
the  general  management  and  control  of  the  corporate  business  in 
the  board  of  directors.  The  fact  that  the  charter  requires  such 
concurrence  to  authorize  consolidation  with  another  company 
cannot  be  construed  as  meaning  that  a  mortgage  is  invalid  with- 
out that  concurrence.^ 

A  new  vote  of  the  stockholders  to  authorize  a  mortgage  is  not 
made  necessary  by  the  fact  that,  since  the  mortgage  was  author- 
ized, the  interest  of  the  company  has  changed  from  an  estate  for 
years  into  a  freehold  estate.^ 

Where  a  statute  authorizes  a  company  to  borrow  money  and 
mortgage  its  property  and  franchises,  upon  the  concurrence  of 
the  holders  of  two-thirds  of  the  stock,  such  concurrence  to  be 
expressed  at  a  meeting  of  the  stockholders  called  by  the  directors, 
and  a  mortgage  is  authorized  at  a  meeting  of  the  directors,  who  are 

1  Jesup  V.  City  Bauk  of  Racine  (1861),  presented  to  the  finance  committee  of  the 
14  Wis.  331.  board  and  approved. 

2  Chiflin  V.  South  Carolina  R.  Co.  ^  j^^ge  ^  Isthmus  Transit  R.  Co. 
(1880),  8  Fed.   Rep.   118,   135.     There  it  (1876),  6  Or.  125. 

was  doubtful  whether  an  agreement  with  *  Despatch  Line  of  Packets  v.  Bellamy 

a  syndicate  to  furnish  money  and  buy  up  Mfg.  Co.  (1841),  12  N.  H.  205. 
coupons   for  interest  due,   and  to  secure  ^  Hodder  v.  Kentucky  &  Great  Eastern 

the  retention  of   the   priorities  of   those  R.  Co.  (1881),  7  Fed.  Rep.  793. 
coupons,  was  authorized  by  the  resolution,  •>  Evans  v.  Boston  Heating  Co.  (1892), 

but  the  draft  of  the  agreement  had  been  157  Mass,  37  ;  s.  c.  31  N".  E,  Rep.  698. 


192  RAILWAY  BONDS   AND   MORTGAGES.  [CHAP.  VIII. 

shown  to  be  the  only  stockholders  except  one,  and  subsequently 
assented  to  by  the  entire  body  of  shareholders,  a  substantial  com- 
pliance with  the  law  is  established,  and  the  mortgage  will  be  held 
valid.  1 

A  constitutional  provision  forbidding  an  issue  of  mortgage 
bonds  to  secure  an  increase  of  indebtedness  without  the  con- 
sent of  the  stockholders,  does  not  apply  to  a  case  in  which  the 
debts  secured  have  been  already  incurred  ;2  and  if,  without  such 
consent,  bonds  are  issued  partly  for  the  purpose  of  securing  a  new 
indebtedness,  the  mortgage  will  be  valid  to  the  extent  of  the 
prior  indebtedness.^ 

Under  the  New  York  Manufacturing  Act,  which  provides  that 
a  manufacturing  corporation  may  mortgage  its  goods  and  chat- 
tels, and  "  also  tlie  franchises,  rights,  privileges,  and  liberties 
thereof,"  provided  the  written  consent  of  the  holders  of  two- 
thirds  of  the  stock  is  obtained,  the  consent  of  such  stockholders 
to  mortgage  the  real  and  personal  estate  will  not  authorize  a 
mortgage  of  the  corporate  franchises.* 

The  main  object  of  the  New  York  act  on  this  subject  being 
to  prevent  mortgages  by  these  corporations  being  given  with- 
out the  assent  of  owners  of  more  than  two-thirds  of  the  stock, 
in  requiring  the  assent  to  be  in  writing,  it  has  been  held  that 
a  resolution  passed  at  a  stockholders'  meeting,  by  the  vote  of 
stockholders  owning  more  than  two-thirds  of  the  stock,  entered 
upon  the  minutes,  and  attested  by  the  secretary,  amounted  to 
the  "written  assent"  required.-^ 

A  corporation  which  itself  owns  shares  of  its  own  capital 
stock  cannot  vote  them  so  as  to  make  up  the  majority  which  is 
a  prerequisite  under  this  statute  to  the  validity  of  a  mortgage." 

A  purchase-money  mortgage  could  be  issued  without  the  con- 
sent of  the  stockholders  under  the  former  New  York  statute 
(Laws  of  1848,  ch.  37),  which  authorizes  the  formation  of  gas 
companies.'' 

1  Tlioinas  v.  Citizens'  Horse  Ry.  Co.  Ct.  Com.  PL,  March,  1887),  1  Ry.  &  Corp. 
(1882),  104  111.  462  ;  s.  c.  11  Am.  &  Eng.     L.  J.  321. 

R.  R.  Cas.  306.  *  Lord   v.    Yonkers   Fuel   &   Gas   Co. 

For  a   construction  of   the  special   act  (1885),  99  N.  Y.  547  ;  s.  c.  2  N.  E.  Rep. 

relating   to   mortgages   by   the   Northern  909. 

Pacifii;  Railroad  Company,  see  Da  Pontc  i;.  ^  Beebe  w.  Richmond  Light,    Heat,   & 

Northern  Pac.  Ry.  Co.  (1884),  21  Blatch.  Power  Co.  (1895),    13   Misc.   Rep.    737; 

534.      Tliere  the   consent    of   the   three-  s.  c.  55  N.  Y.  Siippl.  1. 
foiirths  of  the  ])referred  stockholders  was  •*  Vail  v.  ILiniilton  (1881),   85  N.   Y. 

held  to  be  the  necessary  condition.  453. 

2  Aid  V.  Ulioads  (1877),  84  Pa.  St.  319.  7  Farmers'  Loan  &  Trust  Co.  v.  Equity 

3  Rothschild  v.  Rochester  R.  Co.  (Pa.  Gas  Light  Co.  (1894),  84  Hun,  373. 


§§  164,  165.]  MORTGAGES   AND   THEIR   VALIDITY.  193 

An  objection  that  a  mortgage  of  a  business  corporation  under 
tbc  laws  of  New  York  was  not  authorized  by  the  assent  of  stock- 
holders owning  two-thirds  of  the  stock,  may  be  taken  by  any  one 
interested  in  defeating  the  mortgage.^ 

§  164.  Notice  of  Meeting.  —  The  requirement  of  the  Mass.  Pub. 
Stat.,  ch.  106,  §  23,  that  a  mortgage  of  corporate  property  must 
be  authorized  "  at  a  meeting  called  for  that  purpose,"  is  satisfied 
when  the  notice  of  the  meeting  states  the  object  to  be  "  to  con- 
sider the  question  of  an  issue  of  bonds  of  the  company  secured  by 
a  mortgage  of  its  property .^ 

§  165.  Place  of  Execution,  Acknowledgment,  or  Authorization.  — 
In  an  early  case  in  Indiana  the  validity  of  a  railroad  mortgage  was 
attacked  on  the  ground  that  it  had  been  executed  out  of  the  State. 

This  objection  was  disposed  of  by  the  court  in  the  following 
manner :  -^ 

"We  do  not  think  the  contract  void  because  executed  out  of 
the  State.  There  is  nothing  in  our  railroad  act  requiring  the 
directors  of  corporations  to  transact  their  business  within  the 
State.  It  is  true  that  corporations  cannot  migrate  from  one  sov- 
ereignty into  another  so  as  to  become  legal,  local  existences  within 
the  latter  sovereignty  ;  but  it  is  also  true  that  the  migration  of  the 
directors  of  a  corporation  from  one  sovereignty  into  another  does 
not  terminate  the  existence  of  such  corporation  within  the  sover- 
eignty which  created  it ;  for  by  our  statute  (1  Rev.  Stats.,  p.  409) 
the  stockholders  are  the  corporation,  the  directors  its  agents,  and 
by  inter-State  and  international  courtesy  corporations  created  in 
one  State  are  permitted  to  contract  and  sue  in  others  ;  and  if 
all  the  directors  could  there,  as  agents  of  the  corporation,  make  a 
contract,  why  can  they  not  there  authorize  one  of  their  number 
to  make  it  ? 

"  The  mere  place  where  the  active  agents  of  a  corporation  enter 
into  a  contract  must,  in  general,  be  immaterial.  The  important 
question  arising  must  be  one  of  power,  not  of  place.  The  exer- 
cise of  the  power  has  relation  to  the  place  of  their  legal  establish- 
ment, where  the  contract  may  be  subsequently  acted  under.  The 
meetings  of  the  directors  of  a  business  corporation  are  not  analo- 

1  Beebe  v.  Richmond  Light,  Heat,  &  decision,     in     Greenpoint     Company     v. 

Power  Co.   (189.5),    13    Misc.    Rep.    737;  Whitin  (1877),  69  N.  Y  328  ;  Paulding  v. 

S.  c.  35  N.  Y.  SuppL  1.     This  was  settled  Chrome  Steel  Co.  (1884),  94  N.  Y.  334  ; 

in  the  case  of  Lord  ;-.  Yonkers  Fuel  &  Gas  Rochester  Bank  v.  Averell  (1884),  96  N. 

Co.  (1885),  99  N.  Y.  547  ;  s.  c.  2  N".  E.  Y.  473. 
Kep.  909.  2  Evans  v.  Boston  Heating  Co.  (1892), 

Doubts  as  to  this  point  had  been  ex-  157  Mass.  37;  s.  c.  31  N.  E.  Rep.  698. 
pressed   by  the  courts  previously  to  this 

13 


194  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  VIII, 

gous  to  the  sessions  of  a  judicial  tribunal.  The  corporation  is 
organized  by  the  election  of  directors ;  but  the  mere  organization 
of  the  directors  into  a  formal  meeting  for  business  afterwards  is 
quite  a  different  thing. 

"  States  cannot  migrate,  but  by  their  agents  they  are  daily 
making  contracts  without  their  territorial  boundaries.  Besides, 
our  law  seems  to  contemplate  that  corporations  chartered  in  this 
State,  and  local  to  it,  may  have  offices  for  business  in  other  States. 
1  Rev.  Stats.,  p.  113,  §  32  ;  Acts  of  1853,  p.  102.  Such,  also,  is 
the  spirit  of  our  legislation  authorizing  railroad  companies  in  this 
State  to  consolidate  with  those  in  other  States."  ^ 

In  a  Vermont  case  a  like  conclusion  has  been  reached ;  but  the 
argument  against  the  validity  was  based  not  so  much  on  the  want 
of  statutory  authority  as  on  the  theory  that  the  resolution  of  the 
directors  empowering  the  president  to  execute  and  deliver  the 
mortgage  in  the  name  of  the  corporation  did  not  empower  him  to 
exercise  the  agency  so  conferred  outside  the  State.  The  court 
held  that,  as  he  had  not  been  directed  to  execute  the  mortgage  in 
any  particular  place,  a  restriction  in  this  respect  could  not  be  im- 
plied, especially  as  the  validity  of  the  deed  had  been  subsequently 
authorized  by  the  company .^ 

A  similar  ruling  has  been  made  in  a  case  wliere  the  president  of  a 
company  operating  a  railroad  in  Kentucky  acknoAvledged  the  execu- 
tion of  a  mortgage  on  its  property  while  he  was  residing  in  Ohio.^ 

On  grounds  similar  to  those  which  control  the  cases  just 
noticed,  it  is  held  that  a  company  cannot  repudiate  a  mortgage 
given  to  secure  its  bonds,  at  least  after  they  have  passed  into  the 
hands  of  bona  fide  holders,  for  the  reason  that  the  resolution  by 
which  the  execution  of  the  instrument  was  authorized  was  passed 
outside  the  State.* 

1  Wright  V.  Bundy  (1858),  11  Ind.  E.  Co.  (1881),  7  Fed.  Rep.  793,  affirmed 
398,  404.  in  Wriglit  v.   Kentucky  &  Great  Eastern 

For  a  case  involving  a  mortgage  of  a  R.    Co.,  117  U.  S.  72.      In  Kelly  v.  Cal- 

corporation   where  the  meeting  of  direc-  houn,    95   U.   S.    710,  the   circumstances 

tors  was  called  to  be  held  at  a  ])lace  other  were  such  as   to   involve  the  same  point, 

than   the   principal   place  of  business   of  but   it   was    not    raised,    the   case   being 

the  forporation,  see  Corbett  v.  Woodward  made   to   turn   on    the   sufficiency  of  the 

(1879),    5  Sawy.    403;  s.  c.   6   Fed.   Cas.  certificate   of    acknowledgment,    couched 

531,  Case  No.  3223.  in    terms   somewhat   different   from   that 

2  Ciieev(!r  v.  Rutland  R.  Co.  (Vt.,  Nov.,  employed  in  the  formula  prescribed  by  the 
18fi9),  4  Am.  Ry.  Rep.  291.  It  was  also  statute  of  the  State  in  which  the  corpo- 
held  that  such  a  mortgage  could  not  be  ration  was  organized. 

invalidated  on  the  grounds  that  it  allowed  *  Galveston      Railroad      v.      Cowdrey 

the   trustees   to   be    residents   of  another  (1876),    11  Wall.    459.     The  estoppel  in 

State.     Such  a  ])rovision  is  not  contrary  to  such  a  case  extends  to  the  purchaser  at  an 

public  policy.  execution  sale  of  the  road. 
"   Hoddcr  I'.  Kentucky  &  Great  Eastern 


§  166.]  MORTGAGES   AND   THEIR   VALIDITY.  195 

This  doctrine  is  placed  in  Vermont  on  the  grounds  that  the 
directors  in  conferring  authority  to  execute  a  deed  arc  not  per- 
forming an  act,  but  are  themselves  acting  as  agents  of  and  in 
behalf  of  the  corporation.^ 

This  power  of  acting  through  agents  beyond  the  limits  of  the 
State  is  not  affected  by  a  constitutional  recj[uirement  that  every 
railroad  corporation  organized  or  doing  business  in  a  State  under 
its  laws  shall  have  a  public  office  or  place  of  business  in  that 
State.  Such  a  provision  is  not  intended  to  prevent  the  corpora- 
tion from  having  an  office  beyond  the  limits  of  the  State  also,  nor 
to  invalidate  the  acts  which  it  performs  outside  the  State.^ 

A  resolution  authorizing  the  execution  of  a  mortgage  on  the 
property  of  a  company  which  owns  a  line  extending  through  sev- 
eral States,  from  each  of  which  it  has  received  a  charter,  mailing 
it  a  corporation  in  and  of  that  State,  may  be  lawfully  passed  at  a 
meeting  held  in  any  one  of  those  States.^ 

§  166.  Bondholders  entitled  to  presume  that  the  Mortgage  has 
been  regularly  executed.  —  It  has  been  stated  above  (in  Chap.  II.) 
that  a  bondholder  purchasing  bonds  which  on  their  face  have  been 
issued  in  accordance  with  the  provisions  of  the  statute  or  other 
instrument  from  which  the  corporation  derives  the  authority  for 
such  issue,  and  purport  to  have  been  executed  by  the  proper  for- 
malities, is  not  bound  to  inquire  into  the  manner  in  which  they 
may  have  been  actually  executed  by  the  corporate  officers  (§  37). 
A  similar  rule  prevails  as  respects  the  right  of  the  bondholders  to 
assume  the  mortgage  to  be  valid. 

Thus  the  fact  that  the  seal  was  affixed  by  resolution  at  a  meet- 
ing of  directors  at  which  less  than  a  quorum  was  present  will  not 
invalidate  the  mortgage,  as  between  the  corporation  and  a  mort- 
gagee without  notice  of  the  irregularity.* 

i  Arms  V.  Conant  (1864),  36  Vt.  744.  3  Graham  v.  Boston,  Hartford,  &  Erie 
2  Hervey  v.  111.  Midi.  R.  Co.  (1884),  28  R.  Co.  (1883),  14  Fed.  Rep.  753  ;  s.  c.  118 
Fed.  Rep.  169, 175.  In  this  case  the  court  U.  S.  161  (1886).  In  this  case  it  was  de- 
was  also  referred  to  a  statutory  provision  tennined,  upon  an  examination  of  the  sev- 
which  avoided  the  acts  of  any  meeting  eral  statutes  under  which  the  consolidated 
beyond  the  limits  of  the  State,  unless  that  (;ompany  was  doing  business,  that,  wliile 
meeting  was  authorized  or  its  acts  ratified  it  was  originally  a  Connecticut  corporation, 
by  a  vote  of  two-thirds  of  the  directors  or  it  had  acquired  a  domicil  also  in  Massa- 
trustees,  but  was  of  the  opinion  that,  even  chusetts,  Rhode  Island,  and  New  York,  and 
if  that  provision  applied  to  any  railroad  apart  from  this  fact  it  also  appeared  that 
corporations  except  those  operating  horse  the  proceedings  of  the  company  in  making 
and  dammy  roads,  the  evidence  showed  the  mortgage  had  been  expressly  ratified 
that  the  meeting  at  which  the  mortgage  by  the  legislature  of  all  the  States. 
was  authorized  had  been  duly  convened,  4  County  of  Gloucester  Bank  ?'.  Rudry 
or  at  least  subserpiently  ratified  and  I\[erthyr,  etc.  Co.  (1895),  L.  R.  1  Ch. 
approved.  629.     See  §  162,  ante. 


196  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  VIII. 

Nor  is  the  validity  of  a  corporate  mortgage  executed  by  two 
out  of  three  directors  affected,  as  regards  the  mortgagee,  by 
the  fact  that  no  notice  of  the  meeting  of  directors  was  given 
to  tlie  third  director,  unless  the  mortgagee  has  actual  knowl- 
edge of  tlie  absence  of  such  notice.  Whether  such  notice  was 
given  or  not  is  a  matter  into  which  the  mortgagee  is  not  bound 
to  examine.^ 

For  additional  cases  illustrating  this  rule  see  Art.  lY.,  post. 

§  167.  Mortgages  validated  by  Ratification.^  —  The  general  rule 
as  to  ratification  and  its  rationale  is  thus  clearly  stated  in  a  recent 
New  York  case :  "  The  stockholders  are  the  equitable  owners  of 
the  corporate  property,  and  if  the  officers  or  trustees  do  an  unau- 
thorized act,  or  incur  indebtedness  which  would  not  create  a  cor- 
porate liability,  the  stockholders  may  subsequently  ratify  the  acts 
and  validate  the  originally  unauthorized  transaction.  What  they 
might  originally  have  done  they  may  do  afterward,  and  their  sub- 
sequent assent  is  equivalent  to  original  authority .^ 

Although  a  trust  deed  authorized  by  the  board  of  directors  may 
differ  in  the  manner  of  its  execution  in  many  particulars  from  the 
one  authorized,  if  it  appears  that  the  directors  afterwards  recog- 
nized its  validity,  and  directed  the  sale  of  the  bonds  secured  by 
it,  it  will  not  be  held  to  be  void.* 

A  corporation  which  has  executed  a  corporate  mortgage  upon 
its  property  to  secure  its  bonds,  and  afterwards  sells  its  property 
to  another  corporation  subject  to  the  lien  of  this  mortgage,  and 
not  contracting  with  its  vendee  for  the  payment  of  the  mortgage 
debt,  nor  giving  a  guaranty  that  there  will  be  no  foreclosure  of  the 
mortgage,  will  not  be  heard  in  a  court  of  equity  to  claim  the  mort- 
gage invalid  because  of  its  lack  of  authority  to  execute  it.^ 

1  Kuser  r.  Wright  (1894),  52  N.  J.  Eq.  al.  v.  Lakeport  Agricultural  Park  Assn. 
825  ;  s.  c.  31  Atl.  Kep.  397.  et  al.  (Cal.,  1896),    43  Pac.    Rep.    1106  ; 

2  Some  cases  dealing  with  the  operation  Ashley  Wire  Co.  et  al.  v.  Illinois  Steel 
of  the  analogous  principle  of  estoppel  will  Company,  60  111.  App.  179  (1895). 

be  found  in  §  173,  post.     See  also  §  162,  For  a  rule  as  to  the  authorization  and 

ante.  execution  of  mortgages  by  a  corporation, 

8  Martin  t?.  Niagara  Falls  Paper  Manufg.  see  Atlantic  Trust  Co.  v.  The  Vigilanion 

Co.  (1890),  122  N.  Y.  165  ;  s.  c.  25  N.  E.  et  al.  (1896),  73  Fed.  Rep.  452;  s.  c.  19 

Rep.  303  ;  9  Ry.  &  Corp.  L.  J.  15.  C.  C.  A.  528. 

*  First    Nat.    I'ank    of   Montpelier   v.  As  to  the  ratification  of  an  unauthorized 

Sioux    City    Terminal    II.    &    Wareliouse  mortgage  by  a  corporation,  see   Blood  v, 

Co.   (Trust  Co.  of  North  America,  Inter-  La  Serena  Land  &  Water  Co.  (Cal.,  1895), 

vener)  (1895),  69  Fed.  Rep.  441.  41  Pac.  Rep.  1017. 

As    to    what     would    amount    to    an  *  American  Waterworks  Co.  of  Illinois 

authorization  of  the  directors  of  a  corpo-  et  al.  v.  Farmers'  Loan  &  Trust  Co.  (1896), 

r.ation  to  oxecuti'  a  corporate  mortgage,  or  73  Fed.  Rep.  956. 
a  ratification  of  its  execution,  see  Boggs  et 


§§  1G8,  169.]  MORTGAGES   AND   THEIR    VALIDITY.  197 

Any  technical  defect  in  the  original  execution  of  a  corporate 
mortgage  is  cured  by  the  corporation's  subsequent  acquiescence, 
—  as  where  it  uses  the  consideration  received  by  the  officers  upon 
the  execution  of  the  mortgage.^ 

Ratification,  however,  can  never  be  given  effect,  so  as  to  displace 
intervening  rights  that  have  accrued  while  the  mortgage  was  still 
awaiting  validation  in  this  manner.  Thus  the  lien  of  a  mortgage, 
invalid  because  not  authorized  by  the  directors  and  not  sealed, 
will  be  postponed  to  the  claims  of  parties  whose  claims  have  be- 
come fixed  at  any  time  prior  to  ratification.^ 

A  resolution  of  a  corporation  authorizing  the  president  and 
secretary  to  execute  mortgages  subject  to  mortgages  previously 
executed  by  them,  and  specified  therein,  is  a  ratification  of  the 
notes  secured  by  the  mortgage,  as  well  as  of  the  mortgages  them- 
selves, although  the  notes  are  not  expressly  mentioned.^ 

But  where  the  votes  of  a  certain  proportion  of  the  stockholders 
are  required  to  enable  the  directors  to  mortgage  the  corporate 
property,  there  is  no  legal  ratification  of  an  unauthorized  mortgage 
unless  it  is  formally  adopted  by  at  least  that  number  of  stock- 
holders. The  fact  that  an  assessment  to  pay  the  mortgage  is 
levied  by  the  vote  of  a  mere  majority  of  the  stockholders,  and 
actually  paid  by  two-thirds  of  them,  does  not  constitute  a  valid 
ratification.'* 

§  168.  Improper  Application  of  the  Proceeds  of  the  Bonds,  Trust 
Deed  not  invalidated  by.  — It  has  been  stated  above  (in  Chap.  11.) 
that  the  misapplication  of  the  proceeds  of  the  bonds  will  not 
invalidate  those  instruments  in  the  hands  of  the  holders.  For 
analogous  reasons  such  misuse  of  the  loan  will  not  affect 
the  rights  of  the  beneficiaries  of  the  mortgage  securing  the 
bonds.^ 

§  169.  Fraud  inferred  from  Personal  Interest  of  Officers  in  Con- 
tract. —  Where  the  president  and  vice-president  of  a  railroad 
company  are  secret  members  of  a  company  organized  with  a  de- 
clared object  of  completing  and  acquiring  the  ownership  of  the 
railroad,  a  mortgage  made  by  the  railroad  company  to  secure  a 
debt  due  to  the  construction  company  will,  in  view  of  the  fiduci- 
ary relations  between  the  parties,  be  pronounced  constructively 

1  Dexter,  Horton,&  Co. -y.  Long  (1891),  *  Forbes   v.  San  Rafael  Turnpike  Co. 

■2  Wash.  435  ;  s.  c.  27  Pae.  Rep.  271.  (1875),  50  Cal.  340.     See  §  163,  a7Ue. 

"^  National  Foundry  &  Pipe  Works  v.  ^  Robinson  et  ux.   v.  Dolores  Number 

Oconto  Water  Co.   (1895),  68  Fed.   Rep.  Two    Land   &  Canal    Co.    et   al.    (1892), 

1006.  2    Colo.   App.  17;    s.   c.   29    Pac.   Rep. 

3  Shaver  v.  Hardin   (1891),    82   Iowa,  750. 
378 ;  s.  c.  48  N.  W.  Kep.  68. 


198  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  VIII. 

fraudulent ;  but  in  bankruptcy  proceedings  the  advance  may  be 
proved  as  an  unsecured  debt.i 

So  also  though  the  bonds  evidencing  the  sums  of  money  due  on 
a  construction  contract  are  held  void,  for  the  reason  that  the  direc- 
tors of  the  railroad  company  are  interested  in  the  construction 
company,  the  mortgage  securing  the  bonds  may  be  foreclosed  in 
order  that  the  sums  of  money  actually  expended  on  the  construc- 
tion of  tlie  road  may  be  paid  to  the  bondholders.''^ 

There  are,  however,  some  transactions  between  the  company 
and  the  directors  which  are  not  constructively  fraudulent,  but  are 
allowed  to  stand,  on  the  ground  that  they  are  for  the  interest  of 
the  company,  and  the  directors  have  not  thereby  obtained  any 
unfair  advantage.  Thus  the  action  of  a  board  of  directors  of  a 
corporation  in  delivering  corporate  stock  in  payment  of  a  portion 
of  its  indebtedness,  and  consolidating  the  remainder  into  a  mort- 
gage on  the  corporate  property,  is  not  rendered  illegal  by  the 
fact  that  members  of  the  board  have  become  guarantors  for  fur- 
ther advances  made  to  the  corporation,  after  it  had  exhausted 
its  credit,  which  advances  were  to  be  paid  by  the  delivery  of  the 
stock ;  nor  will  an  issue  of  bonds  in  pursuance  of  such  an  agree- 
ment be  enjoined.^ 

Nor  can  subsequent  creditors  attack  the  validity  of  bonds  issued 
for  the  purpose  of  reimbursing  a  director  who  has  made  large 
advances  out  of  his  own  means,  and  of  raising  money  to  enable 
him  to  complete  the  work  of  construction  which  he  has  under- 
taken, unless  some  actual  bad  faith,  irregularity,  or  fraud  in  the 
execution  of  the  mortgage  is  shown.* 

§  170.  Constructive  Fraud  as  to  Creditors  and  Preferences.  — 
Circumstances  which,  in  the  case  of  an  ordinary  grantor,  would 
render  a  mortgage  fraudulent  as  to  creditors  will  not  necessarily 
have  that  effect  in  the  case  of  a  railroad  company.  Thus  a  mort- 
gage executed  by  an  insolvent  railroad  company  to  secure  bonds 
issued  for  the  purpose  of  enabling  it  to  complete  its  road  is  not 
void  for  tlic  reason  that  the  company  is  insolvent,  nor  yet  because 
it  is  provided  in  the  deed  that  the  whole  estate  wliich  it  covers  is 
to  be  retained  by  the  company  until  the  maturity  of  the  bonds, 
and  then  sold,  in  case  of  default,  for  the  benefit  of  the  holders  of 
the  bonds  primarily,  and  afterwards  of  its  general  creditors.^ 

1  K,ii.[)nor  V.  St.  Louis  &  St.  Joseph  F.altiinore  &  Oliio  R.  Co.  (.1885),  35  Fed. 
R.  Co.  (1875),  3  Dill.  228.  Rep.  1(51. 

2  Tlioiiias  V.  Drown ville,  Fort  Kearney,  *  Porter  v.  Pittsburgh  Bessemer  Steel 
&  Pan.  R.  Co.  (1883),  109  U.  S.  52'2  ;  s.  c.  Co.  (1886),  120  (J.  S.  649. 

3  Slip.  Ct.  Rep.  315.  6  Allen  v.  Montgom.Ty  k  West  Point 

8  County    Court    of   Taylor  County  v.      R.    Co.    (1817),    II    Ala.     437.      Such    a 


§  170.]  MORTGAGES   AND   THEIR   VALIDITY.  199 

A  similar  ruling  has  been  made  as  to  the  effect  of  a  provision 
allowing  the  company  before  default  to  sell,  hypothecate,  or  other- 
wise dispose  of  any  of  its  property  not  necessary,  in  its  judgment, 
for  the  use  of  the  road.  The  very  nature  of  the  business  of  a 
railroad  company,  the  means  and  j)ower  requisite  to  keep  it  up, 
the  wear  and  tear  of  its  rails,  ties,  and  rolling-stock,  and  the  con- 
stant necessity  of  replacing  injured  or  worn-out  appurtenances 
with  new  ones,  were  declared  to  negative  the  existence  of  any 
fraudulent  purpose  in  inserting  such  a  provision.^ 

So  also,  in  the  absence  of  a  statute  forbidding  preferences,  a 
mortgage  executed  to  secure  bonds  the  proceeds  of  which  are  to 
be  used  to  pay  debts  and  current  expenses  is  not  invalid  as 
against  judgment  creditors,  even  if  the  company  be  insolvent,^ 
provided,  of  course,  the  transaction  is  a  bona  fide  one,  and  there 
is  no  purpose  at  the  time  of  immediately  abandoning  business  or 
making  an  assignment.^ 

As  has  been  said  in  a  Pennsylvania  case,  "  The  purpose  of  a 
railroad,  the  nature  of  its  property,  the  necessity  of  possession  to 
accomplish  its  purpose,  and  the  powers  conferred  in  [its]  charter 
[to  '  pledge  its  property  and  income'],  leave  no  room  to  doubt 
the  validity  of  a  mortgage,  without  delivery  of  possession,  of 
those  chattels  which  are  necessary  to  carry  out  the  object  of 
incorporation."  * 

Hence,  although  the  income  received  by  a  company  between  the 
time  when  a  mortgage  covering  it  was  executed,  and  the  time 
when  the  mortgagee  forecloses  the  mortgage,  or  enters  into  pos- 
session of  the  road,  is  left  in  the  possession  of  the  mortgagor 
with  powers  of  use  and  disbursements,  as  the  income  is  of  the 
nature  of  personal  property,  this  fact  does  not  raise  any  im- 
plication of  fraud  whereby  the  mortgage  is  rendered  void  as  to 
creditors.^ 

But  although  the  insolvency  of  a  corporation  does  not  deprive 
it  of  the  power  of  preferring  one  creditor  or  class  of  creditors, 
provided  it  is  still  a  going  concern  when  the  preference  is  granted, 
this  power  cannot  be   exercised  in  favor  of  the  directors,  and  a 

stipulation,  it  was  said,  had  no  tendency  '  Damarin  &  Co.  v.  Huron  Iron  Co. 

to  hinder  or  delay  creditors,  as  they  could,  (1891),  47  Ohio  St.  581  ;  s.  c.  26  N.   E. 

at  any  time  after  their  judgments,  have  Rep.  37  ;   32   Am.   &  Eng.    Corp.    Cases, 

compelled  the  trustees  to  close  the  trust.  625. 

i  Butler  V.  Rahm  (1877),  46  Md.  541  ;  *  Covey,  for  the  use,  etc.  v.  Pittsburg, 

18  Am.  Ry.  Rep.  86.  Fort  Wayne,  &  Chicago  R.  Co.  (1858),  3 

2  Bergen     v.     Porpoise     Fishing     Co.  Phil.  173,  178,  per  Agnew,  P.  J. 

(1886),  42  N.  J.  Eq.  397  ;  s.  c.  8  Atl.  Rep.  ^  Jessupe<  al  Trustees,  v.  Bridge  et  al. 

523.  (1861),  11  Iowa,  572. 


200  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  VIII. 

mortgage  given  for  that  purpose  is  invalid  as  against  a  general 
creditor. 1 

§171.  Effect  of  the  Chattel-mortgage  Acts.  —  The  principles 
illustrated  in  the  foregoing  section  are,  however,  considerably 
modified,  in  regard  to  the  personal  property  of  the  company,  by 
the  statutes  of  some  States  which  make  a  mortgage  of  such 
property  void  as  to  purchasers,  mortgagees,  and  creditors,  un- 
less the  mortgage  is  recorded  or  the  property  is  delivered  to  the 
mortgagee.  These  statutes  have  usually  been  discussed  in  con- 
nection with  the  question  whether  the  rolling-stock  is  a  fixture, 
and  the  cases  on  the  subject  have  been  placed  in  that  portion 
of  this  treatise  which  deals  with  that  question.  In  Montana 
a  special  statute  has  been  passed  for  the  recording  of  railroad 
mortgages  rendering  registration  in  each  county  unnecessary, 
and  this  law  was  not  repealed  by  the  more  recent  Chattel 
Mortgage  Acts.^ 

Railway  mortgages  are  not  within  the  purview  of  State  statutes 
regulating  chattel  mortgages.^ 

A  chattel  mortgage,  even  if  not  properly  registered,  is  good 
against  every  one  who  is  not  hindered  or  defeated,  and  will  ordi- 
narily prevail  against  the  mortgagor  himself,  and  also  against  a 
subsequent  purchaser  or  mortgagee  of  the  chattels  with  notice.* 
But  the  terms  of  the  statute  may  be  such  as  to  place  the  cred- 
itors in  a  more  favored  position  in  this  respect,  and  if  it  is  pro- 
vided in  unqualified  terms  that  the  mortgage  shall  be  void  against 
creditors  unless  it  is  duly  registered,  or  accompanied  by  an  imme- 
diate delivery  of  things  mortgaged,  followed  by  an  actual  and 
continued  change  of  possession,  the  fact  that  the  creditor  has 
notice  of  the  mortgage  will  not  prevent  him  from  taking  advan- 
tage of  the  failure  to  comply  with  the  requirements  of  the 
statute.^ 

1  Howe,  Brown,  &  Co.  v.  Sanford  Fork  United  States  held  that  the  Illinois  stat- 

&  Tool  Co.,  44   Fed.    Rep.   231    (1890)  ;  ute  as  to  chattel  mortgages  was  couched 

8.  c.  9  Ry.  &  Corp.  L.  J.  185.  in  such  terms  that  the   legislature  could 

'■^  Ciih;hrist  v.   Helena,  H.  S.  &  S.   R.  not  have  intended  that  it  should  be  ap- 

Co.  (1891),  47  Fed.   Rep.  593.     See  Man-  plicable  to  the  personalty  of  railroad  com- 

hattan  Trust  Co.   of  New  York  v.  Seattle  i)anies. 

Coal  &   Iron   Co.   (1897),  Wash.    48   Pac.  *  Williamson  v.  N.  J.  Southern  R.  Co. 

Rep.  333,   for  a  ruling  as  to  the  Chattel  (1875),  26  N.  J.  Eq.  398. 
Mortgage  Act  of  Washington.  ^  Williamson  i;.  N.   J.  So.  R.   Co.,  29 

8  Farmers' Loan  &  Trust  Co.  V.  Detroit,  N.  J.    Eq.  311,   citing   Farmers'   Loan  & 

B.  C.  &  A.  R.  Co.,  In  re  Keating  (1895),  Tmst  Co.  v.  Hendrickson  (1857),  25  Barb. 

71  Fed.  Rep.  29.  485  ;  Stevens  v.  Puttalo  &  N.  Y.  City  R. 

In    Hammock    v.    Loan    &   Trust   Co.  Co.  (1858),  31  Barb.  590  ;   Thompson  v. 

(1881),  105  U.  S.  77  ;  .s.  c.  7  Am.  &  Eng.  Van  Vechten  (1863),  27  N.  Y.  568. 
R.  R.  Gas.  465,  the  Supreme  Court  of  the 


§  172,]  MORTGAGES   AND   THEIR   VALIDITY.  201 

On  the  other  hand,  if  the  mortgage  merely  declares  that  the 
mortgage  is  void,  except  as  between  the  parties,  "  unless  posses- 
sion of  such  property  is  delivered  to  and  retained  by  the  mort- 
gagee, or  the  mortgage  is  recorded,"  an  unrecorded  mortgage 
will  take  precedence  of  an  attachment  lien,  provided  possession 
is  actually  taken  before  the  levy  is  made.^ 

There  is  a  sufficient  change  of  possession  within  the  meaning 
of  such  statutes  where  the  trustees  assume  control  of  the  road, 
even  though  they  carry  on  the  business  through  the  agency 
of  the  former  superintendent  and  other  employees  of  the 
company  .2 

Where  it  is  necessary  to  the  validity  of  a  mortgage  covering 
rolling-stock  that  the  instrument  should  be  registered  as  a  chattel 
mortgage,  or  that  possession  should  be  taken  by  the  mortgagee, 
the  lien  cannot  prevail  against  creditors  whose  claims  accrued 
before  the  mortgagee  was  entitled  under  the  terms  of  his  mort- 
gage to  take  possession.^ 

The  term  "  apparatus,"  in  a  mortgage  of  the  real  estate 
and  property  of  an  electric  lighting  company,  will  include  the 
lamps.  It  is  therefore  good  to  that  extent  as  a  chattel  mort- 
gage, and  must  be  filed  as  such  to  prevail  against  subsequent 
creditors.* 

The  capital  stock  of  a  corporation  is  not  goods  and  chattels 
within  the  meaning  of  the  Chattel  Mortgage  Acts,  and  the  mort- 
gage of  such  stock  need  not  be  filed  according  to  the  provisions 
of  those  acts.^ 

A  mortgage  of  railroad  personalty  shown  to  be  valid  by  the  lex 
loci  contractus  will  be  treated  as  valid  in  anotlier  State,  on  the 
principle  of  comity,  although  it  does  not  comply  with  the  law  of 
that  State  under  which  the  registration,  in  accordance  with  the 
provisions  either  of  the  Chattel  Mortgage  Acts  or  the  statute 
relating  especially  to  the  mortgage  of  railroad  personalty,  is  an 
indispensable  condition  of  validity.® 

§  172.  Mortgage  to  secure  Future  Advances  •when  not  invalid. 
—  A  mortgage  of  railroad  property  to  secure  bonds  to  be  issued 

1  Hamlin  v.  Jerrard  (1881),  72  Me.  62  ;  (1893),  8  Wash.  570  ;  s.  c.  36  Pac.  Rep. 
9  Am.  &  Eng.  R.  R.  Cas.  488.     In  this     460. 

case  the  trustee   in   possession  recovered  *  Ramsdell  v.   Citizens'  Electric  Light 

in   trespass   against  a  sheriff  who  levied  &  Power  Co.  (1894),  103  Mich.  89;  s.  c. 

on   certain   rolling-stock   covered  by  the  61  N.  W.  Rep.  275. 
mortgage.  s  Williamson  v.  New  Jersey  Southern 

2  Palmer    v.    Forbes  (1860),    23    111.  R.  Co.  (1875),  26  N.  J.  Eq.  398. 

301.  6  Mase  v.    Nichols  (1863),    94  N.  Y. 

■  Radebaugh  v.   Tacoma  &  P.  R.   Co.     160  ;  s.  c.  17  Am.  &  Eng.  R.  R.  Cas.  230. 


202  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  VIII. 

to  raise  money  to  pay  the  debts  of  the  corporation  cannot  be 
declared  invalid  merely  on  the  ground  that  it  is  given  to  secure 
future  advances.-' 

But  if  the  rights  of  a  creditor  to  seize  the  estate  of  the  corpora- 
tion becomes  complete  by  judgment  and  execution  before  the 
bonds  come  into  possession  of  a  bona  fide  holder,  the  mortgage 
will  not  operate  against  that  right.^ 


Article  III.  —  Partial  Invalidity  of  Contract,  Effect  op. 

§  173.  Invalidity  of  Part  of  Bonds,  Validity  of  Mortgage  not 
afiected  by.  —  The  fact  that  some  of  the  bonds  secured  by  a 
mortgage  are  invalid  will  not,  as  a  general  rule,  affect  the  valid- 
ity of  the  mortgage,  or  the  proceedings  for  its  foreclosure.^ 

§  174.  Mortgage  may  be  Valid  as  to  a  Part  of  the  Road  and 
Void  as  to  the  Residue.  —  Thus  where  two  Companies  organized 
in  different  States  become  consolidated  into  a  single  company, 
which  takes  the  name  of  one  of  the  constituent  companies,  and  a 
mortgage  is  executed  by  the  consolidated  company  covering  the 
entire  property,  then,  even  if  the  consolidation  contract  is  illegal, 
the  mortgage  will  be  good  as  to  that  part  of  the  line  which  is  right- 
fully owned  by  the  constituent  company  whose  name  was  adopted 
by  the  consolidated  company.  The  principle  governing  such  a 
case  is  that  the  consolidation  does  not  make  the  constituent 
companies  one  corporation  of  both  States,  or  of  either.  The 
corporation  of  each  State  continues  a  corporation  of  the  State  of 

1  Richards  f.  Merrimack  &  Connecticut  2  Am.  L.  Reg.  (N.  S.)  1  ;  3  Am.  L.  Reof. 
River  Railroad  (1862),  44  N.  H.  127;  (N.  S.)  79-93;  Piugrey  on  Mortgages, 
Mobile  &  Cedar  Point  R.  Co.  v.  Talraan  §§  483  et  seq.  In  Neilson  v.  Iowa  Eastern 
(1849),  15  Ala.  472  (a  ca.se  of  an  equitable  R.  Co.  (Iowa,  1875),  8  Am.  Ry.  Rep.  82, 
mortgage)  ;  Allen  v.  Montgomery  &  West  it  was  held  that  a  mortgagee  who  has  con- 
Point  H.  Co.  (1847),  11  Ala.  437.  tracted  to  make  advances  or  incur  liabil- 

2  Allen  V.  Montgomery  &  West  Point  ities  may  tack  the  liabilities  incurred  on 
R.  Co.  (1847),  11  Ala.  437.  The  court  the  advances  made  by  him  to  the  mort- 
added :  "In  our  judgment  the  validity  of  gage,  and  his  mortgage,  when  recorded,  is 
a  conveyance  of  this  description  rests  on  a  valid  lien  upon  the  property  for  all  such 
precisely  the  same  principles  as  obtained  claims,  even  though  the  liabilities  were 
when  deeds  are  made  which  ])rovide  for  incurred  on  the  advances  made  after  he 
the  security  of  future  advances  or  future  had  notice  of  subsetjuent  mortgages  or 
liabilities."      The  doctrine  stated  in   the  incumbrances  on  the  property. 

text  would  perhaps  not  be  approved   in  '  Graham  v.  Bo.ston,  Hartford,  &  Erie 

some   States   without  qualification.      For  R.   Co.,  118    U.   S.  161  ;    Pullan  v.  Cin- 

discussions  of  the  i)rotection  afforded  to  a  cinnati  &  Cliicago  Air  Line  R.  Co.  (1865), 

mortgagee  by  a  mortgage   for  future  ad-  4  Biss.  35  ;  Rothschild  v.  Rochester  R.  Co. 

vancea,    see   articles   in    11    Weekly  Law  (Penn.  Ct.  of  Com.   Pleas,  1887),  1  Ry.  & 

Bulletin,  157;  11  Am.  L.  Rep.  (N.  S.)  273  ;  C  L.  J.  321. 


§§  175-178.]  MORTGAGES   AND    TUElIi    VALIDITY.  203 

its  creation,  although  the  same  persons,  as  officers  and  directors, 
manage  and  control  both  corporations  as  one  body.^ 

§  175.  Mortgage  of  the  Franchises  may  be  Valid  as  to  Part  of 
them  and  Invalid  as  to  the  Rest.  —  Thus  where  a  mortgage  is 
executed  in  accordance  with  the  provisions  of  an  enabling  statute, 
covering  the  whole  of  the  property  of  the  franchises  of  a  raih'oad 
company,  and  another  statute  is  subsequently  passed  permitting 
the  alteration  of  a  portion  of  the  route,  the  altered  section  of  the 
road  may  perhaps  be  regarded  as  having  been  built  under  the 
franchise  granted  by  the  latter  act,  and  not  by  way  of  substitu- 
tion. But  even  if  that  view  be  taken,  the  operation  of  the  mort- 
gage upon  so  much  of  the  road  as  was  constructed  within  the 
limits  of  the  franchise  originally  granted  will  not  be  invalidated 
for  the  reason  that  the  altered  section  is  embraced  in  the  deed.^ 

§  176.  Excess  of  Powers  by  Officer  as  regards  a  Part  of  the 
Mortgage.  —  The  fact  that  the  officer  deputed  to  execute  the  mort- 
gage transcends  his  powers  by  inserting  a  stipulation  that  the 
principal  sum  is  to  become  due  at  the  option  of  the  holder,  on 
default  of  the  payment  of  the  interest,  will  not  vitiate  the  mort- 
gage as  a  whole.^ 

§  177.  Defective  Execution  as  to  One  Kind  of  Property,  Effect 
of.  —  Wbere  a  mortgage  is  defectively  executed  as  regards  realty, 
but  fulfils  the  legal  requirements  as  to  a  mortgage  of  personalty, 
the  latter  part  will  be  sustained.* 

Article   IV.  —  Who   may   and   who   may    not    question    the 
Validity  op  the  Mortgage. 

§  178.  The  Mortgagor  Company.  —  The  right  of  the  corporation 
or  of  the  stockholders  to  assail  the  validity  of  a  mortgage  executed 
by  the  corporate  officers  without  the  due  observance  of  the  for- 
malities and  procedure  prescribed  by  the  charter  or  the  by-laws 
is  a  necessary  corollary  of  the  elementary  rule  that  a  principal 
may  always  repudiate  the  unauthorized  act  of  an  agent.  More- 
over, it  is  only  by  the  corporation  or  the  stockholders  that  this 
defect  of  authority  can  be  taken  advantage  of.  It  is  well  settled, 
therefore,  that  a  mortgage  which  was  within  the  powers  of  the 

1  Racine  &  Mississippi  R.  Co.  v.  Far-  139  Pa.  St.  13;  s.  c.  21  Atl.  Rep.  211  ; 
mers'  Loan  &  Trnst  Co.  (1868),  49  111.  331.  27  W.  N.  C.  497. 

2  East  Boston  Freight  R.  Co.  v.  East-  3  jgsup  v.  City  Bank  of  Racine  (1861), 
era  R.  Co.  (1866),  13  Allen,  422  ;   Butler  14  Wis.  331. 

V.  Rahm  (1877),  46  Md.  541  ;  Glonin^er  v.  *  Despatch  Line  of  Packets  v.  Bellamy 

Pittsburg  &  Connellsville  R.   Co.  (1890),     Mfg.  Co.  (1841),  12  N.  H.  205. 


204  RAILWAY   BONDS    AND   MORTGAGES.  [CHAP.  VIII. 

corporation,  but  was  not  executed  with  the  formalities  prescribed 
either  by  statute  or  the  corporate  by-laws,  as  a  safeguard  against 
improvident  contracts,  can  be  avoided  only  by  the  corporation 
or  the  stockholders  for  whose  benefit  those  formalities  were 
intended. 1 

The  right  of  the  corporation  and  its  members  is  of  course  sub- 
ject to  the  same  limitations  as  those  which  restrict  the  right  of 
any  other  principal  from  releasing  himself  from  an  obligation 
which  an  agent  has  contracted  in  his  behalf ;  that  is  to  say,  the 
corporators  will  not  be  permitted  to  repudiate  a  mortgage,  if  their 
subsequent  conduct  can  be  construed  as  an  intentional  ratification 
thereof.  For  a  review  of  some  cases  in  which  this  rule  has  been 
applied,  see  §  163,  ante.  Similarly  the  principle  of  equitable 
estoppel  will  sometimes  operate  to  prevent  the  corporation  from 
relieving  itself  of  the  obligation  of  the  mortgage.  Perhaps  the 
most  frequent  illustration  of  this  result  is  found  in  those  cases 
where  the  corporation  has  acted  under  its  contract  and  received 
the  benefit  arising  from  it.  Under  such  circumstances  it  will  not 
be  allowed,  after  receiving  the  loan  secured  by  a  mortgage,  to 
avoid  its  liability,  by  raising  the  question  of  its  power  to  make 
the  mortgage,  or  showing  that  such  power  has  been  defectively 
executed,^  nor  by  denying  the  authority  of  the  agents  who  con- 
tracted the  loan  on  its  behalf.^ 

On  similar  grounds  a  company  which  executes  a  mortgage  to 
indemnify  another  which  lias  guarantied  the  bonds  of  the  mort- 
gagor, cannot,  after  the  liabilities  tlms  assumed  have  been  met  as 
a  real  one,  and  discharged  as  to  certain  coupons  which  the  mort- 
gagor has  failed  to  pay,  invalidate  the  mortgage  on  the  ground 
that  the  giving  of  the  guaranty  was  illegal.* 

Thus  when  the  stockholders  sanction  a  contract  under  which 
moneys  were  loaned  to  a  corporation  by  its  directors,  and  its 

1  Campbell  v,  Argenta  Gold  &  Silver  ^  Miller  v.  Rutland  &  Washington  R, 

Min.  Co.  (1892),  51  Fed.  Rep.  1  ;  Hervey  Co.  (1863),  36  Vt.  452,  citing  Redf.  Rail. 

V.  111.  Midland  R.  Co.  (1884),  28  Fed.  Rep.  572;  Curtis  v.  Leavitt  (1857),  15  X.  Y. 

169;  Beecher  v.  Marquette  &  Pac.  Rolling  947  ;  El  well  v.  Grand  Street  &  Xevvtown  R. 

Mill  Co.  (1881),  45  Mich.   103.     Consult  Co.  (1874),  67  Barb.   83;  Mobile  &  Cedar 

also  the  two  following  sections.  Point  R.  Co.  v.  Talman  (1849),  15  Ala. 

^  Dimpfel  v.  Ohio  &  Miss.  Ry.  Co.  472  ;  Frank  v.  Hicks  (Wyo.,  1894),  35 
(1879),  9  Biss.  127  ;  Tex.  West.  R.  Co.  v.  Pac.  475  ;  Witter  v.  Grand  Rapids  Flour- 
Gentry  (188S).  69  Tex.  625  ,•  s.  c.  33  Am.  ing  Mill  Co.  (1891),  78  Wis.  543 ;  s.  c.  9 
&  Kiig.  R.  R.  Tas.  46;  Hervey  v.  111.  Ry.  &  Corp.  L.  J.  236;  47  N.  W.  Rep. 
Midland  R.  Co.  (1884),  28  Fed.  Rep.  169  ;  729. 

Thomas  w.  Citizens',  etc.  R.  Co.  (1882),  104         *  Macon  &  Augusta  R.  Co.  v.  Georgia 

111.  462  ;    K.  c.   33  Am.  &  Eng.  R.  R.  Cas.  R.  &  Bkg.  Co.  (1879),   63  Ga.  103  ;  s.  c. 

306  ;    Peoria,    etc.  R.    Co.    v.    Thompson  1  Am.  &  I'.iig.  R.  R.  Cas.  378. 
(1881),  103  111.  187. 


§  179.]  MORTGAGES   AND   THEIR   VALIDITY.  205 

bonds  therefor  secured  by  mortgage  given,  and  the  moneys  have 
been  properly  applied,  the  corporation  is  estopped  from  setting 
lip  that  the  bonds  and  mortgage  are  void  by  reason  of  the  trust 
relation  which  the  directors  sustain  to  it.^ 

The  rule  that  neither  party  to  a  fraudulent  contract  has  a 
standing  in  a  court  of  equity  to  have  it  set  aside  is  as  applicable 
to  corporations  as  to  individuals,  and  operates  so  as  to  prevent  a 
mortgagor  railroad  company  from  procuring  the  cancellation  of  a 
mortgage  executed  as  a  part  of  a  scheme  by  which  the  directors 
acting  within  the  scope  of  their  powers  attempt  to  obtain,  through 
a  construction  contract  with  a  company  of  which  they  are  mem- 
bers, certain  unfair  advantages  for  themselves.  Such  a  contract 
cannot  be  enforced ;  but,  on  the  other  hand,  neither  party  can  ask 
to  have  it  set  aside.^ 

The  agent's  want  of  authority  must  be  promptly  taken  advan- 
tage of  as  soon  as  it  is  ascertained.  Otherwise  his  act  will  be 
treated  as  having  been  validated  by  the  subsequent  acquiescence 
of  the  corporation.^ 

Where  a  railroad  mortgage  which  has  been  authorized  by  reso- 
lution of  a  board  of  directors  of  the  company,  and  executed  by  its 
officers,  and,  upon  discovery  of  an  omission  of  a  default  clause  in 
the  same,  altered  by  action  of  its  officers,  to  meet  the  requests  of 
proposed  purchasers  of  bonds,  by  inserting  such  clause  without  a 
re-execution  of  the  mortgage,  the  mortgagor  company,  as  against 
the  purchasers  of  bonds,  upon  a  representation  that  it  was  all 
right,  will  not  be  allowed  to  claim  the  mortgage  to  be  invalid 
by  reason  of  the  alteration.* 

§179.  The  Stockholders  individually.  —  Stockholders,  if  they 
stand  by  without  objection  and  allow  the  bonds  secured  by  a 
mortgage  to  pass  into  the  hands  of  bona  fide  purchasers,  and 
large  sums  to  be  invested  on  the  faith  of  validity  of  the  security, 
will  be  estopped  from  denying  that  validity  afterwards ;  and  the 
longer  the  time  during  which  they  have  omitted  to  assert  their 
rights,  the  stronger  are  the  reasons  for  refusing  to  allow  them  to 
impair  that  validity.^ 

1  Hotel  Co.  V.  Wade  (1877),  97  U.  S.  ^  Boston  &  Providence  R.  Co.  New 
13.  York  &  New  England  R.  Co.  (1881 ),  13  R. 

2  Lewis  V.  Meier  (1882),  14  Fed.  Rep.  I.  260  ;  s.  c.  2  Am.  &  Eng.  R.  R.  Cas.  300. 
311.  In  this  case  the   complainants   were  mi- 

2  Augusta,  Tallahassee,  &  Gulf  R.   Co.  nority  stockholders,  without  whose  assent 

V,  Kittel  (1892),  52  Fed.   Rep.   63  ;  s.  c.  the  company  had  leased  the  road  in  per- 

2  C.  C.  A.  615.  petuity  to  another  company,  the  effect  of 

*  Woodbury  et  al.   v.  Allegheny  &  K.  tlie  agreement  being  to  leave  nothing  to 

R.  Co.  et  al.  (1895),  72  Fed.  Rep.  371.  the  lessor  but  the  bare  franchise  to  exist 


206 


RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  VIII. 


After  the  bonds  have  been  issued  to  hona  fide  purchasers,  it  is 
too  late  to  question  the  authority  of  the  directors  to  insert  a 
power  of  sale  in  the  trust  deed  securing  them.^ 

§  180.  Junior  Mortgagees.  —  If  two  mortgages  are  made,  both 
purporting  to  convey  the  same  property,  the  question  whether  the 
company  had  the  power  to  convey  that  property  cannot  be  raised 
by  the  junior  mortgagee,  for  the  only  claim  wliich  that  mortgagee 
has  upon  the  property  of  the  company  necessarily  depends  upon 
the  existence  of  the  very  power  which,  by  attacking  the  validity 
of  the  first  mortgage,  he  denies  the  company  to  possess.^ 

This  rule  is,  of  course,  subject  to  the  qualification  that,  if  the 
junior  mortgage  is  executed  by  virtue  of  express  statutory  au- 
thority, and  not  of  the  law  upon  the  construction  of  which  the 
validity  of  the  prior  mortgage  depends,  the  junior  mortgagee  is  in 
a  position  to  take  advantage  of  any  defect  in  the  prior  mortgage.^ 

Nor  can  a  junior  mortgagee  object  to  the  validity  of  a  prior 
mortgage  executed  without  the  requisite  consent  of  the  stock- 
holders where  the  latter  have  acquiesced  in  the  contract.* 

Still  less  can  a  junior  mortgagee  impeach  the  indebtedness 


as  a  corporation.  This  beiug  a  transaction 
wliich  the  majority  had  no  right  to  carry 
out  against  the  will  of  the  minorit}',  it 
was  held  that  the  latter  might  have  set'  it 
aside  by  a  timely  application.  As  they 
had  not  made  such  an  application,  and 
permitted  a  mortgage  by  the  lessee  com- 
pany to  stand  unquestioned  for  twelve 
years,  they  were  denied  relief. 

In  Central  Trust  Co.  v.  Marietta  & 
North  Ga.  R.  Co.  (1891),  48  Fed.  Rep. 
14,  a  trustee  brought  suit  to  foreclose  a 
mortgage  executed  by  a  consolidated  rail- 
road company  which  was  formed  by  the 
union  of  a  Georgia  corporation  with  a 
North  Carolina  corporation  and  a  Ten- 
nessee corporation.  Certain  stockholders 
in  the  original  Georgia  corporation  filed  a 
petition  asking  to  be  allowed  to  defend 
against  the  suit,  on  the  ground  that 
the  mortgage  was  invalid  and  void,  for  the 
same  reason  that  the  consolidation  of  the 
comyianics  was  illegal,  and  that  there  was 
no  authority  to  execute  the  mortgage.  As 
an  additional  reason  for  granting  the  appli- 
cation the  company  was  alleged  to  be  so 
situated  as  to  be  esto{)ped  to  make  this 
defence,  even  if  disposed  to  do  so.  The 
court  refused  tlie  jjrayers  of  the  petition 
for  the  rea.son  that  there  was  no  charge  of 


fraud  or  collusion  on  the  part  of  the  com- 
pany and  its  officers,  and  the  stockholders 
were  left  to  assert  their  rights  by  an 
independent  proceeding.  For  a  statement 
of  the  circumstances  under  which  the 
court  thought  it  very  questionable  whether 
not  only  the  company  itself,  but  the  ad- 
ministrator of  a  deceased  president  of  the 
company  and  holder  of  its  stock,  should 
not  be  estopped  to  deny  the  validity  of  a 
mortgage,  see  Mcllhenny  v.  Binz  (1890), 
80  Tex.  1 ;  s.  c.  13  S.  W.  Rep.  655. 

1  States.  Brown  (1855),  64  Md.   199. 

2  McAllister  v.  Plant  (1876),  54  Miss. 
106. 

3  Commonwealth  v.  Smith  (1865),  10 
Allen,  448.  Here  the  junior  :uortgagee 
was  the  State  itself. 

It  was  held  that  such  a  case  does  not 
fall  within  the  principle  that  a  violation 
of  corporate  powers  cannot  be  taken  ad- 
vantage of  collaterally.  The  court,  how- 
evei',  dismissed  the  bill  for  the  cancellation 
of  the  first  mortgage,  on  the  ground  that 
the  petitioner  had  an  adequate  remedy  at 
law. 

*  Campbell  ?;.  Argenta  Gold  &  Silver 
Mining  Co.  (1892),  51  Fed.  Rep.  1.  See 
§163. 


§  181.]  MORTGAGES   AND   THEIR   VALIDITY.  207 

secured  by  an  earlier  mortgage  of  which  he  has  notice,  where 
all  the  defects  of  consideration,  and  all  equities  existing  to  the 
prejudice  of  the  prior  bonds,  have  been  waived  and  extinguished 
by  the  obligor.^ 

A  chattel  mortgagee  having  knowledge  of  prior  mortgages  is 
not  a  bona  fide  mortgagee,  and  cannot  impugn  them  on  the  ground 
that  they  were  not  properly  filed.  ^ 

Parties  standing  in  the  same  position  as  junior  mortgagees  are 
subject  to  the  same  disabilities,  so  far  as  regards  impugning  the 
validity  of  an  earlier  contract.  Thus  bondholders  secured  by  a 
mortgage  which  expressly  recognizes  the  superiority  of  the  obli- 
gation created  by  a  lease  which,  in  legal  effect,  amounts  to  a 
pledge  of  the  tolls  and  income,  cannot  question  the  legal  capacity 
of  the  company  to  execute  the  lease.^ 

Since  the  directors  of  an  insolvent  corporation  become  trustees 
for  its  creditors,  a  bill  to  set  aside  as  fraudulent  a  deed  of  trust  of 
corporate  assets  to  secure  debts  for  which  the  directors  are  them- 
selves liable  as  sureties  need  not  show  that  the  complainant  has 
established  his  claim  by  judgment.'^ 

§  181.  General  Creditors  of  the  Company. — These  cannot  ques- 
tion the  validity  of  a  mortgage,  so  far  as  regards  its  execution  and 
delivery,  where  such  execution  and  delivery  are  admitted  by  the 
company.^ 

Nor  can  they  be  heard  to  impugn  the  validity  of  a  mortgage 
executed  by  the  same  board  of  directors  as  that  with  which  he 
contracted,  on  the  ground  that  sucli  board  was  not  legally  consti- 
tuted, for  his  own  claim  must  necessarily  be  invalid  if  the  direc- 
tors were  illegally  acting  as  such.^  (Compare  the  similar  rule  as 
to  junior  mortgagees,  §  180,  ante.^ 

Nor  can  they  raise  the  objection  that  the  resolution  pursuant  to 
which  the  mortgage  was  executed  was  not  passed  at  a  general 
meeting,  as  required  by  the  by-laws.'' 

1  Coe  V.  East  &  West  R.  Cc.  of  Alabama  (1884),  28  Fed.  Kep.  169,  174.  The  mort- 
(1894),  52  Fed.  Rep.  531,  citing  Bronson  gage  in  this  case  was  assailed  on  the 
V.  La  Crosse  &  Milwaukee  R.  Co.,  2  Wall,  ground  of  failure  to  comply  with  the  pro- 
283,  287  ;  Graham  v.  Railroad  Co.  (1880),  visiois  of  an  act  requiring  the  assent  of  a 
102  U.  S.  148.  certain   number  of    shareholders    to    the 

2  Benjamin  v.  Elmira,  Jefferson,  &  execution  of  a  mortgage.  This  statute 
Canaudaigua  R.  Co.  (1873),  54  N.  Y.  was  said  to  be  primarily,  if  not  exclusively, 
675.  for  the  beneiit  of  the  stockholders. 

8  Vermont  &  Canada  R.  Co.  v.  Vermont  ^  Porter  v.  Pittsburgh  Bessemer  Steel 

Central  R.  Co.  (1861),  34  Vt.  1.  Co.  (1887),  120  U.  S.  649  ;  s.  c.  30  Am. 

*  Consolidated  Tank  Line  Co.  v.  Kansas  &  Eng.  R.  R.  Cas.  472. 

City  Varnish  Co.  (1891),  45  Fed.  Rep.  7  ;  "  Autietam  Paper  Co.  v.  Chronicle  Pub. 

8.  c.  9  Ry.  &  Corp.  L.  J.  329.  Co.  (1894),  115  X.  C.  143  ;  s.  c.  20  S.  E. 

~  6  Hervey  v.  Illinois  Midland   R.    Co.  Rep.  367. 


208  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  VIII. 

Nor  will  failure  to  publish  the  notice  required  by  statute  to  be 
given  to  stockholders  before  mortgaging  corporate  property  in- 
validate the  mortgage  as  to  third  parties  where  no  stockholder 
objects.^ 

Creditors,  however,  may  take  advantage  of  the  omission  to 
register  the  mortgage,  provided  they  raise  the  issue  by  an  appro- 
priate allegation  in  the  bill.  As  registration  is  necessary  only  as 
to  creditors  without  actual  notice,  the  party  claiming  under  a 
mortgage  may  rely  on  the  allegation  that  the  creditor  had  such 
notice.^ 

The  validity  of  a  mortgage  which  was  executed  for  the  express 
purpose  of  defrauding  subsequent  creditors  may,  of  course,  be 
assailed  by  any  of  them  upon  that  ground.^ 

§  182.  Receivers.  —  A  receiver  has  sufficient  interest  in  the 
property  under  his  charge  to  raise  a  question  as  to  the  validity 
of  a  mortgage  or  the  sufficiency  of  the  consideration  of  the  debt 
secured  thereby  as  a  defence  to  a  foreclosure  suit  brought  by  the 
owner  of  all  the  claims  against  the  company.^ 

§  183.  Purchasers  at  the  Foreclosure  Sale.  —  These  cannot  ques- 
tion the  authority  of  the  company  to  make  the  mortgage,  inasmuch 
as  the  validity  of  their  own  claims  depends  upon  the  validity  of  the 
mortgage.^ 

For  similar  reasons  the  validity  of  a  mortgage,  in  so  far  as 
it  is  dependent  on  the  validity  of  the  incorporation  of  the  mort- 
gagor company,  cannot  be  questioned  by  a  trustee  of  the  road 
who  derives  his  title  through  various  mesne  assignments  com- 
mencing with  a  sale  by  the  mortgagor.  "  It  does  not  lie  in 
tlie  mouths  of  such  a  transferee  to  dispute  the  existence  of 
the  corporation  whose  acts  constitute  his  own  sole  source  of 
title."  « 

§  184.  The  State.  —  The  State  is  estopped  to  dispute  the  validity 
of  a  mortgage  which  it  has  authorized  after  third  parties  have 
acquired  rights  under  it.'^ 

'  Central  Trust  Co.  v.  Condon  et  ah,  become  fixed  before  his  claim  arose,  and 

C.  C.  A.  (1895),  67  Fed.  Rep.  84.  no  fraudulent  design  was  alleged. 

2  Allen  V.  Montgomery  &  AVest  Point  *  Ryan   v.    Anglesea  Ry.    Co.    (N.   J. 

R.  Co.  (1847),  11  Ala.  437.    This  answer,  Eq.   Feb.,    1888),    3  Ry.  &  Corp.   L.   J. 

however,  would  presumably  not  be  open  426, 

where  the  mortgage  is  on  chattels,  and  the  ^  Morgan  v.  Donovan  (1879),  58  Ala. 

statute  j)eremptorily  declares  it  to  be  void  241  ;  ,s.  c.  21  Am.  Ry.  Rep.  109. 
unless  registered.     See  §  171,  ante,  "  Beekmnn  v.  Hudson  River  West  Shore 

8  r-oeu.  East  &  West  R.  Co.  of  Alabama  R.  Co.  (1888),  35  Fed.  Rep.  3. 
(1892),  52  Fed.  Rep.  531,  where  the  court  ^  Vicksburg,  Shreveport,  &  Pac.  R.  Co. 

refused  relief  to  a  creditor  for  the  reason  v.  Sledge  (1889),  41  La.  Ann.  896,  902  ; 

that  the  riglits  of  the  bondholders  had  s.  u.  6  So.  Rep.  725  ;    Mower  v.   Kemp 


§  18^-] 


MORTGAGES    AND    THEIR    VALIDITY. 


209 


(1890),  42  La.  Ann.  1007  ;  s.  c.  8  So.  Rep. 
830;  46  Am.  &  I'Jig.  Corp.  Cas.  480. 

The  following  are  some  of  the  statutes 
of  (lillerent  States  authorizing  mortgages  of 
the  property  of  railroad  companies  :  Ala., 
Code  1886,  §  1580,  subd.  14.  Ark.,  Dig. 
1894,  §  6168.  Cal.,  Civ.  Code,  §  456. 
Colo.,  St.  1891,  ch.  30,  §  476.  Couu., 
Gen.  St.  1888,  §  344,  Consolidated  com- 
panies, power  to  mortgage  ;  §§  3570-3580, 
Execution  of.  Fla.,  Kev.  St.  1892,  §  2241. 
Ga.,  Code  1882,  §  1689  (i).  Idaho,  Comp. 
L.  1887,  §  2664.  IlL,  Rev.  St.  1891, 
p.  1143,  §  20,  subd.  10.      ImL,  Rev.  St. 

1888,  §  3911,  Power  to  mortgage.  Iowa, 
Code,  §§  1965,  1996,  Mortgage  of  benefits 
from  certain  contracts  of  leases,  etc.  Ky., 
Gen.  St.  1887-1894,  §  771.  La.,  Rev.  L. 
1884,  §  692.  Me.,  Rev.  St.  1883,  ch.  51, 
§  56.  Md.,  Pub.  Gen.  L.  1888,  art.  xxiii. 
p.  171.  Mass.,  Pub.  St.  1882,  ch.  112, 
§§  62  to  73.  Mich.,  How.  Ann.  St.  1882, 
§  3352.  Minn.,  Gen.  St.  1891,  §  2529. 
Miss.,  Rev.  Code,  §  3586.      Mo.,  Rev.  St. 

1889,  §  2543.  Mont.,  Civ.  Code  1895, 
§§  899,  913,  Chattel  mortgage.  Nebr., 
Comp.  St.  1895,  §  4018,  Mortgage  of  an 
extension  ;  §  1823,  Record  ;  §  1821,  Covers 
rolling-stock;  §§  1759,  1820.  Nev.,  Gen. 
St.  1885,  p.  849.      N.  J.,  Suppl.  to  Rev. 


1877  to  1886,  p.  824,  §  12.  New  Mex., 
Comp.  L.  1884,  §  2665,  subd.  14.  N.  Y., 
Rev.  St.  8th  ed.  p.  1752,  §  10  ;  L.  1868, 
g  1,  Cliattel  mortgage.  N.  C,  Code  1883, 
§  1957,  subd.  10.  N.  Dak.,  Code  1895, 
§  2947  (11).  Ohio,  Rev.  St.  1890,  §§  3286, 
3290,  3309  a,  3398,  Lien  of  mortgage 
postponed  to  certain  claims.  Okl.,  St. 
1893,  §  1011.  Pa.,  Br.  Purd.  Dig.  1883,  p. 
1422,  §§  41, 1436.  So.  Dak.,  Comp.  L.  1887, 
§  2981.  Teun.,  Code  1884,  §§  1251,  1271, 
Liens  preferred  to  mortgage.  Tex.,  Civ. 
St.  1888,  §  4219.  Utah,  Comp.  L.  1888, 
§§  2368,  2369,  The  lien  of  the  mortgage. 
Vt.,  St.  1894.  Va.,  Code  1887,  §  1232. 
Wash.,  Code  1891,  ch.  135.  W.  Va.,  Code, 
p.  520,  §  50,  subd.  11,  12.  Wis.,  Ann. 
St.  §  1828,  subd.  10.  Wyo.,  Rev.  St. 
1887,  p.  206,  §  549. 

On  power  to  issue  English  debentures, 
see  Mersey  Ry.,  In  re,  1895,  2  Ch.  Div. 
287,  Debenture  stock  ;  Campbell's  Case, 
4  Ch.  Div.  470,  Issue  debentures  at  dis- 
count ;  also  Webb  v.  Shropshire  Ry.  Co. 
(1893),  3  Ch.  Div.  307  ;  Robison  v.  Coal 
Clitf  Co.,  12  New  South  AVales  Rep.  (Eq. ) 
293,  Debentures  ordered  issued  by  court 
secured  on  property  after  two  prior  mort- 
gages. 


14 


210 


RAILWAY   BONDS   AND   MORTGAGES. 


[chap.  IX. 


CHAPTER  IX. 


INSTRUMENTS   CONSTITUTING   MORTGAGES. 


§  185.    Mortgages  directly  to  Bondholders. 
186.    Trust    Deeds    coustitutiug    Mort- 
gages. 


§  187.    Instruments  operating  as  Equitable 
Mortgages. 
188.    Liens  in  favor  of  the  State. 


§  185.  Mortgages  directly  to  Bondholders.  —  The  ordinarj  mort- 
gage by  which  the  payment  of  railroad  bonds  is  secured  is  in  the 
form  of  a  conveyance  to  a  trustee,  the  instrument  reciting  that 
the  mortgage  is  made  to  him  in  trust  to  secure  the  l)onds  de- 
scribed to  the  holders  thereof.  Such  bonds  have  been  executed 
directly  to  the  creditors  who  make  the  loan,  and  are  not  invalid 
on  that  ground. 1  But  a  holder  of  a  portion  of  bonds  executed  in 
this  form,  and  secured  by  a  mortgage  which  states  the  name  of 
each  creditor  and  the  amount  of  the  debt  covered  by  the  lien, 
will  not  be  allowed,  even  when  professing  to  act  in  behalf  of  all 
bondholders  who  may  come  in  and  contribute  to  the  expenses  of 
the  suit,  to  proceed  alone  against  the  company,  and  ask  a  sale 
of  the  mortgaged  property,  where  it  is  doubtful  whether  that 
property  is  of  sufficient  value  to  secure  the  whole  debt.  In  such 
a  case  it  is  the  interest  of  each  bondholder  to  diminish  the  debt 
of  the  otliers,  and  it  is  therefore  proper  that  every  bondholder 
should  be  present,  both  that  he  may  defend  his  own  claims  and 
that  he  may  attack  the  other  claims,  should  there  be  any  just 
occasion  for  it.'^ 

§  186.  Trust  Deeds  constituting  Mortgages.  — Wherever  a  mort- 
gage in  the  form  of  a  trust  deed  has  been  recognized  and  sanc- 
tioned by  the  courts,  a  grant  by  tlie  legislature  of  the  power  to 
mortgn<j:c  will  be  deemed  to  embrace  the  power  to  execute  that 
kind  of  mortgage.^ 

1  Wright  V.  Bumly  (1858),  11  Ind.  R.  Co.  (1846),  7  Pa.  L.  J.  166;  s.  c.  14 
398.  Fed.  Cas.  554,  Case  No.  7808. 

2  Railroa.l  Co.  j;.  Orr  (1877),  18  Wall.  ^  Central  Gold  Mfg.  Co.  v.  Piatt  (1870), 
471.  For  a  case  where  the  Ijonds  of  a  3  Daly,  263 ;  Pullan  v.  Cincinnati  & 
company  were  considered  as  mortgages,  Clucago  Air  Line  R.  Co.  (1865),  4  Biss. 
see   King  ct  al.   i».   Tuscumbia,   C.  &  D.  35;  Wright  t;.  Bundy  (1858),  11  Ind.  398. 


§  187.]  INSTRUMENTS   CONSTITUTING   MORTGAGES.  211 

The  legal  effect  of  a  trust  deed  of  the  ordhiary  kind  is  that  of 
a  contract  between  the  company  and  all  jtcrsons  who  may  become 
holders  of  the  bonds  thereby  secured,  whereby  they  become  en- 
titled to  the  same  benefits  as  if  they  were  parties  to  the  dced.^ 

The  true  consideration  of  such  a  deed  is,  not  the  recital,  which 
it  contains,  of  the  resolution  of  the  directors  authorizing  the  bonds 
to  be  executed,  but  the  fact  of  its  being  a  security  for  the 
bonds  issued  in   conformity   with  that  resolution.^ 

Such  a  trust  deed,  being  a  de  facto  mortgage,  protects  the 
property  conveyed  thereby  as  effectually  as  a  deed  actually  ex- 
ecuted as  a  mortgage,  and  the  trustees  may  obtain  an  injunction 
restraining  a  levy  upon  the  property.-^ 

So  also,  on  the  familiar  equitable  principle,  "  once  a  mortgage, 
always  a  mortgage,"  a  trust  deed  of  this  kind  is  affected  with  the 
usual  incidents  of  a  mortgage,  and  the  grantor  company  has, 
therefore,  an  equity  of  redemption,  which,  if  that  species  of 
property  is  subject  to  execution,  may  be  levied  upon  and  sold. 
Such  a  sale  will  not  be  enjoined  at  the  instance  of  the  trustee.* 

§  187.  Instruments  operating  as  Equitable  Mortgages.  —  An  equi- 
table mortgage  may  be  constituted  by  any  writing  from  which  the 
intention  to  create  it  may  be  gathered.^ 

Thus  bonds  which  purport  to  pledge  the  real  and  personal 
property  of  a  company  for  the  payment  of  a  debt,  and  contain 
various  other  corresponding  stipulations,  will  be  treated  by  a 
court  of  equity  as   a  mortgage.^ 

So  a  recital  in  a  debenture  bond  that  "  the  company  hereby 
charges  with  such  payment  {i.  e.  of  the  debentures)   its  under- 

1  Butler  v.  Ealim  (1877),  46  Md.  541  ;  management  and  control"  of  the  lands, 

s.   c.   18  Am.  Ry.  Rep.   86  ;    McLane  v.  and  a  provision  for  entry,  foreclosure,  and 

Placerville  &  Sacramento   Valley  R.    Co.  sale  by  the  trustees  only  upon  default  and 

(1885),  66  Cal.  606  ;  s.  c.  26  Am.  &  Eug.  subsequent  demand   by  the   bondholders, 

R.  R.  Cas.  404.  was  in  substance  a  mortgage   within   the 

The  construction  of  the  provisions  of  meaning  of  the  Code.     Until  such  default 

the  California  Code  in  regard  to  mortgages  and  demand,  therefore,  the  right  of  possea- 

was  extensively  discussed  in   the  case  of  sion  remained  in  the  mortgagor. 
Southern  Pac.  Co.  v.  Doyle  (1882),  11  Fed.  2  Butler  v.  Rahm  (1877),  46  Md.  541  ; 

Rep.  253,  and  it  was  held  that  a  convey-  s.  C.  18  Am.  Ry.  Rep.  86. 
anceof  railroad  lands  to  M.  and  T.  in  trust  3  Loudenslager    v.    Benton    (1861),    4 

to  secure  the  payment  of  certain   "first-  Phil.  382. 

mortgage  bonds,"  in  the  usual  form  of  a  *  Coe  v.  Johnson  (1862).  18  Ind.  218  ; 

mortgage,  except  that  it  was  with  a  con-  Coe  v.  McBrown  (1864),  22  Ind.  262. 
dition  of  defeasance,  providing  that  upon  5  chase  v.  Peck  (1860),  21  N.  Y.  581  ; 

the  payment  of  the  bonds  "  the  indenture  Payne  ;'.  Wilson  (1878),  74  N.  Y.  348. 
and   the    estate    thereby   granted    should  6  White   AVater   Valley   Canal    Co.    v. 

cense  and  determine,  there  being  a  reserva-  Vallette  (1858),  21  How.  414. 
tion  to  the  grantor  of  the  sole  and  exclusive 


212 


RAILWAY   BONDS   AND    MORTGAGES. 


[chap.  IX. 


taking,  all  its  property,  whatsoever  and  wheresoever,  both  pres- 
ent and  future,"  creates  an  equitable  mortgage  as  between  the 
parties.^ 

So  if  a  corporate  officer,  acting  within  the  scope  of  his  agency, 
fails,  owing  to  the  non-observance  of  certain  technical  requisites, 
to  execute  a  mortgage  effectual  to  convey  the  legal  estate,  the 
transaction  will  be  regarded  as  an  equitable  mortgage,  and  en- 
forced for  the  benefit  of  the  bondholders. ^ 

So  if  a  company  promises  to  make  a  mortgage  of  a  railroad, 
and  thereafter  goes  into  possession  and  operates  it,  this  promise 
will,  in  equity,  be  a  mortgage  as  between  the  parties.'^ 

So  it  is  held  that  stipulations  in  a  contract  with  a  contractor 
for  mortgages  to  secure  such  sums  as  are  specially  mentioned  in 
the  contract,  raise  the  implication  that  no  other  or  different  mort- 
gage or  lien  was  to  be  given,  and  have  the  effect  of  a  mortgage  to 
the  extent  indicated.^ 

So  an  agreement  which,  for  the  expressed  purpose  of  securing 
payments  to  agents  deputed  to  buy  railroad  iron,  pledges  the  real 
and  personal  estate  of  the  company  to  these  agents,  constitutes  an 
equitable  mortgage.^ 

So   where    a   junior   trust-mortgage    provided    that   no   bonds 


1  Howard  v.  Iron  &  Land  Co.  of  Minne- 
sota (1895),  62  Minn.  298  ;  s.  c.  64  N.  W. 
Rej).  896. 

••2  Miller  v.  Rutland  R.  Co.  (1863),  36 
Vt.  452. 

3  Texas  Western  R.  Co.  v.  Gentr}' 
(1888),  69  Tex.  625  ;  s.  c.  33  Am.  & 
Eng.  R.  R.  Cas.  46  ;  8  S.  W.  Rep.  98. 

The  court  said  :  "  Every  express  agree- 
ment in  writing,  whereby  the  party  clearly 
indicates  an  intention  to  make  some  par- 
ticular ]iro|)erty  therein  described  a  security 
for  a  debt,  creates  an  equitalde  lien  upon 
the  property  which  is  enforceable.  The 
fonn  of  the  writing  is  not  important,  pro- 
vided it  sufficiently  appears  that  it  was 
thereliy  intended  to  create  a  security.  If 
that  intention  appears,  it  will  create  a 
mortgage  in  crpnty,  or  a  specific  lien  on 
the  ))ro|ierty  so  inteuded  to  lie  mortgaged," 
citing  Pom.  Eq.  Jur.,  §§  1235,  1236  ; 
Payne  r.  Wilson  (1878),  74  N.  Y.  348  ; 
Daggett  V.  IJankin  (1866),  31  Cal.  321  ; 
Canal  ('«.  r.  Vallctte  (1858),  21  How.  414. 
Kiirtlicr  on  the  Minnesota  court  said  : 
"  Tiic  Iron  k  I>and  Company  is  an  English 
company,  and  these  debentures  were  evi- 


dently intended  to  be  issued  under  the 
provisions  of  their  '  Companies  Clauses 
Act'  of  1863,  which  regulates  the  creation 
of  debenture  stock  or  bonds  in  companies, 
and  makes  it  a  firm  charge  on  the  under- 
taking. The  evident  purpose,  as  well  as 
effect,  of  the  provisions  of  these  debentures 
is  to  create  a  charge  in  the  nature  of  a 
floating  mortgage,  as  security  for  their 
payment,  upon  all  the  property  of  the 
com{)any,  present  or  future,  but  which 
would  in  the  meantime  leave  the  company 
at  liberty  to  sell  and  dis[iose  of  any  of  it 
in  the  course  of  its  business,  free  from  the 
incumbrance  of  the  mortgage,  without 
being  rei^uired  to  apply  the  proceeds  to  the 
payment  of  the  mortgage  debt.  As  we 
have  no  such  statute,  it  is  quite  evident 
that  such  a  form  of  security  is  in  many 
respects  wholly  unsuited  to  this  State,  and 
that  very  serious  questions  will  arise  as  to 
its  validity  or  effect  as  against  creditors 
and  subsequent  purchasers." 

*  Waco  &  Tap.  R.  Co.  v.  Shirley  (1876), 
45  Tex.  355  ;  s.  c.  13  Am.  Ry.  Rep.  233. 

5  Mobile  &  Cedar  Point  Ry.  Co.  v. 
Talman  d  al.  (1849),  15  Ala.  472. 


§   188.]  INSTRUMENTS    CONSTITUTING   MORTGAGES.  213 

should  be  issued  thereunder  until  holders  of  the  prior  mortgage- 
bonds  to  a  specified  amount  should  have  signed  an  agreement  to 
the  effect  that  bonds  secured  by  the  junior  mortgage  might  be 
issued,  such  bonds  to  constitute  a  lien  on  the  property  taking 
precedence  of  the  bonds  held  by  the  signers  of  the  agreement,  it 
was  held  that  the  agreement,  when  signed  by  the  holders  of 
bonds  to  tlie  amount  s{>eciried,  operated  as  an  equitable  mortgage 
covering  the  interests  which  the  signers  had  under  the  first  mort- 
gage, and  taking  precedence  of  the  latter,  but  that  it  in  no  way 
affected  the  interest  of  the  bondholders  who  did  not  sign  it,  and 
the  priority  of  their  lien.^ 

Contractors  proposed  to  construct  a  railroad  upon  condition  that 
they  should  assume  one-fourth  the  cost  of  construction  and  sub- 
scriptions to  stock  obtained,  and  the  subscribers  to  assume  three- 
fourths.  Subscribers  agreed,  and  contracted  with  the  promoters 
that  their  subscriptions  should  be  loans  bearing  interest,  and 
maturing  at  a  certain  date,  to  be  paid  as  soon  as  securities  of  the 
company  could  be  negotiated,  the  subscribers  to  own  a  thi'ee- 
fourths  interest  in  the  grade  if  the  securities  were  not  negotiated 
on  maturity  of  the  loan.  This  contract  was  held  to  be  a  mort- 
gage of  three-fourths  interest  in  the  grade.'^ 

§  188.  Liens  in  Favor  of  the  State.  —  As  to  liens  declared  by 
statute  in  favor  of  the  State,  see  Chap.  XIII.,  post. 

1  Poland  V.  Lamoille  Valley  R.  Co.  et  to  authorization  of  a  corporate  mortgage, 
al.  (1879),  52  Vt.  144  ;  s.  c.  4  Am.  &Eng.  see  Hayden,  Trustee,  v.  Lincoln  City  Elec- 
R.  R.  Cas.  408.  trie  Ry.  Co.  (1895),  43  Keb.  680  ;  s.  c.  62 

2  Armstrong  fii!  aZ.  y.  Burkitt  c<  a?.  (Tex.  N.  W.  Rep.  73. 
Civ.  App.  1896),  34  S.  W.  Rep.  759.      As 


214 


RAILWAY   BONDS   AND   MORTGAGES. 


[chap.  X. 


CHAPTER  X. 

what   the   mortgage   covers,   including    after-acquired 

property. 


§  189.    General  Statement. 
Art.  I.  —  General  Kules  of  Construc- 
tion. 
§  190.    Introductory. 

191.  General  Laws  the  Standard. 

192.  Lex  Loci. 

193.  Coustructioli  a  Question  for  the 

Court. 

194.  All  the  Writings  must  be  con- 

strued together. 

195.  General  Words  followed  by  Par- 

ticular (Exinessio  unius,  etc.). 

196.  Particular    Words   followed    by 

General   {verba   ejusdcm  gen- 
eris). 
Art.  II.  —  What  is  a  Sufficient  De- 
scription TO  PASS  Property 

OWNED  WHEN  THE  MORTGAGE 
IS  EXECI'TED. 

§  197.  The  Entire  Property  will  pass 
by  an  Appropriate  Generic 
Description  in  a  Mortgage. 

198.  Mortgage  covers  whatever  is  ne- 

cessary to  the  Enjoyment  of 
the  Thing  granted. 

199.  The    same   Rule   prevails  as  to 

the  Construction  of  a  Lien 
declared  by  Statute  in  Favor 
of  the  State. 

Art.  TIT.  —  Principles  on  which  Mort- 
gages PURPORTING  to  CON- 
VEY After-acquired  Prop- 
erty ARE  enforced. 
§  200.  General  Principle  that  of  an 
Executory  Contract. 
201.  Subsidiary  Principles  on  which 
tlie  Enforcement  of  the  Ex- 
ecutory Contract  I'csts. 

Art.  IV.  —  What  is  a  Sufficient  Dk- 

8CRIPTION  to  pass  PrOI'KRTV 
ACQUIRKD  AFTF.R  the    Mi'RT- 

GAGF,  IS  exe(;utf,1).  Gkn- 
eual  liui-Es  stated. 


§  202.  The  Requirement  of  a  Specific 
Description  in  the  Case  of 
Future  Acquisitions,  on  what 
Principle  based. 

203.  The  Piequirement  of   a  Specific 

Description  to  pass  After- 
acquired  Property,  applica- 
ble to  Statutory  Liens. 

204.  Application    of    General    Prin- 

ciples to  Property  acquired 
and  not  required  for  Railroad 
Purposes. 

205.  Property  used  for  Railroad  Pur- 

poses, W^hat  is. 

206.  Property   acquired  by   Consoli- 

dated Company  when  covered. 
Art.  V.  —  What  is  a  Sufficient  De- 
scription TO  PASS  After- 
acquired  Interests  in  Real 
Estate. 
§  207.    General  Rules. 

208.  General  Words  limited  by  Sub- 

sequent. 

209.  Land  beyond  the  Chartered  Lim- 

its will  not  pass. 

210.  Land-grants  subsequently  made 

to  assist  in  the  Construction 
of  the  Road  not  covered. 

211.  Land  acquired  for  Depots,  etc., 

covered. 

212.  Lands    acquired    for    Right    of 

Wa}'  covered. 

213.  Terminal  Facilities  covered. 

214.  Lands  held  by  E(piitable  Title 

covered. 

215.  Leasehold    Interests,  when  cov- 

ered. 
Art.  VI. — What    is    Sufficient    De- 
scription   TO   pass   After- 
acquired  Personalty. 
§  LM6.    General  Princi]»les. 
217.    Materials  for  the  Track,   when 
covered. 


189.] 


WHAT    THE    MORTGAGE    COVERS. 


21/ 


§  218. 
219. 
220. 
221. 

222. 

223. 


225. 


226. 
Art.  VII 


§227 


Rolling-stock,  when  covered. 

Olfice  Furniture,  when  covered. 

Fuel,  when  covered. 

Personalty  not  used  for  Rail- 
road Purjioses. 

Choses  in  Action  and  Stock, 
when  covered. 

Permanent  and  Temporary  Dis- 
use, ElFect  of. 
224.    Alterations  in  the  Subject-mat- 
ter of  the  Pledge. 

Property  bought  to  replace  that 
worn  out,  embraced  by  the 
Mortgage. 

Income,  Revenues,  etc. 

—  Necessity  for  a  Specific 
Description  qualified  by 
THE  Doctrine  of  Fixtures. 

General  Rule.  Things  which 
are  absolutely  Fixtures. 


§  228.    Detached  Personal  Projierty. 
Art.  VIII.  —  Necessity  for  a  Speclfic 
Description   qualified   by 
the  Doctrine  that  a  Rail- 
road is  an  Entirety. 
§  229.    The  Doctrine  of  Accession   ex- 
tended. 
230.    Objections  to  this  Extension  of 
tlie  Doctrine  of  Accession. 
Art.  IX.  — What  will  pass  under  the 
Term  "Appurtenances." 
§  231.    Realty. 

232.  Personalty. 

Art.  X.  —  What  will  pass  under  the 
Word  "Undertaking." 

233.  In  Instruments  creating  Charges 

on  Railroad  Property. 

234.  In  Instruments  creating  Charges 

on  other  Property. 


§  189.  General  Statement.  —  In  determining  the  effect  of  clauses 
of  railroad  mortgages  which  cover  "  after-acquired  "  property,  there 
must  be  considered,  first,  what  property  the  company  had  power  to 
mortgage  ;  second,  what  property  it  intended  to  mortgage ;  third, 
the  effect  of  the  words  which  were  descriptive  of  the  property 
alleged  to  be  covered.  In  Compton  v.  Jesup  ^  it  was  remarked 
by  the  circuit  judge  (Taft)  who  delivered  the  opinion  that  the 
extent  of  the  property  included  in  tlie  grant  of  a  mortgage  de- 
pended on  the  first  two  of  these  questions.  The  authorities 
cited  in  the  following  chapter  are  amply  suihcient  to  show  that 
the  third  question  is  equally  important  in  the  case  of  after- 
acquired  property.  In  fact  the  learned  judge,  by  implication, 
admits  this  when  he  says  in  another  place  that  there  was  no 
controversy  possible  as  to  the  identity  of  the  property  under  dis- 
cussion. If  there  had  been  any  controversy  as  to  its  identity,  the 
third  question  would  have  demanded  an  answer  as  well  as  the 
others.  The  inquiries  respecting  the  intention  of  the  grantor 
and  the  adequacy  of  the  description  are,  however,  of  very  differ- 
ent importance,  according  as  the  subject-matter  of  the  mortgage 
was  owned  by  the  mortgagor  at  the  time  the  instrument  was 
executed,  or  was  subsequently  acquired.  In  the  former  case 
the  intent  of  the  grantor  is  the  paramount  consideration,  and  if  the 
intent  to  embrace  property  not  mentioned  in  terms  is  reasonably 
apparent,  eft'cct  will  be  given,  in  favor  of  the  mortgagee,  to  a 
general  description,  not    only  against  the    grantor    himself,  but 


1  68  Fed.  Rep.  263,  286  (1895). 


216  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  X. 

against  subsequent  purchasers  and  creditors,  except,  of  course, 
in  so  far  as  this  result  may  be  controlled  by  the  rules  regarding 
notice,  and,  in  the  case  of  personal  property,  regarding  construc- 
tive fraud.  As  was  remarked  in  Mississippi  Valley  Co.  v.  Chicago, 
St.  Louis,  &  N.  0.  R.  Co.,^  a  man  or  a  corporation  may  well  mort- 
gage "  all  property  "  then  owned,  "  without  further  words  of  de- 
scription, because  the  fact  of  present  ownership  serves  as  an 
indicator."  On  the  other  hand,  if  the  instrument  purports  to 
cover  after-acquired  property,  even  though  the  intent  to  convey 
the  grantor's  whole  estate,  present  as  well  as  after-acquired, 
may  be  unquestionable,  a  court  will  not  fasten  the  lien  on  the 
latter  portion  of  the  property,  unless  it  is  either  specifically  de- 
scribed, or  so  connected,  visibly  and  physically,  with  the  former 
portion,  or  so  essentially  necessary  for  the  conduct  of  the  busi- 
ness in  which  the  mortgagor  is  engaged,  that  third  parties  may 
fairly  be  presumed  to  understand  that  it  is  subject  to  the  lien.^ 

Article  I.  —  General  Rules  of  Construction. 

§  190.  Introductory.  —  Usually  the  crucial  question  involved  in 
defining  the  scope  of  the  mortgage  lien  is,  whether  the  description 
is  sufficiently  specific  to  pass  the  property  alleged  to  be  covered. 
But  before  entering  upon  this  part  of  the  subject  it  will  be  con- 
venient to  group  together  the  cases  which  illustrate  the  appli- 
cation of  some  of  the  common  rules  of  construction  to  railroad 
mortgages. 

§191.  General  Laws  the  Standard.  —  The  validity  and  effect 
of  railroad  mortgages  must  be  determined  by  the  charters  of  the 
companies,  so  far  as  they  supersede  general  laws.  But  the  general 
laws  will  be  applied  in  the  construction  and  enforcement  of  such 
mortgages  when  lawfully  made,  unless  they  are  suspended  by 
special  legislation.^ 

1  58  Miss.  806  (1881).  following  sections  of  this  chajjter.     See  an 

2  In  the  Mississi|ipi  case  just  cited  it  article  entitled  "  After-acijuiied  Rolling- 
was  observed  that  "neither  \  man  nor  a  stock  is  Subject  to  Mortgage,"  by  Leonard 
corpoiation  can,  by  general  terms  only,  A.  Jones,  in  4  So.  L.  Rev.  N.  S.  199. 
mortgage,  so  far  as  subsequent  purchasers  See,  for  a  rule  of  construction,  Maxwell  v. 
and  creditors  are  concerned,  everything  Wilmington  Dental  Mfg.  Co.  (1896),  77 
that  may  tliereafter  be  acquired,  through  Fed.  Rep.  PoS,  in  which  case  In  it  Pan- 
all  time  ;  for  this  would  be  a  mere  pledge  ama,  N.  Z.  &  A.  Royal  Mail  Co.,  5  Ch. 
of  the  capacity  of  acquisition,  and  would  App.  318,  was  distinguished. 

afford  no  soi-t  of  indication  of  what  was  to  8  ;N'owport  &  Cincinnati   Bridge  Co.   v. 

pass  under  tlie  instrument."      Tbe  rest  of  Douglass  (1877),  12  Ihish  (Ky.),  673  ;  s.c. 

the  statement  in   the  te.\t  is  amply  siis-  18  Am.  I!y.  I!ep.  221. 
tained  by  the  rulings  referred  to  iu  the 


§§  192-194.]      WHAT  THE  MORTGAGE  COVERS.  217 

§  192.  Lex  Loci.  —  If  the  mortgage  to  be  construed  embraces 
property  situated  in  two  States,  and  there  is  no  proof  as  to  the 
place  of  its  execution,  a  court  will  not  be  bound  by  the  rule  of 
comity  to  adopt  the  construction  given  by  the  courts  of  one  of 
those  States  to  a  similar  mortgage,  but  will  presume  that  the 
courts  of  other  States  will  construe  the  instrument  in  accord- 
ance with  common-law  principles.^ 

§  193.  Construction  a  Question  for  the  Court.  —  A  mortgage 
is  subject  to  the  general  rule  which  makes  the  construction  of 
all  written  instruments  matter  to  be  passed  on  by  the  court  and 
not  the  jury .2  It  has  been  held,  however,  that  a  finding  by  a 
court  of  first  instance,  that  a  certain  mortgage  embraces  property 
on  which  a  prior  lien  is  claimed,  is  not  erroneous  as  stating  a 
conclusion  of  law,  and  not  a  conclusion  of  fact.  For  such  a 
l)urpose  the  issue  as  to  whether  an  instrument  is  operative  as 
a  mortgage  is  deemed  to  present  a  mixed  question  of  law  and 
fact,  like  the  issues  whether  a  given  instrument  is  the  last  will 
and  testament  of  an  alleged  testator,  or  whether  one  claiming 
as  heir  or  executor  is  entitled  to  a  particular  estate.^ 

§  194.  All  the  Writings  must  be  construed  together.  —  The  rule 
that  the  meaning  of  a  wi'itten  contract  is  to  be  ascertained  by  a 
consideration  of  all  the  writings  executed  by  the  parties  is  pecu- 
liarly applicable  to  the  instruments  discussed  in  this  treatise. 
The  rights  of  holders  of  railroad  bonds  are  almost  always  de- 
pendent upon  the  effect  of  two  instruments,  —  the  bonds  them- 
selves and  the  mortgage  securing  them.  Both  must,  therefore, 
be  construed  together  as  part  and  parcel  of  the  contract.*  (See 
also  Chap.  II.,  §  22.) 

The  bonds  cannot  be  excluded  from  the  security  of  the  mort- 
gage merely  on  the  ground  that  the  latter  instrument  does  not 
specify  the  date  of  the  bonds  it  is  alleged  to  secure,  provided 
those  bonds  are  in  all  other  respects  clearly  described  therein,  and 
there  is  nothing  in  its  terms  inconsistent  with  the  fact  that  they 
had  been  executed.  Whatever  ambiguity  or  doubt  may  arise  in 
such  a  case  is  removed  by  parol  evidence  that  no  other  bonds  wore 
executed  or  issued  by  the  company  than  those  with  which  the 
mortgage  is  soug-ht  to  be  connected.^ 


1  Miss.  Valley  &  Western  Ry.  Co.  v.  *  Benjamin  v.  Elmira,  Jefferson,  & 
United  States  Express  Co.  (1876),  81  111.  Canandaigua  R.  Co.  (1867),  49  Barb. 
534.  441. 

2  Parsons  on  Contr.  *492.  6  Butler  v.  Rahm  (1877),  46  Md.  541  ; 

3  Binkert  ct  al.  v.  Wabash  Railway  Co.  s.  c.  18  Am,  Ry.  Rep.  86. 
(ISSl),  98  111.  205. 


218  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  X. 

§  195.  General  Words  followed  by  Particular  (Expressio  unius, 
etc.).  — Where  a  mortgage  ia  describing  property  employs  at  first 
general  terms,  and  afterwards  proceeds  to  describe  particularly 
each  thing  mortgaged,  the  latter  description  will  control  the 
former,  if  there  be  a  repugnancy,  the  rule  being  that,  in  a  deed, 
specification  generally  includes  things  not  specified.  Thus  a  mort- 
gage of  "  property,"  with  a  specific  description  of  the  different 
kinds,  does  not  cover  municipal  aid-bonds  not  embraced  in  the 
description.^ 

But  this  rule  is  subject  to  the  qualification  that  the  omission  to 
specify  a  thing  without  which  the  things  specified  would  be  of  no 
value  does  not  exclude  the  thing  omitted. ^ 

So  also,  where  a  general  reference  to  certain  property  has  been 
inserted,  it  will  not  be  limited  by  the  addition  of  a  clause  referring 
to  property  of  that  kind  which  may  afterwards  be  acquired  with 
the  proceeds  of  the  bonds.  Such  a  clause  is  merely  intended  to 
remove  any  doubt  which  may  possibly  arise  as  to  whether  the 
property  thus  purchased  would  also  go  to  increase  the  security 
offered. 3 

§  196.  Particular  "Words  follovred  by  General  (Verba  ejusdem 
generis).  —  The  familiar  rule  of  statutory  construction,  tliat  where 
several  words  preceding  a  general  expression  point  to  a  confined 
meaning,  the  general  expression  shall  not  have  such  a  meaning  as 
to  extend  the  effect  beyond  subjects  ejusdem  generis,  is  sometimes 
applied  to  descriptions  in  railroad  mortgages.  Thus  it  has  been 
held  that  the  effect  of  a  mortgage  of  after-acquired  property,  con- 
taining the  following  words :  "  All  the  articles  of  personal  prop- 

1  Smith    V.    McCullough   (1881),    104  ployed  in  its  maintenance  after  completion. 

U.  S.  25.    Harlan,  J.,  said.  "  But  the  rules  The  "rights,  privileges,  and  franchises  " 

estal)lished  for  the  interpretation  of  written  mortgaged  were,  it  seems  to  us,  only  such 

instruments  will  not  justify  us  in  detach-  as  had  direct  connection  with  the  manage- 

ing  these  general  words  from  those  of  an  ment  and  operation  of  the  road  after  it  was 

explanatory  character  which  immediately  constructed   and   put   iu  use  as  a  public 

follow  in  the  same  sentence.      The  subse-  highway.    There  was  no  purpose,  we  think, 

fjuent  phrase  'that  is  to  say,'  followed  hy  to  pass  the  mortgagee  any  interest  what- 

a  detailed  description  of  the  different  kinds  ever  in  municipal  subscrii)tions  which  had 

of  property  which  are  embraced    by  tlie  been  previously  obtained  and  accepted  by 

general  words  quoted,   indicates  that  the  the   company    for  the  purpose  of  raising 

mortgage    was   not    intended   to   embrace  money  to  build  a  road." 

every  conceivaVjle  possession  and  right  be-  ^  Pullan  v.  Cincinnati  &  Chicago  Air 

longing  to  the  railway  company,  but  only  Line  R.  Co.    (1865),  4  Biss.  35,  applying 

the  road  and   its   adjuncts  and  apjiurte-  the  rule  so  as  to  bring  rolling-stock  under 

nances.     It   specifies    different    kinds    of  the  lien  of  a  mortgage  in  which  it  was  not 

property,  some  of  which  would  enter  into  specified. 

tli<!  construction  of  the  bramh  road  and  ^  yimw  v.  Bill  (1877),  95  U.  S.  10. 
some  of  whicli   would  neces.sarily  be  em- 


§  197.]  WHAT   THE   MORTGAGE   COVERS.  219 

erty  acquired  by  the  company  since  the  date  of  the  mortgage, 
consisting,  among  other  things,  of  the  following,  to  wit,"  etc.,  after 
which  followed  an  enumeration  by  name  of  several  engines,  and, 
by  number,  of  several  different  Ivinds  of  cars,  must  be  restricted  to 
articles  of  the  same  nature  as  those  specifically  named. ^ 

So  also,  when  the  comprehensive  phrase  "  all  other  property  " 
is  used  neither  at  the  beginning  nor  the  end  of  the  granting 
clause,  but  in  a  position  where  its  proper  function  is  evidently  to 
remove  any  doubt  there  might  be  as  to  whether  certain  miscel- 
laneous articles  in  and  around  certain  specified  parts  of  the  prem- 
ises are  covered,  its  use  is  limited  to  explaining  the  words  with 
which  it  is  immediately  connected,  and  it  cannot  be  construed  so 
as  to  extend  the  lien  to  town  lots  not  coming  within  the  specified 
description  contained  in  the  instrument.^ 

If,  however,  it  appears  from  a  consideration  of  the  entire  instru- 
ment that  it  was  the  intention  of  the  parties  to  give  the  words  of 
general  descri^jtion  a  wider  reach  than  the  application  of  this  rule 
would  indicate,  that  intention  must  prevail.^ 

Article  II.  —  What    is    a    Sufficient    Description    to    pass 
Property  owned    when   the   Mortgage   is  executed. 

§  197.  The  Entire  Property  -will  pass  by  an  Appropriate  Generic 
Description  in  a  Mortgage.  —  As  most  railroad  mortgages  have 
been  executed  for  the  express  purpose  of  construction,  the  cases 
in  which  their  effect,  as  regards  property  owned  at  the  time  of 
their  execution,  is  discussed  are  naturally  few  in  number.  The 
general  rule  is  that,  as  already  stated,  the  fact  of  present  owner- 
ship sufficiently  identifies  the  property  to  admit  of  its  being  con- 
veyed by  the  most  general  words,  if  such  appears  to  be  the  intent 
of  the  grantor.  Whether  the  property  is  necessary  to  the  enjoy- 
ment of  the  franchises  is  entirely  beside  the  question.  The  duty 
of  the  court  is  confined  to  ascertaining  the  true  construction  of 
the  instrument  without  regard  to  any  extraneous  considerations. 
Thus,  where  the  granting  clause  covers  "  all  and  singular  the 
estate  and  property  real,"  together  with  "  all  and  singular  the 
lands,  etc.,  rights,  and  interests,  real  estate,"  etc.,  all  the  lands 

1  Brainerd  et  al.  v.  Peck  &  Colby  (1861),  tnre.  Whether  this  property  comes  under 
34  Vt.  496.  the  protection  of  the  principle  that  tliin_£;s 

2  Alabama  v.  Montague  (1885),  117  necessary  for  the  operation  of  the  road  are 
U.  S.  602  ;  s.   C.  6  Sup.  Ct.  Eep.  911.  covered  (see  below)  was  a  question  wliich 

'  Raymond  v.  Clark  (1878),  46  Conn,  was  discussed  and  answered  in  the  afilnn- 
129,  where  the  mort-rage  was  held  upon  ative  in  Buck  u.  Seymour  (1878),  46  Coua. 
this  principle,  to  cover  some  office  furui-     156. 


220  RAILWAY   BONDS   AND    MORTGAGES.  [CHAP.  X. 

belonging  to  the  company  will  pass  without  regard  to  the  pur- 
pose for  which  they  may  be  used.^ 

The  word  "  franchise,"  however,  is  not  one  which  will  be  con- 
strued as  implying  an  intent  to  cover  the  whole  property  of  the 
company,  unless,  perhaps,  by  those  courts  which  have  adopted 
the  theory  that  a  railroad  and  its  franchises  constitute  an  entire 
indivisible  thing.^ 

Hence  a  mortgage  covering  a  "  railroad  and  franchises,  also  all 
the  station-houses,  etc.,  and  other  appendages,  with  all  the  lands 
belonging  to  and  intended  for  the  use  and  accommodation  of  the 
road,"  will  only  cover  property  connected  with  the  road.^ 

§  198.  Mortgage  covers  vyhatever  is  necessary  to  the  Enjoyment 
of  the  Thing  granted. — The  right  to  carry  on  the  business  of  a 
colliery  company,  occupying  mineral  land  as  a  lessee,  passes  under 
a  mortgage,  expressed  to  be  the  company's  lands,  mines,  coal,  and 
other  premises  described  in  certain  leases  referred  to,  with  its 
buildings  and  fixed  machinery.  Under  any  other  construction  the 
mortgagee  would  virtually  have  no  security,  for  the  value  of  the 
property  consists  in  its  being  kept  up  as  an  active  concern,  and 
a  cessation  of  work  would  enable  the  lessor  to  put  an  end  to  the 
lease  by  re-entry.^  Such  a  case  is  entirely  different  from  one 
where  there  is  a  mortgage  of  a  house  or  a  hotel  which  does  not 
pass  the  business  of  the  mortgagor  or  the  goodwill.^ 

§  199.  The  same  Rule  prevails  as  to  the  Construction  of  a  Lien 
declared  by  Statute  in  Favor  of  the  State.^  —  Thus  a  lien  declared 
in  favor  of  the  State  as  security  for  its  aid,  in  which  the  sweeping 
phrase  "  the  road  and  property  of  the  company  "  is  used,  will 
cover  lands  granted  by  Congress  to  a  State,  and  by  the  State  to 
the  company,  for  the  purpose  of  raising  money  to  construct  the 
road,  although  the  lands  are  in  no  way  connected  with  the  opera- 
tion of  the  road.'' 

1  Robinson  v.  Atlantic  &  Great  Western  639,  a  contrary  niling  as  to  another  j.ortion 

Ry.  f'o.  (1870),  66  Pa.  St.  160.  of  these  lands  was  made,  hut  the  court  e.\- 

^  See  §  200,  below.  pi-essly  disclaimed  any  intention  to  thi-ow 

8  Khlridge  v.   Smith  et  al.   (1861),    34  doubt   upon  the  propriety  of  the  general 

yt_  4g4_  principle  of  construction  applied  in  Wilson 

♦  County  of  Gloucester  Rank  v.   Rudry  v.  Boyce,  and  based  its  opinion  upon  its 

Merthvr,  etc.  Co.  (189.')),  T..  R.  1  Gh.  629.  views  as  to  the  effect  of  the  acts  of  Cod- 

&  Whitley  V.  Collis  (1892),  L.  R.  1  Ch.  gress  relating  to  those  lands. 
04.  In    Whitehead  v.  Vineyard  (1872),   50 

8  See  generally  as  to  these  liens.  Chap.  Mo.  29,  30,  the  same  words  weie  held  to 

XIII.,  post.  cover  after-acciuired  lands  as  well,  though 

">  Wilson  V.  Royce  (187.5),  92  U.  S.  320.  not  connected   with  the  operation  of  the 

In  llip  recent  case  of  Wilson  v.   Reckwith  road.      This  ruling  was  also  based  upon  a 

(1893),  117  Mo.  61  ;  .s.  c.  22  .S.   W.  Hep.  consideration  of  all  the  legislation  upon  the 


§  200.]  WHAT   THE   MORTGAGE   COVERS.  221 

Article  III.  —  Principles  upon   which  Mortgages  purporting 
TO  CONVEY  After-acquired  Property  are  enforced. 

§  200,  General  Principle  that  of  an  Executory  Contract.  —  Tlie 
doctrine  of  equity  with  regard  to  the  effect  of  the  after-acquired 
property  clause  of  a  mortgage  is  that  it  amounts  to  an  executory 
contract  on  the  part  of  the  mortgagor  that,  as  soon  as  the  prop- 
erty embraced  therein  comes  into  existence,  he  will  subject  it  to 
the  lien  of  the  mortgage.^ 

The  general  rule  as  to  the  effect  of  a  mortgage  containing  such 
a  clause  was  announced  in  the  following  terms  by  Mr.  Justice 
Story  as  early  as  1843 :  "  It  seems  to  me  a  clear  result  of  all 
the  authorities,  that  wherever  the  parties  by  their  contract  intend 
to  create  a  positive  lien  or  cliarge,  either  upon  real  or  personal 
property,  whether  it  is  then  in  esse  or  not,  it  attaches  in  equity  as 
a  lien  or  charge  upon  the  particular  property  as  soon  as  the  as- 
signor or  contractor  accjuires  a  title  thereto,  against  the  latter, 
and  all  persons  asserting  a  claim  thereto  under  him,  either  volun- 
tarily, or  with  notice,  or  in  bankruptcy."  ^ 

The  doctrine  thus  formulated  was  applied  to  a  railroad  mort- 
gage in  1857  by  the  Supreme  Court  of  New  York,^  which  also 
adopted  as  an  alternative  ground  for  its  ruling  the  theory  of 
Pierce  v.  Emery ,4  that  a  railroad  and  its  franchises  might  be 
regarded  as  an  entirety. 

The  question  as  to  the  validity  of  such  a  clause,  at  least,  as 
against  creditors,  seems,  however,  to  have  been  still  regarded  as 
an  open  question,  for  it  was  carried  to  the  Supreme  Court  of  the 
United  States  very  soon  afterwards  in  the  well-known  case  of 
Pennock  v.  Coe.^  There  Mr.  Justice  Nelson,  after  observing  that 
the  main  argument  urged  against  the  validity  of  the  mortgage 
was  founded  on  the  maxim  that  "  a  person  cannot  grant  a  thing 
which  he  has  not"  {qui  non  habet^  ille  non  dat),  and  conceding 
the  soundness  of  the  principle  that  a  deed  or  mortgage,  by  which 

subject  of  the  aid-bonds,  and  is  therefore  '  Seymour   v.  Canandaigua  &  Niagara 

not  inconsistent  with  the  cases  which  hold  Falls  R.  Co.  (1857),  25  Barb.  284. 
that   under   ordinary  circumstances  such  *  32  N.  H.  484  (1856). 

an  indetinite  description  would  not  cover  ^  23  How.  117  (1859).      The  report  of 

after-acquired  property.     (See  below.)  this  case  as  Coe  v.  Pennock  (18.t7),  in  the 

^  Grape   Creek   Coal    Co.    v.    Farmers'  lower  court,  will  be  found  in  6  Am.  Law 

Loan  &  Trust  Co.   (1894),  63  Fed.    Rep.  Reg.  27  ;  s.  c.  3  Fed.  Cas.  1172,  Cmsp  No. 

891;  s.  c.  12  C.    C.    A.    350  ;    Borden  v.  2962.     See  Lloyd  v.  E.  &  N.  A.  R.  Co.,  18 

Croak,  Admrx.  (1889),  131  111.  68;  s.  c.  New  Br.  194  ;  Lanark  v.  Cameron.  9  I'pp. 

22  N.  E.  Rep.  793.  Can.  C.  P.  109;  Quincy  v.  C,  B.  &  Q.  R. 

2  Mitchell,  Assignee,  v.  Winslow  et  al.  Co.,  94  111.  537. 
(1843),  2  Story,  630. 


222  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  X. 

a  party  undertakes  to  grant,  in  prese7itl,  property  which  does  not 
belong  to  him  or  has  no  existence,  is  inoperative  and  void,  either 
in  law  or  equity,  proceeded  as  follows :  "  But  this  principle  has 
no  application  to  the  case  before  us.  The  mortgage  docs  not 
undertake  to  grant,  in  presenti,  property  of  the  company  not  be- 
longing to  them  or  not  in  existence  at  the  date  of  it,  but  carefully 
distinguishes  between  present  property  and  that  to  be  afterwards 
acquired.  .  .  .  The  inquiry  here  is,  not  whether  a  person  can 
grant,  in  presenti,  property  not  belonging  to  him  and  not  in  exist- 
ence, but  whether  the  law  will  permit  the  grant  or  conveyance  to 
take  effect  upon  the  property  when  it  is  brought  into  existence, 
and  belongs  to  the  grantor,  in  fulfilment  of  an  express  agree- 
ment, founded  on  a  good  and  valuable  consideration."  The 
learned  justice  then  points  out  that  if  the  money  raised  on  the 
security  of  the  mortgage  had  been  diverted  from  the  purposes  to 
which  it  should  have  been  devoted,  namely,  the  building  of  the 
road  and  its  equipment,  a  court  of  equity  would  have  interposed 
and  compelled  a  specific  performance  of  the  agreement.  This 
being  the  case,  it  might  certainly  be  concluded  with  confidence 
that  such  a  court  would  sanction  the  voluntary  performance  of 
the  agreement  by  the  parties  themselves,  and  give  effect  to  the 
security  as  soon  as  the  property  was  brought  into  existence. 
This  view  being  also  supported  by  authorities,  both  English  and 
American,  it  was  held  that  the  mortgage  was  a  valid  security 
upon  the  property  described  therein  (rolling-stock),  from  the 
time  of  its  acquisition  by  the  company.-' 

The  authority  of  Pennock  v.  Coe  does  not  seem  to  have  been 
universally  admitted  at  first.  Thus  we  find  the  Supreme  Court 
of  Massachusetts  in  the  following  year  saying  that,  if  the  mort- 
gage of  after-acquired  rolling-stock  in  the  case  under  review  had 
not  been  recognized  and  ratified  by  the  legislature,  it  would  not 
have  protected  the  property  against  an  execution.  No  reference 
was  made  to  the  equitable  doctrine.^  This  declaration  of  the  law 
was  diametrically  opposed  to  that  of  the  Supreme  Court  of  the 
United  States,  and  that  court,  when  the  same  case  came  before 
it,  merely  referred  to  Pennock  v.  Coe  as  being  decisive  of  the 
doctrine  that  a  mortgage  of  after-acquired  property  is,  within  cer- 
tain limits,  valid  against  judgment  creditors.^ 

^  In  Knj^laiid  the  validity  and  effect  of  House  of  Lords  until  1860,  when  Hnlroyd 

assif^nnients  of  future  acquisitions  had  been  v.  Marshall,  10  H.  L.  C.  190,  was  decided. 

clearly  expouniled  in   Langton  v.  Horton,  ^  Howe  v.  Freeman  (18C0),    1-1  (!ray, 

1  Hare  Ch.  249  (1 842),  which  was  strongly  566. 

relied   upon   in   Pennock  u.  Coe  ;   hut  the  *  Freeman    v.   Howe   (1860),   24   How. 

doctiiiie  did  not  receive  the  sanction  of  the  450. 


§  201.]  WHAT    THE    MORTGAGE    COVERS.  223 

At  the  present  time  the  doctrine  of  Pcnnock  v.  Coe  is  the 
one  which  is  universally  relied  upon  for  the  purpose  of  giving 
effect  to  mortgages  of  after-acquired  property,  and  the  theory 
of  Pierce  v.  Emery ,i  which  for  the  same  purposes  treats  the 
railroad  and  its  franchises  as  an  indivisible  whole,  is  practically 
exploded.^  It  is  possible  that  the  latter  theory  may  have  been 
due  not  merely  to  an  imperfect  realization  of  the  real  effect 
and  scope  of  a  comparatively  new  doctrine,  but  also  to  a  desire 
to  bring  mortgages  of  after-acquired  property  within  the  reach 
of  legal  as  well  as  equitable  principles.  Such  a  considera- 
tion, however,  is  plainly  of  no  weight  where  equitable  rules  are 
enforced.^ 

§  201.  Subsidiary  Grounds  on  vrhich  the  Enforcement  of  the  Ex- 
ecutory Contract  rests.  —  There  is  some  divergence  of  opinion,  or 
more  correctly,  perhaps,  of  statement,  as  to  the  rationale  of  the 
enforcement  of  executory  contracts  of  this  class.  Sometimes  the 
principle  relied  upon  is  that  "  equity  considers  that  as  actually 
done  which  ought  to  bo  done."^  In  other  cases  the  operative 
principle  is  assumed  to  be  that  of  estoppel.^ 

This  difference  of  opinion  is  of  little  moment,  as  it  merely  in- 
dicates that  the  doctrine  was  considered  from  two  equally  possi- 
ble points  of  view. 

By  whatever  principle  the  enforcement  of  the  contract  embodied 
in  the  after-acquired  clause  is  explained,  there  is  complete  unan- 
imity as  to  the  practical  result;  namely,  that  the  property  intended 

1  32  N.  H.  484  (1856).  5  Galveston  Railroad  v.  Cowdrey  (1870), 

2  See  §§  229,  230,  below.  11  Wall.  459.      There  the  court,  speaking 

3  Pliila.,  Wilni.  &  Bait.  R.  Co.  v.  of  three  deeds  of  trust,  said  that  they  cs- 
Woelpper  (1870),  64  Pa.  St.  366.  There  it  lopped  the  company  and  all  persons  claim- 
was  said  :  "  It  is  indubitable  that  a  mort-  ing  under  it  and  in  privity  with  it  from 
gage  of  land  will  pass  all  structures  or  fix-  asserting  that  those  deeds  did  not  cover  all 
tures  that  may  be  afterwards  erected  upon  the  property  and  rights  they  professed  to 
it  by  the  mortgagor.  But  it  is  not  neces-  cover.  "  Had  there  been  but  one  deed  of 
sary  to  maintain  that  the  rolling-stock  and  trust,"  it  was  remarked,  "  and  had  that 
equijiment  of  a  railroad  are  part  of  its  ac-  been  given  before  shovel  had  been  put  into 
cretions  aud  fixtures,  so  as  to  make  the  the  ground  towards  constructing  the  rail- 
transfer  good  at  law.  It  is  unquestionably  road,  yet  if  it  assumed  to  convey  and  niort- 
good  in  eijuity."  g«ige  the  railroad,  which  the  company  was 

*  Phila.,    Wilm.    &     Bait.    R.    Co.    v.  authorized  by  law  to  build,  together  with 

Woelpper  (1870),   64  Pa.  St.  366  ;    Wil-  its    superstructures,    appurtenances,     fix- 

liamson  v.    New  Jersey  Southern   R.   Co.  tures,    and    rolling-stock,     these     several 

(1878),   29   N.  J.   Eq.   311  ;    Little  Rock  items  of  property  as  they  came   into  ex- 

&   Fort   Smith   Ry.    Co.  v.  Page  (1880),  istence  would  become  instantly  attached  to 

35    Ark.     304  ;    s.    c.     7    Am.    &    Eng.  and  covered  by  the  deed,  and  would  have 

R.  R.  Cas.  36;  Seymour  v.  Canandaigua  fed  the  estoppel  created  thereby."   Similar 

&  Niagara  Falls  R.  Co.  (1857),  25  Barb,  language  is  used   in    Scott  v.  Clinton  & 

284.  Springfield  R.  Co.  (1876),  6  Biss,  529. 


224  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  X. 

to  "be  covered  becomes  subject  to  the  lien  the  instant  it  becomes 
a  portion  of  the  corporate  effects.^ 

Article  IV.  —  What  is  a  Sufficient  Description  to  pass 
Property  acquired  after  the  Mortgage  is  executed.  Gen- 
eral Rules  stated. 

§  202.  The  Requirement  of  a  Specific  Description  in  the  Case  of 
Future  Acquisitions,  upon  -what  Principle  based.  —  From  tlie  prin- 
ciple that  the  enforcement  of  the  lien  of  the  after-acquired  clause 
is  essentially  the  enforcement  of  an  executory  contract,  it  neces- 
sarily follows  that  the  terms  of  that  contract  must  satisfy  the 
conditions  which  a  court  of  equity  exacts  as  a  prerequisite  to 
granting  a  decree  of  specific  performance.  The  most  important 
of  those  conditions  in  the  present  connection  is  that  the  property 
intended  to  pass  should  be  described  with  reasonable  certainty. 
"  The  contract  must  relate  to  some  particular  property  described 
in  the  mortgage,  which,  though  not  in  existence,  must  be  reason- 
ably certain  to  come  into  existence,  so  that  the  minds  of  the  par- 
ties may  be  in  agreement  as  to  which  it  is  to  be.  The  mortgagor 
must  have  a  present  actual  interest  in  it  or  concerning  it.  There 
must  be  something  in  presenti,  of  which  the  thing  in  futuro  is  to 
be  the  product,  or  with  which  it  is  to  be  connected,  as  necessary 
for  its  use,  or  as  incident  to  it,  constituting  a  tangible  existing 
basis  for  the  contract."  ^  Similarly  it  was  observed  in  a  case  de- 
cided by  the  Supreme  Court  of  New  York  two  years  before  the 
leading  case  of  Pennock  v.  Coe :  "  It  must  be  the  intention  of  the 
parties  to  create  a  lien,  and  the  lien  must  have  a  specific  refer- 
ence, and  must  necessarily  apply  to  some  designated  property, 
either  in  esse  or  in  expectancy,  and  this  clearly  and  unmistakably. 
Unless  the  agreement  or  mortgage  plainly  describes  or  designates 
particular  lands,  it  will  be  regarded  as  a  mere  executory  contract 
and  enforceable  only  as  such."^  (By  "executory  contract"  is 
clearly  meant  one  binding  upon  the  person  and  general  estate  of 
the  grantor,  as  opposed  to  a  contract  of  that  description  binding 
upon  some  specific  property.) 

'   P.^'tijamin    v.    Elmira,    Jefferson,    &  New  Jersey  Southern  R.  Co.  (1875),  25  N. 

CMn:ui<iiii<,niJiR.  Co.  (1867),  49  Barb.  441  ;  J.  Eq.  13  ;  Dunham  v.  Cincinnati  R.  Co. 

Morrill   v.    Noyes    (1863),    56    Me.    458;  (1863),  1  Wall.  254  ;    United  Lines  Tele- 

Piirkcr  V.  New  Orleans.  B.  R.  &  V.  R.  Co.  f;raph  Co.  v.  Boston  Safe  Deposit  &  Trust 

(1888),  33  Fed.  Rep.  693  ;  Meyer  v.  John-  Co.   (1893),  147  U.  S.    431  ;  s.  c.  13  Sup. 

8ton  (1875),  53  Ala.  237  ;  Galveston  Kail-  Ct.  Rep.  396. 

ron.l  V.  Cowdrey  (1870).  11  Wall.  459,  481  ;  ^  93  How.  117  (1859). 

Barnaril  et  ul.  v.  Norwich  &  Worcester  R.  '  Seymour  v.  Canan<laiCTua        Niagara 

Co.  (1876),  4  CHff.  351  ;   Williamson  v.  Falls  R.  Co.  (1857),  25  Barb.  284. 


§  203.]  WHAT   THE   MORTGAGE   COVP]RS.  225 

Similar  language  has  been  used  by  English  judges.  After- 
acquired  property,  it  has  been  said,  will  not  come  under  the  lien 
in  the  absence  of  some  words  expressive  of  the  intent  that  it  shall 
so  pass,^  and  the  lien  will  not  take  effect,  as  against  adverse 
parties,  unless  that  intent  is  declared  by  apt  terms,  or  a  sufficient 
context.^ 

§  203.  The  Requirement  of  a  Specific  Description  to  pass  after- 
acquired  Property,  applicable  to  Statutory  Liens,"  —  This  necessity 
for  a  specific  description  exists  not  only  in  the  case  of  ordinary 
mortgages,  but  also  in  the  case  of  those  liens  in  the  nature  of 
mortgages  which  are  fastened  by  statute  upon  the  railroad  prop- 
erty, as  a  security  for  State  or  municipal  aid.  On  this  ground  it 
has  been  held  that  after-acquired  property  is  not  covered  by  the 
lien  created  by  an  act  which  provides  that  "  all  liabilities  which  by 
said  city  may  be  assumed  or  incurred  under  or  by  virtue  of  any  of 
the  provisions  of  this  act  shall  at  the  time,  and  by  force  thereof 
and  for  security  and  payment  of  the  same,  create  in  favor  of  said 
city  a  lien  in  the  whole  of  said  railroad,  its  franchises  and  all  its 
appendages,  and  all  real  and  personal  property  of  said  railroad 
corporation."  The  court  said  :  "  Acts  creating  liens  should  not 
be  construed  to  attach  to  after-acquired  property  any  more  than 
grants  or  mortgages,  unless  such  is  the  plain  meaning  of  the 
language  used.  The  language  used  includes  such  a  construction. 
The  lien  provided  for  in  this  section  is  to  take  effect  at  the  time 
the  liability  is  assumed,  and  cannot  be  held  to  include  property 
not  then  owned  by  the  company.* 

In  Tennessee,  however,  it  has  been  held  that  a  lien  declared  by 
statute  upon  "  the  entire  road,  including  the  stock,  right  of  way, 
grading,  etc.,  and  all  the  property,  owned  by  the  company  as  in- 
cident to  or  necessary  to  its  business,"  embraces  not  only  the 
properties  of  the  description  designated  which  were  in  existence  at 
the  time  the  mortgage  took  effect,  but  also  properties  of  that 
kind  which  may  afterward  come  into  existence  and  be  acquired 
by  the  company .^ 

1  In  re  New  Cl3'dacli,  etc.  Co,  (1868),  cision  is  not  based  expressly  on  the 
L.  R.  6  Eq.  514.  ground    that    a    legislative    grant,    if  its 

2  Bank  of  Soiith  Australia  v.  Abrahams  meaning  is  doubtful,  should  be  construed 
L.  E.  6  P.  C.  265.  in  favor   of  the   State    (Rice  v.  Railroad 

8  As  to  these  liens  generally,  see  Chap.  Company  (1861),   1  Black,  358),  but  on 

XIII.,  post.  the     secondary     consideration,     perhaps 

*  City  of  Bath  v.  Miller  (1865),  53  Me.  deemed  by  the  court   to  be   a  justifiable 

308.  deduction   from  that  principle,  —  that  if 

^  McGraw  v.  Memphis  &  Ohio  R.  Co.  the  efiect  of  the  mortgage  were  to  be  lim- 

(1866),  5  Coldw.  (Tenn.)  434.     This  de-  ited  to  the  former  class  of  property,  the 

15 


226  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  X. 

§  204.  Application  of  General  Principles  to  Property  acquired 
and  not  required  for  Railroad  Purposes.  —  The  degree  of  precision 
required  in  the  language  employed  depends  entirely  upon  whetlier 
the  property  alleged  to  be  covered  was  acquired  for  necessary 
railroad  purposes,  or,  in  other  words,  to  be  used  in  facilitating  the 
discharge  of  the  company's  function  as  a  common  carrier.  If  the 
property  was  acquired  to  be  employed  in  this  manner,  it  will  pass 
under  a  generic  description,  the  fact  of  its  forming  a  part  of  the 
railroad  being  deemed  sufficient  to  identify  it  and  distinguish  it 
from  other  property  of  the  same  kind  owned  by  others. 

If,  on  the  other  hand,  the  property  has  no  immediate  connection 
with  the  operation  of  the  road,  a  merely  generic  description  will 
not  fasten  a  lien  upon  it.  The  language  used  must  in  this  case 
be  sufficiently  specific  to  designate  the  property  without  reference 
to  extraneous  circumstances.  This  distinction  is  fundamental, 
and  pervades  all  the  cases  which  turn  upon  the  sufficiency  of  tho 
description. 

The  rule  that  a  generic  description  is  effectual  to  this  extent  is 
of  course  subject  to  be  controlled  by  words  which  show  an  intent 
to  limit  the  lien  in  some  way,  and  is  not  applicable  where  the  de- 
scription of  the  mortgage,  by  its  precise  terms,  limits  the  property 
(in  this  case,  lands)  to  those  lying  between  certain  termini  in  a 
specified  State.^ 

It  has  been  said  that  there  is  not  the  same  necessity  for  a  par- 
ticular description  in  railroad  mortgages  as  in  mortgages  by  a 
private  person.^ 

But  this  statement  seems  to  be  incorrect.  Mutatis  mutandis^ 
the  requisites  of  a  valid  mortgage  of  after-acquired  property  are 
the  same,  whether  the  mortgagor  is  a  railroad  company  or  an 
individual.^ 

ordinaiy   wear  and   tear  of  the   subject-  benefit  of  the  bondholders  created  a  lien 

matter  would  in  a  few  years  deprive  the  in  their  favor  upon  it,  even  if  the  mortgage 

State  of  a  large  part  of  its  security.     This  had  not  been  sulFieient  for  that  purpose, 
is  certainly  carrying  the   doctrine   to  its  ^  Chapman  v.  Pittsburg  &  Steubenville 

extreme  limits.  R.  Co.  (1885),  26  W.  Va.  299,  328. 

In  Buck  V.  Seymour  (1878).  46  Conn.  ^  Ruck   v.   Seymour   (1878),   46  Conn. 

156,  it  was  held  that,  where  the  directory  156. 

of  a  company,  under  a  general  statute  ^  Compare  Parker  v.  New  Orleans,  B. 
aiitliorizing  trustees  in  such  a  case  to  take  R.  &  V.  R.  Co.  (1888),  33  Fed.  Rep.  693  ; 
poss(;ssion,  suri'cndered  to  the  trustees  Bell  v.  Chicago,  St.  Louis,  &  New  Orleans 
with  a  written  declaration  that  they  sur-  R.  Co.  (1882),  34  La.  Ann.  785.  The  last 
rendered  all  the  property  covered  by  the  two  cases  were  decided  under  the  law  of 
mortgage,  such  a  surrender  constructively  Louisiana,  which  limits  the  power  of  the 
iticln<lcd  the  property  acquired  after  the  company,  as  regards  mortgages  of  after- 
date of  tlie  mortgage  ;  and  that  a  deliv-  acquired  ])roperty,  to  property  acquired 
ei-y  of  the  after-acquired  property  for  the  for  railroad  purposes  (see  above,  §  200), 


§  204.]  WHAT   THE   MORTGAGE   COVERS.  227 

The  true  principle  is  laid  down  in  Miss.  Valley  Co.  v.  Chicago, 
St.- Louis,  k  New  Orleans  R.  Co.,^  where  Chambers,  C.  J.,  in  de- 
livering the  opinion  of  the  court,  used  the  following  language  : 
"  It  is  said  that  a  mortgage  of  a  railroad  and  its  future  property 
will  carry  all  after-acquired  property  appurtenant  to  and  neces- 
sary for  building  and  operating  the  road  and  carrying  out  the 
purposes  for  which  it  was  created,  while  a  similar  instrument  will 
be  inoperative  if  executed  by  a  private  person.  This  is  true  if 
the  mortgage  executed  by  a  private  person  is  upon  a  specified 
piece  of  property,  without  reference  to  any  accretions  or  additions 
to  it,  because  there  can  be  no  accretions  of  property  appurtenant 
to  the  person  of  the  mortgagor  ;  but  it  is  untrue  if  the  individual 
has  mortgaged  his  business  and  the  property  then  appurtenant  to, 
or  afterwards  to  grow  out  of,  and  to  be  added  by  accretion  to  the 
particular  business  that  is  pledged.  Thus  a  natural  person,  equally 
with  a  corporation,  can  execute  a  valid  mortgage  of  a  ship  and  the 
profits  of  its  voyage,  or  of  a  factory  and  the  machinery  then  in  it 
or  to  be  placed  in  it,  or  of  a  farm  and  the  products  to  be  produced 
upon  it,  or  of  a  flock  of  sheep  and  its  natural  increase  and  future- 
grown  wool ;  and  so  a  railroad  company  can  execute  in  general 
terms  a  valid  mortgage  of  its  road-bed  and  franchises,  and  all  of 
its  real  and  personal  property  then  owned  or  thereafter  acquired, 
provided  the  future  acquisitions  be  such  as  belong  naturally  to  the 
business  of  construction  and  maintaining  the  road  and  performing 
its  primary  end  as  a  common  carrier  of  passengers  and  freights. 
The  things  which  may  be  deemed  essential  or  useful,  and  there- 
fore appurtenant  to  the  great  work  of  building  and  operat- 
ing a  railroad,  will  frequently  be  more  extensive  and  varied  in 
their  character  than  those  which  can  properly  be  regarded  as 
accretions,"  etc. 

The  actual  decision  of  the  Connecticut  case  referred  to  above 
was  quite  in  harmony  with  this  exposition  of  principles,  as  it  was 
merely  held  that  a  description  of  after-acquired  property  as  "  all 
property  which  may  hereafter  belong  to  said  company,  and  be 
u%ed  as  a  part  of  said  road,'^  was  not  too  indefinite,  and  therefore 
the  distinction  drawn  between  mortgages  by  railroad  companies 
and  private  persons  was  quite  uncalled  for. 

The  fact  that  the  comprehensive  clause, "  and  all  rights,  privileges, 
franchises,  and  property  whatever,  now  belonging  or  hereafter  to 
belong  to  or  to  be  acquired  by  said  party  of  the  first  part,"  is 

and   the    raling   was   that,   provided   the  described  in  the  instrument.     The  Latter 

mortgage  was  confined  by  definite  terms  to  case  gives  a  succinct  resume  of  the  Civil, 

sueh  propert}'-,  the  lien  would  attach  to  it  French,  and  Spanish  laws  on  the  subject, 
as  effectually  as  if  it  had  been  specifically         i  58  Miss.  896  (18S1). 


228  RAILWAY   BONDS    AND   MORTGAGES.  [CHAP.  X. 

added  at  the  conclusion  of  the  granting  part  of  the  mortgage,  will 
not  be  a  ground  for  drawing  any  other  than  the  usual  deduction, 
that  only  property  used  in  connection  with  the  railroad,  in  pro- 
moting the  direct  purposes  of  its  construction,  especially  where 
the  clause  is  preceded  by  a  minute  description  of  specific  kinds  of 
property,  all  of  which  are  of  that  character,  and  so  referred  to.^ 

§  205.  "What  is  Property  used  for  Railroad  Purposes.  —  Property 
may  come  under  the  category  of  that  used  for  railroad  purposes 
without  being  indispensabli/  necessary  for  the  proper  conduct  of 
the  company's  business.^ 

It  is  "  necessary,"  within  the  meaning  of  the  rule,  if  it  is  such 
as  the  company,  in  the  reasonable  exercise  of  its  discretion,  con- 
sidered it  best  to  procure  for  the  most  profital)le  use  of  the  road, 
even  though  the  road  might  have  been  operated  without  it.^ 

Instructions  embracing  the  word  "  indispensably  "  have,  how- 
ever, been  held  correct  upon  appeal.* 

Mere  convenience  is  certainly  not  enough  to  bring  property  into 
this  category,  as  where  lands  are  purchased  for  the  sake  of  the 
timber  on  them.^ 

In  regard  to  lands,  the  proper  test  has  been  held  to  be  whether 
they  could  or  could  not  have  been  taken  by  proceedings  in  emi- 
nent domain  for  the  purposes  to  which  they  are  applied.  In  the 
former  case  they  are  covered  by  the  mortgage ;  in  the  latter  case 
they  are  not.  Thus  the  entire  surveyed  line  to  its  full  width  will 
pass,  and  also  land  required  for  piling  wood  ;  but  not  land  acquired 
for  the  purpose  of  erecting  a  car  factory,  and  dwelling-houses  for 
its  employees.^ 

1  State  V.  Glenn  (1883),  18  Nev.  34.  be  constructed,  or  in  whicli  the  company 
Compare  Hunt  v.  Bullock  (18G0),  23  111.  might  acquire  the  right  of  waj-,  or  lots  or 
320,  wht're  the  court  rejected  the  idea  that  parcels  of  land  along  the  line  of  the  road 
the  word  "franchise"  would  cover  such  used  or  to  be  used  for  erecting  thereon 
property  as  wood,  coal,  writing-desks,  depots,  engine-houses,  shops,  and  all  such 
stationery,  and  all  kinds  of  household  structures  as  might  be  necessary  for  the 
furniture  which  might  happen  to  be  used  by  operation  and  business  of  the  road,  or 
the  company  in  carrying  on  its  business.  upon    which    drains     and    embankments 

2  Morgan  &  Raynorv.  Donovan  (1877),  might  be  made  for  the  preservation  and 
58  Ala.  241  ;  s.  c.  21  Am.  Ry.  Rep.  199.  protection    of  the  road.     Compare  Parish 

8  Buck  V.  Seymour  (1878),  46  Conn.  v.  Wheeler  (1860),   22   N.    Y.    494,    and 

146.  Braiiicrd  v.  Peck  (1861),  34  Vt.  496,  sum- 

*  Shamokin    Valley   R.  Co.    v.   Liver-  marizcd  below  in  tliis  cliapter. 
more  et  al.  (1864),  47  Pa.  St.  465.  ^  El,l,i,lge  v.  Smith  d  ah  (1861),  34  Vt. 

^  Dinsmore  v.  Racine  &  Mississippi  R.  484.     The  last  pai't  of  this  ruling  seems 

Co.  (1860),  12  "Wis.  649.      Mere  the  infer-  scarcely    reconcilable    with    those    which 

ence  was  strengthened   by    the   language  hold  that  a  hotel  for  the  accommodation 

employed  in  the  instrument,  all  the  lands  of    passengers   and    employees   may    pass 

and  real  estate  s])oken  of  in  the  mortgage  under  a  general  description.      See  §  212, 

being  those  ufjon  wliich  the  road  was  to  below. 


§§  206,  207.]  WHAT   THE   MORTGAGE   COVERS.  229 

City  lots  purchased  by  a  railroad  company  designed  for  legiti- 
mate railroad  uses  and  purposes  in  certain  contingencies  will  pass 
under  and  be  covered  by  a  subsequent  mortgage  covering  property 
present  and  to  be  acquired,  though  the  contingencies  may  never 
happen,  and  the  lots  be  not  used  as  originally  designed  from  their 
unsuitability  for  railroad  purposes.^ 

§  206.  Property  acquired  by  a  ConsoHdated  Company  •when 
covered.  —  Property  acquired  by  a  consolidated  company  will  be 
subject  to  the  lien  of  a  mortgage  made  by  one  of  the  constituent 
companies,  provided  the  property  is  such  that  it  would  have  passed 
under  the  mortgage  if  the  consolidation  had  not  taken  placo.^ 

Where  a  mortgage  of  a  street-railway  company  covers  a  con- 
templated extension,  it  may  be  enforced  against  such  extension 
though  it  may  have  been  constructed  by  another  company  which 
had  purchased  the  franchises,  etc.,  of  the  mortgagor.^ 

A  mortgage  on  a  flume  or  ditch  not  completed,  but  projected 
and  in  course  of  construction,  covers  the  whole  work  when  com- 
pleted, if  the  instrument  contains  apt  terms  expressing  the  intent 
of  the  mortgagor  that  it  shall  have  that  operation.^ 


Article  Y.  —  What  is  a  Sufficient  Description  to  pass  After- 
acquired  Interests  in  Real  Estate.^ 

§207.  General  Rules.  —  In  many,  if  not  most,  instances  in 
which  real  estate  is  mentioned  it  will  be  found  that  the  mort- 
gage contains  expressions  which  indicate  that  the  draughtsman 
was  designedly  composing  it  in  conformity  with  the  general  prin- 
ciple stated  in  the  preceding  section.  If  the  property  is  described 
as  that  "  used  or  appropriated  in  operating  and  maintaining  the 

1  Hawkins  et  al.  Trustees  v.  Mercantile  any  interest   in   it   from  the   mortgagors, 

Trust  &  Deposit  Co.  (1895),  96  Ga.  580  ;  took  title  to  the  mortgages  thus  construed, 

s.  c.  23  S.  E.  Rep.  498  (1895).     See  Mc-  and   in    making    additions    or   accessions 

Tighe  d  al.  v.  Macon  Construction  Co.  et  within  the  terms  of  the   mortgages    was 

al.  (1894),  94  Ga.  306  ;  s.  c.  21  S.  E.  Rep.  estopped  by  privity  of  title  with  the  mort- 

'^1-  g'^gors  to  deny  that  such  accretions  were 

-  Compton  V.  Jesup  (C.  C.  A.  1895),  subject  to  the  mortgage  lien." 
68  Fed.  Rep.  263.     The  court  concluded,  3  Hinchman  v.  Point  Defiance  Ry.  Co. 

from  the  wording  of  the  earlier  mortgages  ct  al.   (Boyle  et  al..  Interveners), (Wash., 

through  which  the  consolidated  company  1896),  44  Pac.  Rep.  867. 
deduced  its  title,  that  it  was  the  intention  *  Union  Water  Co.   v.  Murphy's  Flat 

of  the  mortgagors  to  subject  to  the  liens  Fluming  Co.  et  al.  (1863),  22  Cal.  620. 
whatever  was  added  to  the  railroad  at  each  5  For  a  review  of  the  cases  in   which 

of  the  terminal  points  named  for  use  as  the    effect   of   the    mortgage    as    regards 

part    of    it.       "Every   person,    therefore,  realty  is  rather  a  question  of  power  than 

acquiring  the  railroad  thus  described,  or  of  construction,  see  Chap.  VIII. 


230  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  X. 

road,"  the  inference  is  conclusive  that  no  other  property  but  this 
can  pass  under  the  mortgage.^  The  rule,  however,  is  independent 
of  the  effect  of  phraseology  apparently  intended  to  embody  it,  and 
cannot  be  overridden  by  any  description,  however  comprehensive, 
which  is  of  a  merely  generic  character.  An  instructive  case  on 
this  point,  and  one  which  also  affords  illustration  of  the  circum- 
stances which  will  place  after-acquired  land  upon  one  side  or  other 
of  the  line  which  separates  property  used  in  the  operation  of  the 
road  and  property  not  so  used,  is  Miss.  Valley  Co.  v.  Chicago,  St.  L. 
&,  N.  0.  R.  Co.2  There  a  railroad  company  executed  a  mortgage 
of  all  its  property,  present  and  future,  in  the  most  comprehensive 
terms  possible,  the  descriptive  clause  winding  up  with  the  words, 
"  intending  hereby  to  include  all  its  present  real  and  personal 
estate  and  franchises  now  owned  or  hereafter  to  be  acquired, 
without  any  exception  or  reservation  whatever ; "  and  it  was 
argued  that  the  lien  covered  a  hotel,  a  storehouse,  some  vacant 
lots,  and  a  farm  of  three  acres.  The  words  of  the  mortgage  were 
admitted  to  be  broad  enough  to  cover  this  property,  but  it  was 
said  that  neither  a  natural  person  nor  a  corporation  could  mort- 
gage property  to  be  acquired  in  the  future  by  words  so  vague  and 
general  as  to  afford  to  creditors  and  subsequent  purchasers  no 
notice  whatever  of  the  property  to  be  embraced.  The  vagueness 
of  the  description  therefore  prevented  the  clause  as  to  future 
acquisitions  from  taking  effect  as  to  the  particular  property 
alleged  to  be  embraced  in  the  mortgage,  and  it  must  be  excluded 
from  its  operation  unless  it  was  appurtenant  to  the  business  of 
the  road.  This  condition,  it  was  held,  was  not  satisfied  by  a  hotel 
which  was  not  used  as  an  eating-house  for  passengers,  and  real 
estate  which  was  rented  out  for  the  several  purposes  to  which  it 
was  adapted,  the  company  deriving  no  benefit  therefrom  except  it 
received  the  rents. 

§  208.  General  "Words  limited  by  subsequent.  —  The  general 
terms  of  an  after-acquired  clause  may  be  limited  by  sub'sequent 
words  showing  an  intention  to  restrict  the  operation  of  the  lien. 
Tlius  where  an  income  mortgage  includes  "  all  and  singular  the 
line  of  railways  belonging  or  hereafter  to  belong  to"  the  mort- 
gagor, and  then  goes  on  to  describe  them  as  extending  from  cer- 
tain s))ecincd  points  to  others,  and  the  directors  are  required  to 
set  apart  for  payment  of  the  interest  on  the  income  bonds  the  net 
income  derived  from  the  road,  after  deducting  operating  expenses 

1  Walsh  V.  Barton  (1873),  24  Ohio  St.     150  ;   s.  c.   12  Am.  &   Eng.   R.   R.   Cas. 
28.     Compare  Boston   &    New  York    Air     375,  referred  to  in  tlie  next  section. 
Line  R.   Co.  v.   CoUin   (1882),   50   Conn.  '■'  68  Miss.  896  (1881). 


§  209.]  WHAT   THE   MORTGAGE    COVERS.  231 

and  betterments  necessary  to  keep  the  line  in  first-class  condi- 
tion, the  lien  of  the  mortgage  attaches  only  to  the  roads  then 
belonging  or  thereafter  to  be  acquired  between  the  termini  named, 
and  the  directors  cannot  deduct  from  the  fund  for  the  payment  of 
interest,-  operating  and  other  expenses  incurred  on  new  Ihies 
acquired  beyond  those  termini. ^ 

The  inference  that  the  after-acquired  property  clause  covers 
only  lands  acquired  for  business  purposes  is  sometimes  strength- 
ened by  some  words  used  in  the  other  parts  of  the  instrument. 
Thus  although  the  granting  clause  may  purport  to  cover  all  future- 
acquired  lands  in  a  certain  county,  yet  if  there  is  an  express 
covenant  for  further  conveyance  and  assurance  which  is  restricted 
to  future-acquired  lands  purchased  for  use  in  carrying  on  its  busi- 
ness of  mining,  the  mortgage  should  not  be  construed  to  include 
lands  not  purchased  for  that  purpose.^ 

§  209.  Laud  beyoud  the  Chartered  Limits  -will  not  pass.  —  Agree- 
ably to  the  principles  laid  down  in  the  preceding  section,  it  has 
been  held  that  the  mortgage  does  not  cover  lands  purchased  by 
the  company  beyond  the  limit  allowed  in  the  charter  and  never 
used  for  its  road.^ 

Nor  will  town  lots,  unless  directly  appurtenant  to  the  railroad, 
and  indispensably  necessary  to  the  enjoyment  of  its  franchises, 
pass  by  a  mortgage  of  a  road  "  with  its  corporate  privileges  and 
appurtenances."  ^ 

Nor  will  a  mortgage  conveying  "  the  railroad  then  constructed 
and  to  be  constructed,  etc.,  and  all  other  corporate  property,  real 
and  personal,  of  said  railroad  company,  belonging  or  appertaining 
to  the  said  railroad,  whether  then  ow^ned  or  thereafter  to  be 
acquired,"  cover  lands  granted  as  an  inducement  to  erect  a  depot 
at  a  certain  place,  and  never  used  for  any  railroad  purposes.^ 

Nor  will  the  use  of  the  words  "necessary  and  convenient"  in 
connection  with  the  lands  which  the  mortgage  purports  to  convey 
cover  a  portion  of  a  lot  which  was  never  used  for  railroad  pur- 
poses, except  as  a  site  for  the  temporary  office  during  the  time 
when  the  building  ordinarily  occupied  for  that  purpose  was  being 
re-erected.^ 

1  Spies  V.  Chicago  &  Eastern  Iowa  R.  *  Sharaokin  Valley  R.  Co.  v.  Livermore 
Co.  (1889),  40  Fed.  Rep.  34  ;  s.  c.  40  Am.     (1864),  47  Pa.  St.  465. 

&  Eiig.  R.  R.  Cas.  401.  5  Calhoun  v.  Memphis  &  Paducah  R. 

2  Grape    Creek    Coal   Co.   v.  Farmers'     Co.  (1879),  2  Flip.  442. 

Loan  &  Trust  Co.  (1894),  63   Fed.  Rep.  ^  St.  Louis,  Arkansas,  &  Texas  Ry.  Co. 

891  ;  s.  c.  12  C.  C.  A.  350.  v.  Whitaker  (1887),  68  Tex.  630  ;   s.  c.  5 

8  Youngman  v.  Elmira  &  Williamsport  S.  W.  Rep.  448. 
R.  Co.  (1870),  65  Pa.  St.  278. 


232  EAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  X. 

Similarly  where  the  general  words  of  the  description  are  quali- 
fied by  such  phrases  as,  "  that  may  be  included  in  the  location  of 
said  railroad;"  "used  as  a  part  of  said  railroad;"  "appurtenant 
thereto;"  "necessary  for  the  construction,  operation,  or  security 
thereof ; "  "  necessary  for  the  completion  and  operation  of  the 
road,"  —  the  lien  will  be  confined  to  the  lands  which  were  pros- 
pectively necessary  and  convenient  for  the  construction  and  future 
operation  of  the  road,  and  will  not  embrace  lands  situated  outside 
the  lay-out  of  the  road,  which  had  been  taken  over  by  the  com- 
pany in  order  to  acquire  at  a  less  cost  the  lands  actually  needed 
for  the  line  itself.^ 

On  the  other  hand,  in  deference  to  the  general  principle  that 
"  the  case  of  a  railroad  holding  more  property  for  its  own  pur- 
poses than  its  present  needs  demand,  is  entirely  different  from  one 
in  which  the  company  buys  other  property  distinct  from  the  road 
and  its  appurtenances,  not  intended  or  necessary  for  the  present 
or  prospective  exercise  of  its  franchise,"  the  court  will  subject  to 
the  lien  of  a  mortgage  covering  all  its  property  "  then  possessed 
or  to  be  thereafter  acquired,"  land  purchased  for  terminal  facili- 
ties at  a  time  when  the  company  believed  it  to  be  required  for 
the  accommodation  of  the  road,  even  though  their  expectations 
of  business  have  not  been  realized,  and  the  land  has  never  been 
actually  put  to  the  use  for  which  it  was  bought.^ 

It  has  been  already  stated  that  in  some  early  cases  a  greater  lati- 
tude of  construction  was  asserted  in  regard  to  railroad  mortgages, 
on  the  theory  that  a  railroad  is  an  indivisible  thing.  An  unsuc- 
cessful attempt  was  made  on  this  ground  in  Dinsmore  v.  Racine 
R.  Co.2  to  establish  the  lien  of  a  mortgage  upon  lands  several  miles 
distant  from  the  line  which  had  been  purchased  for  the  timber 
thereon,  whether  owned  at  the  time  of  the  mortgage  or  subse- 
quently acquired,  whatever  condition  it  might  be,  provided  it  was 
obtained  for  the  necessary  use  of  the  road.  The  court  declined 
to  accept  this  theory,  saying,  "  I  cannot  adopt  this  view  of  a  rail- 
road, or  think  that  such  is  the  peculiar  nature  and  character  of  the 
property  belonging  to  these  corporations.  A  railroad  corporation, 
with  its  franchises  and  property,  has  undoubtedly  many  things 
peculiar  to  itself.  But  theoretically  I  have  great  difficulty  in  con- 
sidering it,  with  all  those  franchises  and  real  and  personal  prop- 
erty, as  being  one  entire  and  indivisible  thing     My  first  conception 

1  Boston  &  New  York  Air  Line  R.  Co.  can  Ry.   Co.   (1881),   72  Me.   83  ;  s.  C.  4 

I-.  CoWm   (1882),  50  Conn.  150  ;  s.  c.   12  Am.  &  KnR.  R.  R.  Cas.  503. 
Am.  &  KnK.  R.  R.  Ca.s.  375.  »  12  Wis.  649  (1800). 

'^  Hamlin  i;.  European  &  North  Amcri- 


§  210.]  WHAT   THE   MORTGAGE   COVERS.  233 

of  it  is  contrary  to  this  idea.  A  railroad  with  all  its  property  and 
francliiscs  cannot,  witli  much  precision  of  language,  be  likened  to 
a  machine  or  even  a  vessel.  It  is  an  attempt  to  compare  things 
which  have  few,  if  any,  points  of  resemblance.  A  railroad  is  de- 
fined by  Webster  to  be  '  a  road  or  way  on  which  iron  rails  are  laid 
for  wheels  to  run  on  for  the  conveyance  of  heavy  loads  in  vehicles.' 
This,  I  think,  is  the  popular  understanding  of  the  term.  There  is 
no  difficulty  in  conceiving  of  a  railroad  as  separate  and  distinct 
from  its  rolling-stock,  cars,  engines,  and  depots.  The  idea  of  a 
railroad  is  complete  without  these  accessories.  We  speak  of  the 
real  estate  belonging  to  a  railroad,  and  of  personal  property  be- 
longing to  it,  without  meaning  that  all  these  are  inseparable  from 
it.  They  do  not  form  one  entire  thing  which  is  incomplete  with- 
out all  these  accessions.  I  can  understand  how  a  railroad 
corporation  with  its  franchises  may  be  said  to  be  an  entire, 
indivisible  thing,  —  a  unity.  But  I  cannot  well  conceive  how  a 
railroad  with  all  its  property,  real  and  personal,  of  every  nature 
and  character,  can  with  accuracy  be  said  to  be  an  indivisible 
thing,  nor  do  I  think  the  law  so  regards  it." 

§  210.  Laud-grants  subsequently  made  to  assist  in  the  Construction 
of  the  Road  not  covered.  —  Such  land-grants  are  not,  as  a  general 
rule,  covered,  the  idea  of  acquisition  for  the  immediate  purpose  of 
furtliering  the  business  of  a  company  as  a  carrier  not  being  deemed 
to  extend  to  this  class  of  property,  although  it  may,  as  a  matter  of 
fact,  supply  the  only  available  means  for  enabling  that  business  to 
be  started.^ 

The  same  rule  applies,  of  course,  still  more  strongly  in  States 
where  the  authority  of  the  company  to  mortgage  after-acquired 
property  is  expressly  limited  to  such  as  becomes  a  portion  of  the 
railroad.  Thus  it  has  been  held  under  the  law  of  Louisiana  that 
a  grant  from  the  United  States  of  lands  entirely  exterior  to  the 
right  of  way,  and  in  no  way  promoting  the  business  of  the  com- 
pany except  by  the  money  received  from  purchasers  or  tenants,  is 
not  covered.^ 

A  land-grant,  however,  may  be  covered  by  appropriate  words 
before  it  has  been  located  by  the  filing  of  the  map,  or  even  before 
it  has  been  made  by  the  government.^ 

1  Meyer  v.  Johnston  (1875),  53  Ala.  Ey.  Co.  v.  Parker  (1892),  143  U.  S.  42, 
237  ;  s.  c.  (1879),  64  Ala.  603,  where  the  where,  however,  the  court  laid  more  stress 
mortgage  was  of  the  railroad,  "  and  all  upon  the  fact  of  such  lands  not  falling 
other  property  now  owned,  and  which  may  imder  the  description  of  "  appurtenances  " 
be  hereafter  owned."  (see  §  231,  below),  the  theory  that  they  did 

2  New  Orleans  &  Pac.  Ey.  Co.  v.  Union  so  fall  having  been  relied  upon  by  counsel. 
Trust  Co.  (1890),  41  Fed.  Eep.  717.  This  3  Parker  v.  New  Orleans,  B.  R,  &  V. 
decision  was  affirmed  in  New  Orleans  Pac.  R.  Co.  (1888),  33  Fed  Rep.  693. 


234  RAILWAY    BONDS   AND   MORTGAGES.  [CHAP.  X. 

§  211.  Lands  acquired  for  Depots,  etc.,  covered.  —  It  is  well 
settled  that  lands  purchased  for  the  erection  of  such  buildings 
as  depots,  stations,  warehouses,  woodyards,  machine-shops,  and 
the  like  are  covered  by  the  after-acquired  clause.^ 

§  212.  Lands  acquired  for  the  Right  of  Way  are  covered.  —  A 
right  of  way  is  an  easement  appurtenant  to  the  road  as  an 
entirety,  which  in  its  nature  must  be  perpetual.  Being  there- 
fore assignable,  it  will  pass  to  the  purchaser  at  the  foreclosure 
of  a  mortgage  of  the  property  and  franchises  of  the  company.^ 

The  right  of  way  for  the  purposes  of  this  rule  is  not  necessarily 
that  which  was  first  located.  The  mortgage  binds  the  road  as  it 
is  actually  built,  such  being  the  fair  construction  of  the  language 
ordinarily  employed  in  railroad  mortgages.^ 

This  construction  is  sometimes  corroborated  by  the  language  of 
the  statute  authorizing  the  change  of  route.  Thus,  where  the 
right  of  transfer  conferred  contemplates  the  acquisition  by  the 
company  of  a  branch  road  by  which  to  connect  with  another  rail- 
road, and  a  change  in  this  contemplated  link  of  connection  is 
authorized  by  a  subsequent  statute  which  does  not  declare  the 
original  right  to  be  withdrawn  or  limited,  there  is  a  strong  impli- 
cation that  the  right  extends  to  the  substituted  route.* 

But  in  no  case  is  the  position  of  the  land  the  sole  test  applied  ; 
and  it  has  been  expressly  held  that  the  fact  of  its  being  outside 
the  right  of  way  is  not  incompatible  with  the  lands  being  subject 
to  the  lien,  provided  it  has  been  devoted  to  railroad  purposes,  such 
as  the  erection  of  a  depot  or  station.^ 

On  the  other  hand,  the  fact  that  the  tract  in  question  is  outside 
the  right  of  way  is   of  considerable  importance  in  determining 

1  Seymour  v.  Canandaigua  &  Niagara  has  been  located  and  constructed  beyond 
Falls  E.  Co.  (1857),  25  Barb.  284  ;  Stevens  one  terminus  of  its  location  and  surve}',  as 
V.  Watson  (1865),  4  Abb.  Ct.  App.  Dec.  it  was  at  that  time.  Still,  if  it  is  the 
302.  railroad  of  the  corporation  under  its  char- 

2  Junction  R.  Co.  v.  Ruggles  (1857),  7  ter,  the  whole  becomes,  in  our  apprehen- 
OhioSt.  1  ;  s.  p.  Pollard  y.  Maddox (1856),  sion,  subject  to  the  mortgage.  .  .  .  The 
28  Ala.  321.  road  then  [when  the  mortgage   was   exe- 

2  Elwell  V.  Grand  St.  &  Newtown  R.  Co.  cutcd]  in  the  j)rocpss  of  construction,  with 

(1874),  67  Barb.  83;  Seymour  u.  Canan-  the  rights  and  ])rivileges  of  the  company  in 

daigua  &  Niagara  Falls  R.  Co.  (1857),  25  it  as  a  road  completed,  was  the  thing  mort- 

I'arb.  284;  Meyer  v.  Johnston  (1879),  64  gaged"  (citing  Willink  v.  Morris  Canal  & 

Ala.  C03  ;  s.  c.  8  Am.  k  Eng.  R.  R.  Cas.  Bkg.  Co.  (1843),  4  N.  J.  Eq.  377  ;  Pennock 

584  ;  Miller  v.  Rutland  &  Washington  K.  v.  Coo  (1859),  23  How.  117  ;    Morrill  v. 

Co.  (1863),  36  Vt.  452.     In  the  case  last  Noyes  (1863),  .'■>6  Mo.  458). 
cited  the  court  said  :  "  It  may  be  taken  as  *  East  Boston  Freight  R.  Co.  v.  Eastern 

granted  that,   in  fact,  the  location  of  the  R,  Co.    1866),  13  Allen  (Mass.),  422. 
road  was  clianged,  at  different  points,  from  *  Coe  v.  New  Jersey  Midland  Ry.  Co. 

tlie  phice  fixeil  upon  in  the  original  location,  (1879),  31  N.  J.  Ecj.  105. 
after  the  mortgage  took  effect,  and  that  it 


§§   213,  214.]  WHAT   THE   MORTGAGE   COVERS.  235 

whether  it  falls  into  the  category  of  land  acquired  for  railroad 
purposes  or  not,^  or  of  a  building  intended  to  serve  as  a  boarding- 
house  for  the  employees  of  the  company  and  an  eating-house  for 
the  passengers.  The  mere  fact  that  such  a  building,  besides  being 
thus  used  in  forwarding  the  business  of  the  com{)any,  is  also  used 
as  a  house  of  entertainment  for  the  public  at  large,  does  not  make 
it  an  outside,  independent  enterprise.^    ■ 

If  the  rights  acquired  by  the  company  in  the  right  of  way  are 
simply  in  the  nature  of  an  easement,  and  the  track  is  never  laid, 
owing  to  a  change  of  route,  the  abandoned  lay-out  necessarily  re- 
verts to  the  owner  and  is  not  covered  by  the  mortgage.^ 

A  sale  under  a  foreclosure  of  a  statutory  mortgage  whereby 
everything  contained  therein  is  to  pass  to  the  purchaser  will 
carry  a  right  of  way  obtained  subject  to  a  condition  of  reverter 
in  the  event  of  a  failure  to  complete  the  road.* 

§  213,  Terminal  Facilities  covered.  —  Terminal  facilities  are  cov- 
ered by  a  mortgage  expressed  to  be  upon  a  "  line  of  railroad  con- 
structed or  to  be  constructed,  together  with  all  the  stations,  depot 
grounds,  engine-houses,  machine-shops,  buildings,  erections  in 
any  way  now  or  hereafter  appertaining  unto  said  described  line 
of  railroad."  The  stations,  etc.,  in  the  terminal  cities  appertain 
to  the  railroad  as  fully  as  similar  structures  in  places  between 
the  termini.^ 

§  214.  Lands  held  by  Equitable  Title  covered.  —  If  the  other 
conditions  necessary  to  bring  the  land  under  the  protection  of  the 
mortgage  are  satisfied,  the  fact  that  the  legal  title  is  outstanding 
in  another,  while  the  company  holds  only  the  equitable  title,  will 
not  prevent  the  lien  from  attaching  under  words  of  general 
description.^ 

^  Seymour  v.   Canandaigua  &  Niagara  general   principles,  but  "terminal   facili- 

FallsR.  Co.  (1857),  25  Barb.  284  ;  Boston  ties"  were  specified  in  tbe  mortgage  under 

&  New  York  Air  Line  R.    Co.   v.   Coffin  discussion   in   tbe    clause   following    that 

(1882),  50  Conn.  150  ;  s.  c.  12  Am.  &  Eng.  which  was  construed. 

R.  R.  Cas.  375.  e  Toledo,  D.   &  B.   R.  Co.  v.  Hamilton 

2  Omalia  &  St.  Louis  Ry.  Co.  v.  Wabash,  (1890),  134  U.  S.  296  ;  s.  c.  10  Sup.  Ct. 
St.  Louis,  &  P.  Ry.  Co.  (1891),  108  Mo.  Rep.  546  ;  Central  Trust  Co.  v.  Kneeland 
298;  s.  c.  18  S.  W.  Rep.  1101  ;  United  (1891),  138  U.  S.  414  ;  s.  c.  11  Sup.  Ct. 
States  Trust  Co.  v.  Wabash,  St.  Louis,  &  Rep.  357;  Wade  v.  Chicago,  Springfield, 
P.  Ry.  Co.  (1887),  32  Fed.  Rep.  480.  &  St.  Louis  R.  Co.  (1893),  149  U.  S.  327; 

3  Meyer  v.  Johnston  (1875),  53  Ala.  s.  c.  13  Sup.  Ct.  Rep.  892.  In  the  last 
237  ;  s.  c.  15  Am.  Ry.  Rep.  467.  two  cases  tbe  legal  title  had  been  taken  by 

*  Harrison  et  ux.  v.  Lexington  &  Frank-  the  financial  agent  of  tlie  company  under 

fort  R.  Co.  (1849),  9  B.  Monr.  (Ky.)  470.  circumstances   which    raised    a    resulting 

^  Central  Trust  Co.  w.  Kneeland  (1891),  trust  in  favor  of  the   company.     To  the 

138  U.  S.  414;  s.  c.  11  Sup.  Ct.  Rep.  357.  same  effect  is  Boston  &  New  York  Air 

In  this  case  the  above  ruling  was  made  on  Line  R.  Co.  v.  Coffin  (1882),  50  Conn.  150, 


236  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  X, 

Such  a  title  is  acquired  by  a  contract  for  the  conveyance  of  land 
entered  into  after  the  execution  of  the  mortgage.^ 

The  situation  is  not  affected  by  the  mere  fact  that  the  contract 
was  originally  made  by  other  parties,  and  assigned  by  them  to  the 
company  .2 

This  principle,  however,  will  not  be  applied  in  favor  of  the 
mortgagee  and  against  an  adverse  claim  for  a  lien  on  the  prop- 
erty, unless  the  title  is  completed  before  the  second  lien  has 
attached.^ 

§  215.  Leasehold  Interests,  when  covered.  —  A  leasehold  inter- 
est in  real  property  will  pass,  provided  the  words  of  the  mortgage 
comprehend  it,  either  expressly  or  by  reasonable  implication,  and 
the  contract  by  which  it  vests  in  the  company  was  entered  into 
with  the  purpose  of  forwarding  its  business  as  an  agency  of 
transportation.^ 

So  also  a  mortgage  purporting  to  convey,  among  other  prop- 
erty, "  all  the  corporate  rights,  privileges,  franchises,  and  immu- 
nities, and  all  things  in  action,  contracts,  claims,  and  demands," 
of  the  mortgagor,  whether  now  owned  or  hereafter  acquired," 
will  cover  a  lease  of  a  belt  railroad  necessary  to  afford  the  mort- 
gagor proper  terminal  facilities.^ 

A  railroad  company  had  executed  a  mortgage  upon  its  line  of 
railroad, "  with  the  appurtenances  now  completed,  or  to  be  hereafter 


12  Am.  &  Eng.  R.  R.  Cas.  375,  where  the  New  Jersey  Southern   R.    Co.  (1877),  28 

president  and  treasurer  had  purchased  the  N.  J.  Eq.   277;    s.  c.  29  N.   J.   Eq.    311 

lands  with  the  funds  of  the  company,  and  (1878),    and    Botsford    v.    New    Haven, 

taken  the  title  in  their  own  names.  Middletown,  &  Willimantic  R.  Co.  (1874), 

1  Hamlin  v.  European  &  North  Ameri-  41  Conn.  454,  where  the  mortgage  was 
can  Ry.  Co.  (1881),  72  Me.  83;  s.  c.  4  postponed  on  the  ground  that  the  second 
Am.  &  En<T.  R.  R.  Cas.  503.  The  court  lien  had  attached  when  the  full  equitable 
attached  some  importance  to  the  fact  that  title  rested  in  the  mortgagor. 

the  right  of  the  contractee  in  such  a  case  *  Barnard  v.  Norwich  &  Worcester  R. 

had  a  lerjal  e-xistence,  and  was  subject  to  Co.    (1876),    14    N.    B.    R.   469;    s.  c.  4 

levy.    But  this  circumstance  was  not  alone  Cliff.    348.     In   this   case  "leases"   were 

relied  upon,  and  in  any  case  it  is  plainly  specifically  mentioned,  but  the  court  (per 

immaterial  in  considering  the  effect  of  the  Clifford,  J.)  rested  its  decision  also  on  the 

after-acquired  clause.     The  whole  founda-  ground  that  a  lease  was  covered  by  a  mort- 

tion  of  the  mortgagee's  rights  under  that  gage  of  "all  the  estate,  real,  personal,  and 

clause  is  of  an  equitable  nature,  and  its  mixed,"  of  any  of  the  descriptions  named, 

effectisnecessarily  determined  on  equitable  In  Beekman  v.  Hudson  River  West  Shore 

princijilcs,  and  acconling  to  those  the  con-  Ry.  Co.  (1888),  35  Fed.  Rep.  3,  the  lease 

tractee  is  the  owner  of  the  land.  was  assimied  to  be  valid,   the  only  argu- 

2  Farmers'  Loan  &  Trust  Co.  v.  Fisher  ment  being  as  to  whether  the  transfer  was 
(1862),  17  Wis.  114.  valid. 

"  Toledo,  D.  &  B.  R.  Co.  v.  Hamilton  ^  Columbia  Finance   &   Trust   Co.    v. 

(1890),  134  U.  S.  290  ;  .s.  r.  10  Sup.  Ct.  Kentucky  Union  Ry.  Co.  (1894),  60  Fed. 

Kep.  .046,  commenting   on  Williamson  v.  Rep.  794. 


§  215.]  WHAT   THE   MORTGAGE   COVERS.  237 

constructed,  together  with  all  the  lands,  tenements,  heredita- 
ments, fixtures,  buildings,  cars,  engines,  tools,  and  machinery, 
franchises,  privileges,  interest,  and  estate  of  the  first  party  apper- 
taining thereto,  which  the  i)arty  of  the  first  part  now  possesses 
or  owns,  or  may  hereafter  acquire,"  in  trust  to  secure  an  issue  of 
bonds.  Subsequently  the  mortgagor  leased  its  road  and  property 
for  ninety-nine  years  to  another  company.  By  the  terms  of  the 
lease  the  lessee  company  covenanted  in  a  certain  event  to  ad- 
vance money  to  pay  accruing  coupons  for  interest  on  the  bonds  of 
the  lessor  when  due.  This  lease  was,  in  a  State  court,  cancelled 
in  an  action  brought  by  stockholders  of  the  lessee  company. 
Upon  default  in  payment  of  the  interest  coupons  of  the  bonds 
the  trustees  of  the  bondholders,  before  a  federal  court,  in  an  action 
for  foreclosure  of  their  mortgage,  sought  to  have  their  decree 
cover  this  lease,  and  have  the  covenants  of  the  lease  as  to  the 
lessee's  making  advances  to  pay  interest  on  their  bonds  enforced 
against  the  lessee  company,  contending  that  their  mortgage 
covered  the  rights  of  the  mortgagor  company  against  the  lessee 
under  the  lease.  The  holding  of  the  court  was  adverse  to  this 
contention,  and  the  trustees  were  allowed  a  decree  of  foreclosure 
against  the  property  of  the  lessor  company  only.^ 

1  Moran  v,  Pittsburg,   C.  &  St.  L.  Ry.  the  lease   and   quit,"  citing  many  cases. 

Co.  et  al.  (1887),  32  Fed.  Kep.  878.     The  Further  on  it  was  said:    "The   lease  in 

court  said  :  "  That  said  lease  having  been  question  does  not  come  within  the  descrip- 

executed  siobsequent  to  the  mortgage,  no  tion  of  the  property,  rights,  or  franchise 

privily  of  estate  or  contract   was   thereby  covered  by  the  mortgage,  nor  is  it  in  anj' 

created  between  the  mortgagee  and  lessee,  sense  '  after-acquired  property  '  within  the 

It  is  the  well-settled  rule  in  this  country  meaning  of  these  terms  as  used  in  said 

and   in    England    that,    inasmuch   as   no  mortgage.     Even  if  the  income,  rents,  and 

reversion   vests   in   the   mortgagee   under  profits  of  the  road  had  been  covered  by 

such  circumstances,  he  cannot  distrain  or  tlie  mortgage,   the   personal    covenant   of 

bring  an  action,  either  at  law  or  in  equity,  the  lessee  to   make    'advances,'    as   pro- 

for  the  rents  payable  by  the  tenant,  nor  is  vided  in  the  lease,  could  not  be  treated  as 

he  entitled  to  enforce  the  covenants  and  'income'    of  the  road,  or  as  part  of  the 

provisions  of  the  lease.     He  has  no  elec-  '  purchase '  of  the  mortgage.     The  subject 

tion,  either  before  or  after  the  mortgagor's  of  '  after-acquired  propeity,'  under  mort- 

default,  to  adopt  and  demand  the  benefits  gages  containing   similar   provisions   and 

of  the  lease  without  the  consent  of  the  clauses   as  the   present,    has    often   been 

lessee.     His  remedy  is  to  foreclose  upon  before  the  Supreme  Court,  but  no  case  yet 

default  of  the  mortgagor,  or  to  take  pos-  decided  has  gone  to  the  extent  of  holding 

session  of  the  premises  and  thereby  place  that  personal  contracts  or  covenants  en- 

himself  in  position  to  obtain  the  future  tered  into  with  the  mortgagor,  and  under 

profits.     Either  step  operates  as  an  evic-  which  no  new  estate  is  acquired  by  the 

tion. of   the  tenant   by   title  paramount,  mortgagor,    come    within   these   terms;" 

and   leaves   him   at   liberty  to   terminate  citing  cases. 


238  railway  bonds  and  mortgages  [chap.  x. 

Article  YI.  —  What  is  a   Sufficient  Description  to  pass 
After-acquired  Personalty. 

§  216.  General  Principles.  —  The  rule  that  a  Specific  descrip- 
tion of  the  property  intended  to  be  conveyed  is  necessary,  unless 
it  is  acquired  for  railroad  purposes,  is  equally  applicable  to 
personalty.  As  to  certain  kinds  of  personalty  there  is  no  dif- 
ficulty in  pronouncing  that  they  do  or  do  not  belong  to  the  class 
which  calls  for  such  a  description.  But  some  articles  lie  near 
the  border  line,  and  a  thoroughly  consistent  rule  cannot  be  ex- 
tracted from  the  authorities,  while  the  uncertainty  inherent  in  the 
subject  is  increased  both  by  the  varying  phraseology  employed  in 
the  mortgages,  and  by  the  fact  that  some  courts  have  deemed  it 
necessary  to  consider  not  merely  the  nature  of  the  article  and  the 
purposes  of  its  acquisition,  but  also  whether,  supposing  it  to  have 
been  acquired  for  railroad  purposes,  the  application  to  such  pur- 
poses has  actually  begun  or  not.  The  doctrine  of  these  courts  is 
that,  unless  the  property  is  already  in  use  upon  the  road,  it  is  not 
protected  by  the  mortgage. 

§  217.  Materials  for  the  Track  and  for  the  Operation  of  the  Road 
generally.  —  The  uncertainty  arising  from  the  cause  just  referred 
to  is  well  exemplified  in  the  case  of  personalty,  about  which  it 
would  prima  facie  have  been  supposed  that  there  could  have  been 
no  doubt  whatever,  provided  the  mortgage  contained  any  term 
covering  personalty  as  a  whole.  If  the  destination  of  the  arti- 
cles is  the  true  criterion,  there  seems  to  be  no  valid  reason  for 
excluding  from  the  protection  of  the  lien  chattels  acquired  with  a 
view  of  constructing  or  repairing  the  track,  replacing  the  worn- 
out  parts  of  rolling-stock,  and  supplying  the  locomotives  and  ma- 
chine-shops with  fuel.  The  preponderance  of  authority  is  in  favor 
of  the  doctrine  that  such  personalty  is  covered  as  soon  as  the 
company  becomes  its  owner,  and  without  regard  to  the  fact  that, 
at  the  time  when  an  adverse  claim  to  it  is  asserted,  it  has  not 
been  put  into  actual  use.  In  fact  no  other  rule  could  be  enforced, 
consistently  with  the  continued  operation  of  the  road ;  for  if  the 
lien  were  not  effectual  to  this  extent,  the  general  creditors  might, 
])}'  constantly  intercepting  the  necessary  supplies,  soon  reduce  the 
i-ailio;id  to  a  helpless  condition.  Accordingly  it  has  been  held 
tiiat  cars,  wheels,  firewood  obtained  for  the  use  of  the  engines, 
nnd  coal  for  the  use  of  the  machine-shop  are  covered,  on  the 
broad  ground  that  they  are  things  incident  and  indispensable  to 
the  use  and  enjoyment  of  the  thing  conveyed.^ 

1  riiillips  V.  Winslow  (1857),  18  B.  Monr.  (Ky.)  431. 


§  217.]  WHAT   THE   MORTGAGE   COVERS.  239 

So  also  a  clause  covering  personal  property  "  now  owned  or 
hereafter  to  be  acquired  "  embraces  old  or  new  rails  along  the 
track  in  readiness  for  repairs. ^ 

So  also  rails,  fish-plates,  and  bolts,  purchased  by  the  company 
for  the  use  of  its  road,  but  not  yet  actually  used,  and  stacked  on 
land  not  witliin  the  right  of  way,  are  covered  by  a  mortgage  which 
includes  all  real  and  personal  property  of  every  kind  and  descrip- 
tion "  used  or  intended  to  be  used  in  connection  with  or  for  the 
purpose  of  the  railroad."  ^ 

A  fortiori  will  the  same  rule  prevail  as  between  the  bondholders 
and  the  company .^ 

In  an  early  Wisconsin  case,*  on  the  other  hand,  it  was  held  that 
certain  railroad  chairs,  never  used  in  the  construction  of  the  track, 
were  not  covered  by  the  conveyance  of  a  "  railroad,  with  all  the 
superstructure,  track,  and  all  other  appurtenances,  made  or  to  be 
made,  also  all  and  singular  the  furniture,  including  the  engines, 
etc.,  materials,  machinery,  and  every  other  kind  of  personal  prop- 
erty which  shall  be  used  in  operating  said  railroad.^''  The  ruling 
was  based  upon  the  ground  that  the  rails,  under  these  circum- 
stances, could  not  be  brought  under  the  description  of  "  appurte- 
nances," nor  could  they  be  said  to  be  "  used  in  operating  the 
road." 

This  decision  is  certainly  opposed  to  the  earlier  and  later 
authorities  cited  above.  The  consideration  that  the  rule  stated 
in  this  last  case  would,  if  accepted,  place  the  company  in  the  po- 
sition of  carrying  on  its  business  by  the  mere  sufferance  of  its 
general  creditors,  is  an  unanswerable  objection  to  it  if  the  inter- 
ests of  the  community  are  to  be  taken  into  account.  "  If,"  as  was 
pertinently  observed  by  Mr.  Justice  Agnew,  in  a  case  decided  in 
the  Pennsylvania  Court  of  Common  Pleas,  "  besides  the  rails  and 
their  supporting  chairs  actually  embedded  in  the  track,  the  com- 
pany may  not  maintain  deposits  of  others,  at  convenient  inter- 
vals, for  immediate  repair,  and,  if  because  they  thus  lie  in  piles, 
they  may  be  seized  all  along  the  route  by  successive  writs,  the 
usefulness  of  the  railway  as  a  public  work  must  cease.     If  it  may 

*  Covey  V.  Pittsburg,   Fort  Wayne,  &  ever,"  acquired  or  furnished  for  the  use  of 

Chicago  R.  Co.  (1858),  3  Phil.  173.  said  raih'oad.    See  Hunt  v.  Bay  State  Iron 

2  Farmers'   Loan   &  Trust  Co.    v.  San  Co.,  97  Mass.  279,  as  to  rails  attached  to 

Diego  Car  Co.  (1891),  45  Fed.  Rep.  518.  realty  remaining  chattels  of  vendor,   by 

^  Weetjen  v.   St.   Paul  &  Pac.  R.  Co.  agreement   between   vendors  and  railway 

(1875),  4  Hun,  529.     Here  the  property,  company. 

iron  rails,  was  held  to  be  covered  by  a  *  Farmers'  Loan  &  Trust  Co.  v.  Corn- 
mortgage  covering  "any  and  all  rolling-  mercial  Bank  of  Racine  (1860),  11  Wis. 
stock,  equipment,  and  materials  whatso-  207;  s.  c.  15  Wis.  424  (1862). 


240  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  X. 

be  dismantled  by  attacking  it  in  detail  and  seizing  those  things 
most  easily  removed,  though  essential  to  its  preservation,  it  would 
be  but  a  step  to  the  end ;  when  stripped  of  all  but  its  road-bed 
and  fixtures,  it  would  be  powerless  to  serve  the  public  or  benefit 
itself."  1 

On  the  other  hand  it  would  be  a  very  strained  construction  of 
the  words  of  such  a  mortgage  to  assume  that  the  intention  of  the 
parties  is  merely  to  protect  the  articles  while  in  actual  use.  Such 
a  construction,  in  fact,  would  give  the  after-acquired  clauses  no 
greater  protective  effect  than  that  of  the  common-law  rule  which 
declares  that  personalty  is  not  liable  to  seizure  while  it  is  being 
actually  applied  to  the  discharge  of  the  duties  connected  with 
that  franchise.  This  can  scarcely  be  the  meaning  of  the  words, 
interpreted,  as  they  should  be,  not  according  to  narrow  techni- 
cal rules,  but  with  a  constant  reference  to  the  interests  of  the 
public. 

Apart  from  these  objections  there  is  high  authority  for  the  doc- 
trine that  the  articles  denied  by  the  Wisconsin  court  to  be  subject 
to  the  mortgage  in  question  are  a  part  of  the  realty  and  pass  as 
fixtures,  independently  of  whether  the  description  is  worded  so 
as  to  include  them  or  not.^ 

§  218.  Rolling-stock,  when  covered.  —  RoUing-stock  will  pass 
under  a  mortgage  of  "  all  the  present  and  future  to  be  acquired 
property  of  the  company,  including  the  right  of  way  and  land 
occupied,  and  all  rails  and  other  materials  used  thereon  or  pro- 
cured therefor,"  —  the  reason  assigned  being  that  the  specific 
pledge  of  a  thing  carries  other  things  without  which  it  would  be 
of  no  use.'^ 

On  the  analogous  principle  that,  when  a  thing  is  granted,  all 
the  means  to  attain  it,  and  all  the  fruits  and  effects  of  it,  are 
irranted,  a  morttraire  of  the  entire  line  of  the  railroad,  with  all  the 
tolls  and  revenues,  covers  not  only  the  line  of  the  road,  but  all 
the  rolling-stock  and  fixtures,  whether  movable  or  immovable, 
essential  to  the  production  of  tolls  and  revenue.^ 

A  like  effect  has  been  given  to  a  mortgage  of  "  all  the  road, 
property,  rights,  liberties,  privileges,  corporate  franchises,  incomes, 
tolls,  and  receipts,  then  held  or  thereafter  to  be  acquired,"  as  far 

1  Covey  »'.  Pittshurg,  Fort  Wayne,  &  stock  is  now  usually  acquired  through 
Chicaf»o  R.  Co.  (18.")8),  3  Phil.  173.  what  are  known    as   car-tiust   contracts. 

2  Palmer  v.  Forbes  (1800),  23  111.  301.  These  are  discussed  in  another  part  of  the 
Sec  §§  227  et  acq.,  post.  work  (Cliap.  XIV.). 

8  PuUan   I'.  Cincinnati  &  Chicaf,'o  Air  *  State  r.   Northern   Central  Ry.   Co. 

Line  It.  Co.  (18C5),  4  Bias.  35.     Rolling-     (1861),  18  Md.  193. 


I  218.]  WHAT    THE    MORTGAGE    COVERS.  211 

as  regards  rolling-stock  in  actual  use  and  required  for  the  trans- 
action of  its  business.^ 

It  seems,  however,  that  some  word  signifying  an  intent  to  pass 
the  personal  property  of  the  company  is  necessary  to  constitute  a 
description  sufficient  to  cover  rolling-stock,  unless,  of  course,  where 
the  doctrine  obtains  that  it  is  a  lixturc.  Thus  a  mortgage  of  the 
"  road  and  its  franchises"  will  not  be  construed  as  embracing  the 
rolling-stock,  or  any  of  the  furniture  or  equipment  of  the  road 
which  is  not  so  connected  with  the  realty  as  to  partake  of  its 
character.^ 

Where  a  railroad  consists  of  two  or  more  divisions,  and  a  mort- 
gage is  given  at  different  times  on  each  division,  and  then  upon 
the  whole  line,  each  mortgage  being  worded  so  as  to  cover  ''  all 
and  singular  the  locomotive  engines  and  other  rolling-stock,  and 
all  other  equipments  of  every  kind  and  description  which  have 
already  been  or  may  hereafter  be  procured  for  or  used  on  said 
road,"  and  expressly  made  subject  to  prior  mortgages  of  the  road, 
and  the  rolling-stock  is  purchased  with  the  general  funds  of  the 
company,  and  used  upon  the  whole  line  without  any  apportion- 
ment between  the  several  divisions,  the  mortgages  will,  as  regards 
the  entire  rolling-stock,  take  rank  according  to  their  dates,  and 
the  earliest  divisional  mortgage  will  have  a  priority  over  the 
other  divisional  mortgages  as  well  as  over  the  mortgage  of  the 
entire  line.  This  inference  in  regard  to  the  rolling-stock  will, 
however,  be  rebutted  by  words  which  show  the  intention  of  the 
parties  to  make  the  several  mortgages  distinct  as  to  everything 
else  conveyed  by  them.^ 

Where  a  mortgage  of  a  division  contains  a  covenant  to  desig- 
nate in  a  certain  mode,  as  belonging  to  that  division,  such  a  pro- 
portion of  the  whole  rolling-stock  owned  by  the  mortgagor,  as 
that  division  bears  to  the  entire  railway,  only  such  rolling-stock 
as  is  thereafter  designated  is  covered,  although  it  is  less  in  amount 
than  the  amount  which  by  the  covenant  is  to  be  so  designated.* 

A  chattel  mortgage  covering  the  property  of  a  street-railway 
company,  including  its  after-acquired  property,  has  been  held 
not  to  cover   rolling-stock    and  other    equipments  purchased    by 

1  Philadelphia,  Wilm.  &  Bait.  R.  Co.  In  the  opinion  of  Mr.  Justice  Jliller  in 
V.  Woclpper  (1870).  64  Pa.  St.  366.  MniTiesota  Co.   v.  St.  Paul  Co.,  supra,  he 

-  Miller  v.  Ruthuul  &  Washington  R.  refers   to   the   competencj^   of    a   railroad 

Co.  (I860),  36  Vt.  452.  company  to  designate  and  assign  a  pertain 

2  Minnesota  Co.  v.  St.  Paul  Co.  (1864),  jiortion  of  its  rolling-stock  to  one  division 
2  Wall.  609.  of  its  road  and  another  portion  to  another 

*   United  States  Trust  Co.  v.  Wabash     as  a  conceded  matter. 
W.   Ry.   Co.  (1889),   38  Fed.  Rep.   891. 

16 


242 


RAILWAY   BONDS   AND   MORTGAGES. 


[chap. 


a  company  which  had  before  purchased  the  franchises  and  prop- 
erty of  the  mortgagor  company,  to  be  used  in  conducting  the 
business  over  the  whole  line  of  road.^ 

§  219.  Office  Furniture,  when  covered. —  Office  furniture,  suitable 
in  kind  and  of  a  necessary  amount,  provided  for  the  use  of  the 
employees  in  the  performance  of  their  daily  duties,  as  well  as  for 
the  directors  to  transact  their  business,  are  covered  by  a  general 
"after-acquired  property"  clause.^ 

§220.  Fuel,  when  covered.  —  In  City  of  Bath  v.  Miller  3  the 
court  declined  to  express  an  opinion  as  to  whether  the  "  after- 
acquired  property "  clause  embraced  wood  used  for  fuel ;  but, 
under  the  given  circumstances  it  was  held  to  be  attachable. 

§  221.  Personalty  not  used  for  Railroad  Purposes.  — The  Converse 
of  the  rule  illustrated  by  the  preceding  sections  has  often  been 
applied.  Thus  the  general  clause  as  to  after-acquired  personal 
property  will  not  cover  canal-boats,  purchased  with  the  funds  of 
the  corporation,  and  used  in  connection  with  the  railroad,  but 
beyond  its  terminus;^  and  still  less  will  it  embrace  property 
bought  of  an  opposition  steamship  line,  not  with  a  view  of  employ- 
ing it  in  connection  with  the  business  of  the  road,  but  in  order 
to  put  a  stop  to  its  competition.^ 


i  Hinclimaii  v.  Poiut  Defiance  Jly.  Co. 
et  id.  (Bo\le  et  al..  Interveners)  (Wash., 
1896),  44  Pao.  Rep.  867. 

2  Ludlow  V.  Hurd  (1857),  1  Dis.  552. 
Compare  Buck  v.  Seymour  (1878),  46 
Conn.  156.  It  will  be  shown  hereafter 
that  such  property  is  not  covered  as  a 
fixture. 

8  .ol  Me.  341  (1863)  ;  S.  C  53  Me.  308 
(186'i).  The  niortgucces  to  be  construed 
were  executed  in  pursuance  of  a  statute 
authorizing  the  company  to  execute  to  the 
Treasurer  of  the  City  of  Bath  a  nioitgage 
of  a  certain  extension  of  their  railroad, 
.  .  .  and  of  all  the  property  of  said  exten- 
sion, wliich  they  then  had  or  might  subse- 
quently acquire,  "the  said  mortgage  to 
be  made  "  so  as  to  embrace  not  only  the 
Raid  extension,  but  also  the  oriffinal  rortd 


belonged  to  and  was  "the  property  of  the 
whole  of  said  railroad."' 

The  "  after-acquired  "  clause,  therefore, 
could  have  no  application,  since  it  was 
only  in  reference  to  the  "  extension  "  that 
this  term  was  employed. 

That  fuel  will  not  pass  under  the  mort- 
gage as  a.  fixture,  see  §  220,  jwst. 

For  a  case  holding  that  a  mortgage  of 
the  "franchises"  of  a  railroad  comi>any 
will  cover  "  fuel,"  see  Dunham  v.  Earl  et 
al.  (1859),  8  Fed.  Cas.  41,  Case  No.  4149. 

4  Piirish  V.  Wheeler  (1860),  22  N.  Y. 
494.  This  case  turned  jiartly  on  the 
meaning  of  the  word  "appurtenances" 
(see  §§  231,  232).  With  this  case  may  be 
contrasted  Williamson  v.  New  Jersey 
.Southern  R.  Co.  (1874),  25  N.  J.  Eq.  13, 
where  a  mortgage  covering  after-acquired 


of  S'lid  company,  and  all  the  proi)erty  of     personalty    in  general  terms,  and  speciii- 
said   road.       Tiie  court  pointed  out  that     cally  enumerating  as  a  part  of  such  per- 


this  statute  treated  the  "extension"  and 
the  "original  road"  as  separate  .ind  dis- 
tinct corporations,  and  that  the  wood  in 
controversy,  not  having  been  bought  with 
the  special  funds  of  citlier  portion,  did  not 
T)cliing  to  either.  Being  lionght  witli  the 
funds  of  tlie  "whole  of  .said  railroad,"  it 


sonalty  "steamboats,"  etc.,  to  be  used  in 
connection  with  the  business  of  the  road, 
was  allowed  to  take  effect. 

6  Morgan  &  Raynorr.  Donovan  (1877), 
58  Ala.  241  ;  s.  c.  21  Am.  Ry.  Rep.  109. 
In  this  case  tliere  was  also  a  lack  ot 
authority  to  make  the  purchase. 


§  222.]  WHAT   THE   MORTGAGE   COVERS.  243 

Nor  docs  a  mortgage  on  all  other  "  personal  property  belonging 
to  said  company  as  the  same  is  now  in  use  by  said  comjjany,  or 
as  the  same  may  be  hereafter  changed  or  renewed  by  said  com- 
pany," embrace  certain  machinery  for  burnetizing  ties  and  timber 
to  render  them  more  durable,  the  machinery  not  having  been  in 
existence  at  the  time  of  the  execution  of  the  mortgage,  nor  sub- 
stituted for  anything  that  was  therein  specified,  but  merely  con- 
structed by  the  railroad  company  as  a  mere  experiment.^ 

§  222.  Choses  in  Action  and  Stock,  when  covered.  —  Choses  in 
action  are  not,  as  a  general  rule,  covered.  Thus  the  phrase  "  char- 
tered rights,  privileges,  and  franchises"  does  not  embrace  the 
unpaid  balance  of  a  subscription  to  the  stock  of  the  company .^ 
Nor  will  a  mortgage  in  the  usual  form,  covering  personalty,  carry 
the  interest  of  the  mortgagor  in  a  contract  with  the  United 
States  government  for  carrying  the  mails ;  ^  nor  municipal  sub- 
scriptions to  aid  in  the  construction  of  the  road  ;^  nor  an  appro- 
priation by  a  county  for  that  purpose,  at  least  until  the  claim  of 
the  company  is  capable  of  being  enforced  against  the  county;^ 
nor  notes  given  by  a  real -estate  company  with  a  mortgage  upon 
the  property,  as  security  to  the  company,  in  consideration  of  its 
agreement  to  extend  its  line  through  or  to  the  mortgagor's 
property.^ 

A  deed  of  trust  made  by  a  coal  and  railway  company  embrac- 
ing all  the  "  personal  property  of  every  kind  now  owned,  or  here- 
after to  be  acquired  and  owned  and  used,  whether  by  purchase  or 
otherwise,  in  connection  with,  and  for  use  in  developing  and  oper- 
ating, its  said  coal  mines  or  other  works  of  improvement  now  on 
or  hereafter  to  be  opened  upon  said  lands  or  any  part  thereof," 
was  construed  by  the  Alabama  Supreme  Court.  The  court 
said  :  "  This  clause  manifestly  refers  not  to  the  product  or  income 
from  said  mines,  but  to  chattels  used  in  carrying  on  the  mining 
operations,  and  in  operating  in  connection  therewith  the  railway 
covered  by  the  instruments,  such  as  engines,  cars,  live-stock,  min- 
ing implements,  and  the  like."  " 

1  15rainerd  v.  Peck  (1861),  34  Vt.  496.  *  Morgan    County  v.   Thomns   (1875), 

2  Dean  v.  Biggs  (1881),  25  Hun,  122.  76  111.  120  ;  Smith  v.  McCullough  (1881), 
Compare  Morris  v.  Cheney  (1869),  51  111.     104  U.  S.  25. 

451.  5  Board     of    Commrs.    v.    The    State 

»  St.  Paul  &  Duluth  R.  Co.   v.   United  (1888),  115  Ind.  64. 

States  (1885),    112  U.   S.    733  ;    s.   c.   5  ^  Farmers'  Loan   &  Trust  Co.   v.   Sau 

Sup.  Ct.  Rep.  366.     In  Farmers'  Loan  &  Diego  Street  Car  Co.  (1891),  45  Fed.  Rep. 

Trust  Co.  V.  Gary  (1860),  13  Wis.  110,  a  518. 

like  ruling  was  made  on  the  gi-onnd  that  ''  AlalDama   Nat.    Bank   v.   Mary    Lee 

there   were   no   apt    terms   to   cover    the  Coal  &  Railway  Co.  (Ala.,  1896),   19  So. 

income.  Rep.  404,   in  which  a  bill    was   filed   by 


244  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  X. 

The  capital  stock  of  another  company,  acquired  by  lawful 
authority  with  a  view  to  consolidation  with  that  company,  is 
covered  by  a  mortgage  embracing  after-acquired  personalty.^ 

§  223.  Permanent  and  Temporary  Disuse,  Effect  of.  —  After  the 
lien  has  once  attached,  it  is  not  displaced  by  the  permanent  dis- 
use of  the  mortgaged  articles.  Thus  personalty  cast  off  because 
worn  out,  and  fragments  and  old  materials,  have  been  held  to 
continue  under  the  mortgage,  if  a  proper  and  judicious  manage- 
ment of  the  road  requires  that  they  shall  be  recast  or  exchanged 
for  new  articles  for  the  use  of  the  road.^ 

The  limitation  here  implied  is  perhaps  unnecessary.  At  all 
events,  it  has  been  held  in  another  State  that  where  the  mortgage 
expressly  covered  "  rails,"  the  mortgagees  had  a  right  to  insist 
that  the  money  received  from  the  sale  of  old  rails  shall  be  ap- 
plied to  keep  down  the  interest  on  the  bonds,^  —  a  ruling  which 
seems  to  assume  the  existence  of  a  general  principle,  that  the 
lien  attaches  to  anything  which  may  take  the  place  of  the  article 
mortgaged,  whether  the  substituted  article  be  another  manufac- 
tured from  the  old  materials,  or  another  of  the  same  kind  pur- 
chased with  the  proceeds,  or  the  proceeds  themselves.  Nor, 
indeed,  does  there  seem  to  be  any  valid  reason  why  the  doctrine 
should  not  be  carried  further,  so  as  to  give  the  mortgagees  a 
prior  claim  to  property  acquired  with  the  proceeds,  although  that 
property  is  not  of  a  kind  which  would  be  covered  by  an  ordinary 
after-acquired  clause,  apart  from  such  a  consideration.  Such  an 
extension  of  the  doctrine  would  obviously  be  quite  in  harmony 
with  the  equitable  rule  which  denies  the  possibility  of  divesting 
an  equitable  lien  by  any  change  in  the  form  of  the  property,  so 
long  as  the  rights  of  bona  fide  purchasers  without  notice  have 
not  intervened. 


genpral   creditors   to  withdraw   from    the  ^  Williamson  v.  New  Jersey  Southern 

possessioTi   of  the   receiver  in  foreclosure  K.  Co.  (1875),  26  N.  J.  Eq.  398. 

proceedings  certain  coal    which  had  been  ^  Cooper  v.  Wolf  (lS6i),  15  Ohio  St. 

mined,  certain    coke  and   pig-iron  which  523.     In  this  case  the  subject-matter  of 

had   been   manufactured  aiul    was  in  the  the  lien   was   the    "  engines,   cars,    tools, 

possession  of  the  company  before  the  re-  materials,    machinery,  contracts,    and   all 

ceivership,  as  well  as  certain  bills  receiv-  other  personal  projierty,  right,  or  interest 

able  which  the  company  had  representing  therein."     Two  judges  dissented  from  the 

the  proceeds  of  sales  of  such  manufactured  decision   on  the  special  ground   that  the 

articles,  or  to  have  them  administered  for  mortgagor  had  reserved  a  right  to  control 

the   benefit  of  the   general  creditors,  the  the  pro])erly  in  question,  and  that  it  was 

receiver   having,    when   a])pointed,   taken  therefore  liable  to  execution, 

possession  of  them  for  the  benefit  of  the  ^  First   National   Bank   of    Salem    17. 

bondholder.,.  Anderson  (1881),   75  Va.   250;    s.  0.  12 

Am.  &  En'.  V..  R.  Cas.  411. 


§§  224,  225.]  WHAT   THE   MORTGAGE    COVERS.  245 

The  mortgage  also  continues  in  effect  although  the  articles 
temporarily  cease  to  form  a  part  of  the  property  employed  in  the 
operation  of  the  road.^ 

§  224.  Alterations  in  the  Subject-matter  of  the  Pledge.  —  If  an 
essential  alteration  is  made  in  one  part  of  the  equipment  of  a 
railroad,  the  necessary  alterations  in  the  rest  of  the  C(juipment 
may  be  made  for  the  purpose  of  adapting  it  to  the  new  conditions, 
without  divesting  the  lien.^ 

A  fortiori  must  the  lien  continue  where  the  changes  simply 
create  a  difficulty  in  identifying  the  property.  Thus,  where 
rolling-stock  is  purchased  for  a  certain  division  of  the  road,  and 
designated  accordingly,  the  subsequent  obliteration  of  the  desig- 
nation will  not  deprive  the  bondholders  of  their  security,  if  the 
property  be  otherwise  traceable.^ 

§  225.  Property  bought  to  replace  that  worn  out,  embraced  by 
the  Mortgage. —  The  terms  of  an  ordinary  after-acquired  clause 
necessarily  embrace  articles  such  as  cars  bought  to  replace  those 
worn  out,  not  on  the  ground  of  the  substitution,  but  on  the 
ground  that  the  new  articles  are  themselves  in  the  category  of 
those  which  it  is  the  intention  to  cover.* 

The  effect  of  a  clause  which  would  ordinarily  receive  this  con- 
struction is  not  limited  by  the  fact  that  a  special  reference  is  also 
made  to  cars  which  may  afterwards  be  acquired  with  the  proceeds 
of  the  bonds  issued  on  the  security  of  the  mortgage.  This  addi- 
tion will  be  deemed  to  have  been  inserted  merely  to  obviate 
any  possible  doubt  as  to  whether  such  cars  are  intended  to  be 
covered.^ 

The  same  result  must,  of  course,  follow  if  the  articles  are  held 
to  be  subject  to  the  lien  on  the  ground  that  they  are  fixtures.^ 

In  Tennessee  the  courts  have  gone  still  further,  and  held,  in 
the  case  of  a  lien  declared  in  favor  of  the  State,  that  it  extends 
to  property  acquired  to  replace  that  worn  out,  although  the 
articles  are  not  fixtures,  and  there  is  no  specific  reference  to 
subsequent  acquisitions.^ 

1  Hamlin  v.  Jerrard  (1881),  72  Me.  62  ;  *  Shaw  v.  Bill  (1877),  95  U.  S.  10. 
s.  c.  4  Am.  &  Eng.  R.  R.  Ca.s.  62.     Here  5  ibij. 

rolling-stock  was  laid  up  pending  a  change  ^  Palmer  v.  Forbes  (1860),  2-3  111.  301. 

in  the  irauge.  7  McGraw  v.  Mempiiis  &  Ohio  R.  Co. 

2  Hamlin  r.  Jerrard  (1881),  72  Me.  62;  (1868),  5  Coldw.  (Tenn.)  434.  Some 
4  Am.  &  Enjj.  R.  R.  Ca.s.  62.  Here  the  comments  have  been  made  above  on  this 
cars  wei-e  altered  to  suit  a  change  of  decision  (§  208).  It  seems  to  be  only 
gauge.  sustainable    on    the    principle    that    the 

3  United  States  Trust  Co.  v.  Wabash  State,  and  not  a  private  part}',  was  the 
W.  R.  Co.  (1889),  33  Fed.  Rep.  891.  mortgagee. 


246  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  X. 

Replacements  of  rolling-stock  while  the  road  is  in  the  hands  of 
the  receiver  become,  in  like  manner,  a  part  of  the  mortgaged 
property,  and  pass  to  the  purchaser  at  the  foreclosure  sale.^ 

§  226.  Income,  Revenues,  etc.  —  Income,  if  Specifically  men- 
tioned, as  where  "  tolls,  income,"  etc.,  are  referred  to  among  the 
various  kinds  of  property  intended  to  be  embraced,  will,  of  course, 
be  subject  to  the  lien.^ 

In  such  a  case  the  agreement  of  the  parties  is  that,  as  soon  as 
the  income  is  received,  it  shall  be  held  in  equity  for  the  fulfil- 
ment of  the  obligation  of  the  mortgagor,  and  persons  who,  with 
notice  of  the  contract,  take  possession  of  the  road  by  virtue  of  a 
decree  and  sale  have  no  claim  on  the  money .^ 

The  income  pledged  by  such  a  clause  is  understood  to  be  the 
"  net  income  "  remaining  after  payment  of  all  expenses,  including 
the  money  applied  to  the  payment  of  interest,  and  laid  by  to 
form  a  sinking  fund  for  the  eventual  liquidation  of  the  bonds.* 

If  one  railroad  company  mortgages  to  another  the  "  net  earn- 
ings" which  may  accrue  to  it,  by  reason  of  business  "from  and 
over"  the  line  of  the  latter,  the  earnings  include  those  arising 
from  business  carried  on  in  both  directions,  whether  going  or 
coming.^ 

Income  has  also  been  held  to  be  covered  by  the  comprehensive 
term  "  personal  property."^ 

If  the  mortgage  contains  no  reference  to  future  acquisitions  of 
personal  property,  the  earnings  are  not  covered  ;  and  this  rule  has 
been  adhered  to  even  in  the  case  of  a  statutory  mortgage  which 
was  held  to  cover  after-acquired  personal  property,  although  not 
specifically  mentioned,  provided  it  is  such  as  is  to  be  used  for 
railroad  purposes.' 


1  Straiiof  V.  Montgomery  &  Eufaula  R.  to  the  construction  of  the  instrument,  but 

Co.  (1879),  3  Woods,  613.  to    the    priorities    as   between   the   mort- 

'^  Galena   &  Cliicago  Union    E.  Co.  v.  gagees   and   creditors    whose    claim.s    are 

Menzies   (1861),   26    111.    121;    Jesup   v.  based  upon  .some  alleged  superior  equity. 

Bridge  (1861),  11   Iowa,  572.     It  should  (See   Chap.    XXVIII.,   preferred    debts.) 

be  noticed  that  these  cases  were  deci<led  at  See  86  Te.x.   627;  79  Fed.  Rep.  215. 

a  date  when  the  pozoer  to  mortgage  after-  ^  PuUan   v.  Cincinnati  &  Chicago  Air 

acquired  jtroperty  was  still  to  some  extent  Line  R.  Co.  (1873),  5  Biss.  237. 

disputed.     The  discussion  in  the  opinions  ■*  Parkhurst  v.  Northern  Central  R.  Co. 

deals  rather  with  this  aspect   of  the  case  (1863),  19  Md.  472. 

tnan  wliether,  as  a  matter  of  comtni^dion,  <»  Schmidt    o.   Louisville,  etc.   Ry.  Co. 

the    mortgage   covered    the    income.     In  (Ky.,  1894),  25  S.  W.  Rep.  49. 

later  cases  most  of  the  litigation  in  which  ^  Kelly    o.    Trustees    (1877),    58    Ala. 

the  elfect  of  the    mortgage  upon    the  in-  489  ;  s.  0.  21  Am.  Ry.  Rep.  138. 

come    has   been    considered    have    related  ^  McGraw  v.  Memphis  &  Oliio  R.  Co. 

neither  to  the  powers  of  the  company  nor  (1860),  5  Cold.  (Teiui.)  434. 


§§  227,  228.]  WHAT   THE    MORTGAGE   COVERS.  247 

Nor  will  a  mortgage  of  the  "  franchises,  pledges,  and  rights  of 
the  company  in  and  to"  the  road,  etc.,  pass  the  income.^ 

The  trustee's  rights  to  the  earnings  is  independent  of  its  situs, 
and  does  not  require  the  striking  of  a  balance  in  order  to  ascer- 
tain the  net  profits.  Hence,  where  a  mortgage  covering  income 
was  made  on  an  Arkansas  railroad  extending  into  Tennessee,  the 
lien  protects  against  attachment  moneys  derived  from  this  source, 
found  in  Tennessee  in  the  hands  of  the  treasurer  of  the  company .^ 

Article  VII.  —  Necessity  for  a  Specific  Description  qualified 
BY  THE  Doctrine  op  Fixtures. 

§  227.  General  Rule.  —  Thiiigs  -which  are  absolutely  Fixtures.  — 
It  is  common  learning  tliat  a  mortgage  of  real  property  will,  as 
a  general  rule,  carry,  as  a  part  of  the  security,  all  fixtures  belong- 
ing to  the  realty,  without  any  special  mention  of  them  being 
made  in  the  mortgage.  A  railroad  corporation,  therefore,  when  it 
mortgages  its  road,  tracks,  and  franchises,  thereby  mortgages  all 
its  permanent  fixtures,  such  as  the  road  equipments  for  its  con- 
tinued use ;  and  by  such  a  mortgage  all  future  additions  to  it  of 
the  same  permanent  nature,  being  an  incident  to  the  real  estate, 
must  become  subject  to  the  lien  in  the  same  manner  as  improve- 
ments to  the  real  estate  mortgaged  by  individuals.^ 

The  practical  application  of  this  rule  involves  no  difficulty  up 
to  a  certain  point.  There  is  no  controversy  as  to  the  principle 
that  personalty  which  is  worked  up  into  bridges,  depots,  and  other 
structures  become  invested  with  the  character  of  real  property, 
and  will  therefore  pass  under  a  mortgage  of  the  road,  although 
not  referred  to  in  terms,  and  although  erected  after  the  making 
of  the  mortgage.* 

A  mining  ditch  or  flume  is  in  the  nature  of  real  estate,  and  a 
mortgage  thereon  will,  without  any  special  provision,  include  all 
improvements  or  fixtures  then  on  the  line  located  for  the  work,  as 
well  as  those  which  may  thereafter  be  put  thereon.^ 

§  228.  Detached  Personal  Property.  —  Detached  personal  prop- 
erty, on  the  other  hand,  such  as  fuel,  office  furniture,  material 

1  Farmers'  Loan  &  Trust  Co.  v.  Gary  Co.  (Teiin.  Sup.  Ct.,  1877),  4  Cent.  L.  J. 
(1860),  13  Wis.  110,  referring  to  Farmers'     430. 

Loan   &  Trust   Co.   v.  Commercial  Bank  3  Hunt  j;.  Bullock  (1860),  23  111.  320. 

(1860),  11  Wis.  207  ;  Dinsmore  v.  Racine  *  McGraw  v.  Memphis  &  Ohio  R.  Co. 

R.  Co.  (1861),  12  Wis.  649.     See  Alabama  (1868),  5  Coldw.  (Tenn.)  434. 
Nat.    Bank  v.  Mary  lee  Coal  &   Ry.   Co.  5  Union   Water    Co.    v.    Murphy's  Flat 

(Ala.,  1896),  19  So.  Rep.  404.  "  Flaming  Co.  (1863),  22  Cal.  620.  ^ 

2  Buck  V.  Memphis  &  Little  Rock  R. 


248  RAILWAY   BONDS    AND    MORTGAGES.  [CHAP.  X. 

for  lights,  which  are  not  designed,  like  road  equipments,  for  the 
continued  use  of  the  road,  are  held  to  be  chattels  which  can  only 
be  subjected  to  a  mortgage  lien  by  an  instrument  specifically  men- 
tioning them,  and  executed  in  conformity  with  the  laws  relating 
to  chattel  mortgages.^ 

Such  articles  are  merely  intended  for  consumption,  and  may  be 
sold  and  carried  away,  and  used  for  other  purposes,  as  well  as  the 
operation  of  the  road.  Nor  have  they  any  distinguishing  mark 
to  show  that  they  are  designed  for  purely  railroad  purposes.^ 

An  iron  safe  has  been  held  to  be  property  of  this  description, 
on  the  ground  that  it  has  "  none  of  the  distinctive  features  or 
essential  qualities  that  belong  to  real  estate."  ^ 

Whether  rolling-stock  is  a  fixture  is  a  question  upon  which  the 
courts  are  divided.  The  authorities  are  reviewed  in  another 
chapter.     (See  Chapter  XIV.,  on  Car  Trusts.) 

A  planing-mill,  unless  it  is  so  attached  to  the  realty  as  to  in- 
dicate that  it  is  designed  to  be  permanent,  or  its  removal  would 
be  injurious  to  the  freehold,  is  personal  property.* 

Article   VIII.  —  Necessity  for  a  Specific  Description  quali- 
fied BY  the  Doctrine  that  a  Railroad  is  an  Entirety. 

§  229.  The  Doctrine  of  Accession.  —  The  doctrine  of  accession, 
of  which  the  rules  relating  to  fixtures  are  the  most  familiar  iUus- 
tration,  has  been  extended  by  some  courts  to  cover  a  much  wider 
class  of  cases  than  those  referred  to  in  the  preceding  subdivision 
of  this  chapter.  The  theory  that  a  railroad  and  its  franchises 
constitute  an  entire  indivisible  thing,  and  that  for  this  reason 
a  mortgage  of  the  road  will  pass  after-acquired  property,  even 
though  not  specifically  mentioned  or  described  in  the  instrument, 
was  first  propounded  in  Pierce  v.  Emery.^     There  the  trustees 

1  Hunt  V.  Bullock  (1860),  23  111.  320  ;  should  be  consumed  to-morrow,  is,  if  not 
Gre^^g  V.  Sanford  (1860),  24  111.  17  ;  absurd,  a  re(inement  beyond  that  prac- 
Fanners'  Loan  &  Trust  Co.  v.  St.  Jo.  &  tical  common  sense  we  are  capable  of 
Denver  Citv  Rv.  Co.  (187.'i),  3  Dill.  412.  understanding." 

2  Palmer  v.  Forbes  (1860),  23  III.  301.  ^  Titus  v.  Mabee  (1861),  25  111.  257. 
The  intention  to  make  articles  of  this  It  is  presumed,  however,  that  this  ruling 
sort  fixtures  is  clearly  absent,  as  well  as  was  intended  to  apply  to  a  detached  safe. 
the  rerpiisite  physicnl  connection  with  Such  an  article,  it  is  submitted,  is  to  be 
tlie  realty.  As  was  observed  by  Caton,  classed  with  those  which  may  or  may  not 
(I  J.,  in  the  case  just  cited:  "To  say  be  fixtures,  according  to  the  nature  of 
that  a  mortgage  wliich  u])()n  its  face  pro-  tlieir  connection  witli  the  realty  and  the 
vides  for  its  maturity  twenty  years  hence  intention  of  the  parties. 

was    designed   to    embraci!    and    hold    the  •*  Titus  ;».  Mabec  (1 S61),  25  111.  257. 

fuel  and  oil  which  all  knew  and  intended  ^  32  N.  H.  484  (1856). 


§  229.]  WHAT   THE   MORTGAGE   COVERS.  249 

were  empowered  by  the  statute  authorizing  the  execution  of  a 
trust  mortgage  on  the  railroad  to  sell  the  property  upon  the  non- 
payment of  the  principal  or  interest  of  the  bonds,  and  the  con- 
veyance executed  to  tlie  purchasers  was  to  liave  the  effect  of 
transferring  to  them  "  all  the  real  and  ])ersonal  estate  named  in 
the  mortgage  deed,  together  with  all  the  rights,  franchises,  powers, 
and  privileges  in  relation  to  the  same  which  the  corporation  en- 
joyed, or  possessed,  or  were  entitled  to  at  the  time  of  the  execu- 
tion of  the  mortgage  deed."  A  mortgage  executed  in  pursuance 
of  the  provisions  of  this  statute  was  alleged  to  cover  a  quantity 
of  railroad  iron  afterwards  purchased  for  the  use  of  the  road,  and 
therefore  not  specifically  mentioned  in  the  mortgage.  This  view 
prevailed,  the  position  taken  being  that  the  right  to  acquire  jirop- 
erty  was  one  of  the  franchises  of  the  company,  so  that  a  transfer 
of  the  franchises  necessarily  involved  a  transfer  of  the  property 
which  might  subsequently  be  acquired  by  the  exercise  of  that 
franchise.  In  the  opinion  much  stress  is  laid  on  the  special  cir- 
cumstances of  the  case,  and  the  apparent  intention  of  the  legis- 
lature in  conferring  the  power  specified  in  the  charter.  For  this 
reason  a  doubt  has  been  expressed  whether  the  decision  is,  prop- 
erly speaking,  an  authority  for  the  general  principle  which  it  is 
thought  to  have  laid  down. 

This  doubt,  however,  has  not  been  shared  by  other  courts,  and 
upon  a  review  of  the  argument  we  think  it  can  scarcely  be  dis- 
puted that  the  decision  was  really  intended  to  rest  on  the  doctrine 
of  accession,  although  the  fact  that  the  conclusion  thus  arrived  at 
was  apparently  the  one  best  calculated  to  give  effect  to  the  pre- 
sumed intent  of  the  legislature  was  not  without  its  influence.  A 
similar  doctrine  was  applied  soon  afterwards  in  Kentucky,  the 
court  holding  that  a  pledge  of  the  road  itself,  with  its  profits  and 
privileges,  and  the  rights  and  franchises  of  the  corporation,  cov- 
ered all  such  future  acquisitions  as  were  necessary  and  proper  for 
the  full  and  complete  use  of  the  road.^ 

The  court  reasoned  as  follows :  "  Now  it  is  evident  that  as  the 
pledge  was  to  continue  during  many  years,  and  new  cars  and  en- 
gines and  materials  of  different  description  would  from  time  to 
time  become  necessary,  and  fuel  would  all  tlie  time  have  to  be 
purchased  as  it  was  needed,  these  articles  were  therefore  included 
in  the  deed ;  and  as  the  business  of  this  road  could  not  be  carried 
on  without  them,  the  power  to  pledge  the  road  itself  with  its 

^  Philips   V.    Wiiislow^  (1857),    18    B.     ascertained    from    the    report,    Pierce  v. 
Moil.    (Ky.),   431.     Tliis  conclusion   was     Emery  not  being  referred  to. 
arrived  at  independently,  so  far  as  can  be 


250  RAILWAY   BONDS    AND   MORTGAGES.  [CHAP.  X. 

profits  and  privileges,  and  the  rights  and  franchises  of  the  cor- 
poration, carried  along  with  it  the  implied  authority  to  pledge  all 
such  future  acquisitions  of  the  company  as  were  necessary  and 
proper  to  the  full  and  complete  use  and  operation  of  the  road 
itself." 

In  the  same  year  the  Supreme  Court  of  New  York  lent  its 
sanction  to  the  same  theory,  though  the  property  in  question  (the 
right  of  way)  was  also  held  to  be  subject  to  the  lien  by  virtue  of 
the  rule  enforced  in  Pennock  v.  Coe.^ 

§  230.  Objections  to  this  Extension  of  the  Doctrine  of  Accession. 
—  The  doctrine  announced  in  these  early  cases,  though  sometimes 
mentioned  with  respect  in  recent  decisions, ^  seems  to  rest  on  very 
dubious  foundations,  and  it  has  frequently  been  attacked.  That 
it  is  not  in  harmony  with  the  general  principles  of  law  relating 
to  the  effect  of  a  mortgage  upon  subsequent  acquisitions  is  not 
denied,  and  no  satisfactory  reason  has  been  given  for  applying 
different  rules  in  a  case  of  this  kind  to  mortgages  by  individuals 
and  mortgages  by  railroad  companies.  A  specially  serious  objec- 
tion to  the  principle  formulated  in  Pierce  v.  Emery  is  that,  if  it  is 
tested  by  carrying  it  to  its  logical  conclusion,  it  will  have  the 
effect  of  attaching  the  lien  of  a  railroad  mortgage  not  merely 
to  property  acquired  for  railroad  purposes,  but  also  to  property 
which  has  no  connection  with  the  business  of  the  company  as  a 
carrier.  The  difficulty  which  must  necessarily  arise  in  accommo- 
dating such  a  rule  to  the  practical  working  of  the  registration  laws 
is  self-evident.  This  consideration  was  forcibly  presented  in  Dins- 
more  V.  Racine,  etc.  R.  Co.,  decided  about  four  years  after  the  New 
Hampshire  case.  There  Judge  Cole,  in  combating  the  theory 
that  a  railroad  with  its  franchises  and  property  is  an  indivisible 
thing,  used  the  following  language  :  — 

"  I  can  understand  how  a  railroad  corporation,  wath  its  fran- 
chises, may  be  said  to  be  an  entire,  indivisible  thing,—  a  unity.  But 
I  cnnnot  well  conceive  how  a  railroad,  with  all  its  property,  real 
and  personal,  of  every  nature  and  character,  can  with  accuracy 

1  Seymour  v.  Canaiidiugna  R.  Co.  an  pxtension  of  the  canal,  because  that 
(IS.'J?),^.^  Barb.  284.  One  of  the  cases  was  deemed  to  be  the  intention  of  the 
cited  to  sustain  this  theory  was  Willink  v.  legislature.  It  is  also  appaicut  from  the 
Morris  Canal  &  Hkg.  Co'.  (1843),  4  N.  J.  arguments  of  counsel  that  the  principle  of 
Ef|.  377.  But  an  examination  of  that  case  estoppel  wa.s,  to  some  extent  at  least,  re- 
shows  that  no  general  principle  of  the  lied  upon, — a  circumstance  which  seems 
kinfl  ascribed  to  it  is  laid  down  by  the  to  indicate  that  the  case  should  be  classed 
chancellor.  Tlie  decision  was  based  en-  rather  with  Pennock  v.  Coo  than  with 
tirely  upon  a  construction  of  the  statute  Pierce  r.  F.mery. 

empowering  the  company  to  mortga^re  its  2  p,nker  i;.    New  Orleans,  B.  K.  &  V. 

property,   and   the  lieu  was   fastened  on  U.  Co.  (1888),  33  Fed.  Rep.  693. 


§  230.]  WHAT  THE   MORTGAGE   COVERS.  251 

be  said  to  be  an  indivisible  thing,  nor  do  I  think  the  law  so  re- 
gards it.  If  this  doctrine  be  sound,  consider  one  of  the  conse- 
quences in  this  case.  Docs  it  not  work  a  revolution  in  our 
registry  laws  ?  At  the  time  the  mortgage  was  given  to  the  Farm- 
ers' Loan  &  Trust  Company  upon  the  eastern  division  of  the 
road,  there  was  no  statute  authorizing  a  railroad  company  to 
mortgage  its  franchises,  in  force  in  this  State.  Neither  was  there 
any  law  giving  to  a  mortgage  made  by  a  railroad  company  greater 
effect  than  was  given  to  a  mortgage  by  a  natural  person.  If  the 
mortgage  of  the  Farmers'  Loan  &  Trust  Company  became  a  prior 
lien  upon  the  timber  lands  mentioned  in  this  case,  by  virtue  of 
the  doctrine  of  entirety,  there  could  be  no  safety  in  depending 
upon  the  record ;  for  a  person  going  to  buy  these  lands  of  the 
railroad  company  would  find  nothing  upon  the  record  to  apprise 
him  that  they  had  been  mortgaged  to  that  company.  If  he  looked 
into  that  mortgage,  he  would  find  nothing  in  the  description  of 
the  mortgaged  premises  which  related  to  them.  Finding  the  title 
of  record  in  the  railroad  company  unincumbered  so  far  as  he 
could  see,  he  might  buy  or  take  a  mortgage  upon  the  lands,  trust- 
ing to  the  registry  law.  Thinking  that  the  same  legal  conse- 
quences attached  to  a  mortgage  given  by  a  railroad  company  as 
would  attach  to  one  given  by  a  natural  person,  he  would  find  that 
the  record  was  but  a  reference  to  railroads  and  railroad  property, 
—  such  a  person  could  only  complain  of  his  ignorance  and 
folly. "  1 

It  is  clear  that  the  doctrine,  even  if  correct,  cannot  be  applied 
to  a  case  where  several  mortgages  are  given  on  different  divisions 
of  the  road.2 

The  only  way  of  escaping  from  this  difficulty  is  to  draw  a  line 
between  property  used  for  railroad  purposes  and  property  not  so 
used,  and  to  declare  the  doctrine  to  be  applicable  to  the  former 
and  not  to  the  latter.  It  may  readily  be  admitted  that  there 
would  be  no  greater  hardship  in  imputing  notice  of  the  lien  to 
this  extent  to  persons  who  deal  with  the  company,  where  the 
description  covers  merely  the  road  and  its  franchises  in  general 
terms,  than  in  imputing  such  notice  to  those  persons  where  the 
description  employs  such  vague  words  as  "  personalty  "  or  the 
like.  But  it  will  scarcely  be  maintained  that  a  doctrine  which 
has  to  be  limited  in  this  arbitrary  manner  to  adopt  it  to  the  policy 
of  the  registration  laws  is  at  all  satisfactory.  Once  such  a  limita- 
tion is  admitted,  the  doctrine  allows  no  wider  scope  to  the  lien 

1  Dinsmore  v.  Rac,  etc.  R.  Co.  (1860),  2  Farmers'  Loan  &  Trust  Co.  v.  Com- 

12  Wis.  649,  657.  mercial  Bauk  (1860),  11  Wis.  207. 


252  RAILWAY   BONDS    AND   MORTGAGES.  [CHAP.  X. 

than  the  principle  of  Pennock  v.  Coe ;  and  as  the  latter  is  appli- 
cable to  all  mortgages,  it  seems  better  to  give  it  the  preference, 
and  to  discard  a  theory  which  is  fraught  with  so  many  embarrass- 
ing results  in  practice,  and  which,  when  thus  restricted  to  its  only 
allowable  function,  is  shown  to  be  quite  unnecessary  and  super- 
fluous as  a  part  of  the  law  of  mortgages.  The  doctrine  has  also 
been  repudiated  in  Alabama.^ 


Article  IX.  —  What  will  pass  under  the  Word 

"Appurtenances." 

§  231.  What  Real  Property  will  pass  under  the  Term  "Appur- 
tenances."—  In  construing  railroad  mortgages  the  courts  have 
repudiated  the  narrow,  technical  meaning  of  the  word  "'  appurte- 
nances." Such  a  meaning  is  deemed  to  be  unsuited  to  a  complex 
organization  like  a  railroad,  and  the  principle  to  be  deduced  from 
the  cases  is  that,  whatever  property  is  required  for  the  purpose  of 
facilitating  the  performance  by  the  company  of  its  functions  as  a 
carrier  will  pass  under  this  term  if  such  appears  to  be  the  intent 
of  the  parties.  This  more  liberal  doctrine  has  been  discussed 
and  its  precise  limits  defined  in  two  recent  cases  decided  by  the 
Supreme  Court  of  the  United  States.  In  New  Orleans  Pacific  Ry. 
Co.  V.  Parker  2  the  question  was  whether  a  mortgage  by  a  company 
of  its  "  railroad,  rights  of  way,  road-bed,  and  all  its  real  estate 
then  owned,  or  which  miglit  be  thereafter  acquired,  appurtenant 
to  or  necessari/  for  the  operation  of  the  railroad,  and  all  other 
property,  wherever  situated  in  the  State,  then  owned  or  which 
might  thereafter  be  acquired  by  the  company,  and  which  should 
be  appurtenant  to  or  necessary  for  the  operation  of  the  railroad, 
and  also  the  tenements,  hereditaments,  and  appui'tenances  there- 

1  Mever  v.  .Tolinston    (1877),   53  Ala.  City  Horse  Ry.  Co.,  79  Mo.  632  ;  Spoon 

237;  Morgan  &Rav!ior  v.  Donovan  (1879),  v.   C   &  W.  M.  R    Co.,  86   Mich.   300; 

58   Ala.  241  ;  s.  c.'21  Am.  Ry.  Rep.  109.  Watt  o.  H.  M.  &  F.  R.  Co.,  1  Brewst.  (Pa.) 

As  to  what  a  mortgage  covers  or  does  not  418  ;  Hazard  v.  Vermont  &  Can.  R.  Co.,  17 

cover,  see  Corp.  of  Lanark  &  Renfrew  v.  Fed.  Rep.  753;  Swanu  v.  Gaston,  87  Ala. 

Cameron.  9  Up.  Can.  C.  P.  109  ;  Wyatt  y.  569;    Millard  v.   Barley,  13  Nebr.   259; 

L.  k  K.  Rv.  Co.,  6  Que.  L.  R.  213;  Wick-  State  v.  Glenn,  18  Nev.  34  ;  Metropolitan 

ham  r.  N.  P..  &  C.  A.  Rv.  Co.,  L.  \l.  1  P.  T.  Co.  v.  N.  Y.  Tr.  &  W.  R.  Co.,  45  Hnn, 

('.  64  ;  Manhattan  Trnst  Co.  v.  Sionx  City  84. 

Cahlc  Ry.  Co.  (1896),  76  Fed.  Rep.  658;  2  143  u.  S.    42  (1891).     The  doctrine 

Aiidr.-ws  V.   Nat.   Foundrv  &  Pijie  Works  of  this  case  was   followed   in    Wilson    v. 

(Lim.),  (1896).  76   Fed.   R.-p.  166  ;   Piatt  Beekwith  (1893),  117  Mo.  61,  as  to  the 

w.  N.-w  York  &  L.  15.  Ry.  Co.  (1896),   41  ]ioint    that    the   word    "appurtenances" 

N.  Y.  Su).|).  42;  Col.,  H.  &  G.  R.  Co.  v.  does   not  cover   the  land-grant  from  the 

Braden,  110  Ind.  558  ;  Hovcluiaii  i;.  Kan.  State. 


§  231.]  WHAT   THE   MORTGAGE   COVERS.  253 

unto  belonging,"  coTcrcd  a  grant  of  lands  within  the  State 
subsequently  made  by  Congress  to  tlie  company  in  aid  of  the 
construction  of  its  road.  The  court  said  that  the  word  "  appur- 
tenances," as  ordinarily  defined,  was  that  which  belonged  to  or 
was  connected  with  something  else  to  which  it  is  subordinate  or 
less  worthy,  and  with  which  it  passes  as  an  incident,  such  as  an 
easement  or  servitude  to  land ;  the  tackle,  apparel,  rigging,  and 
furniture  of  a  ship ;  a  right  of  common  to  a  pasture,  or  a  barn, 
garden,  or  orchard,  to  a  house  or  messuage.  The  rule  was  affirmed 
that,  in  a  strict  legal  sense,  land  could  never  be  appurtenant  to 
land ;  but  the  mortgage  in  question  evidently  contemplated  the 
subsequent  acquisition  of  real  estate,  such  as  land  for  stations, 
machine-shops,  or  other  purposes  immediately  connected  with  the 
road,  and  this  realty  would  pass  under  the  lien  or  the  mortgage, 
the  general  rule  being  modified  to  that  extent  by  the  intent  of  the 
parties.  The  land-grant  in  question,  however,  not  being  con- 
nected with  the  plant,  and  not  forming  a  part  of  the  organic 
structure  of  the  road,  could  not  be  treated  as  appurtenant  to  it. 

In  Plumphreys  v.  McKissock,^  cited  with  approval  in  New  Or- 
leans Pacific  11}^  Co.  V.  Parker,  supra,  it  was  held  that  the  com- 
missioner had  "  committed  a  manifest  error "  in  ruling  that  an 
elevator  was  a  common  appurtenance  to  the  roads  of  several 
railroad  companies  which  owned  the  stock  of  the  company  which 
constructed  the  elevator,  and  therefore  formed  a  part  of  the 
property  which  should  pass  to  a  receiver  appointed  in  a  suit  to 
foreclose  a  mortgage  executed  by  one  of  the  railroad  companies, 
and  embracing  the  word  "  appurtenances."  Mr,  Justice  Field 
said :  "  It  is  difficult  to  understand  the  course  of  reasoning  by 
which  a  certificate  of  stock  in  an  independent  corporation  can  be 
an  appurtenance  to  a  railroad.  If  stock  in  the  company  in  ques- 
tion could  be  considered  an  appurtenance  to  a  railroad,  by  the 
same  rule  stock  in  a  bank,  or  in  any  other  corporation  with  Avhich 
the  railroad  did  business,  might  be  so  considered. 

"  But  were  we  to  consider  the  Wabash  Company  as  possessing 
a  separable  legal  interest  in  the  elevator,  it  would  not  be  apjjur- 
tcnant  to  its  railroad.  That  building  is  situated  at  some  distance 
from  the  railroad,  —  more  than  half  a  mile,  —  and  is  erected  on 
land  not  belonging  to  that  company,  but  leased  from  the  Union 
Pacific  Railway  Company,  and  can  only  be  reached  by  crossing 
the  tracks  of  another  company.  Had  the  elevator  been  con- 
structed upon  property  covered  by  the  mortgage,  it  miglit  have 
been  contended  that  it  fell,  to  the  extent  of  the  one-sixth  interest. 

1  140  U.  S.  304  (1891). 


254  RAILWAY    BONDS    AND    MORTGAGES.  [CHAP.   X. 

under  the  mortgage,  as  one  of  the  depots  of  the  company.  The 
term  'depot'  in  the  mortgage  is  not  necessarily  limited  to  a  place 
provided  for  the  convenience  of  passengers  while  waiting  for  the 
arrival  or  departure  of  trains.  It  applies  also  to  buildings  used 
for  the  receipt  and  storage  of  freight,  which,  when  received,  is  to 
be  safely  kept  until  forwarded  by  the  cars  of  the  company  or 
delivered  to  the  owner  or  consignee.  Such  a  building,  whetlier 
existing  at  the  time  of  the  mortgage  or  constructed  afterwards 
upon  the  property  of  the  company  covered  by  it,  may  pass  as  an 
appurtenance  to  the  property  previously  existing.  A  thing  is 
appurtenant  to  something  else  only  when  it  stands  in  the  relation 
of  an  incident  to  a  principal,  and  is  necessarily  connected  with 
the  use  and  enjoyment  of  the  latter." 

The  learned  justice  then  reviewed  some  earlier  decisions  and 
proceeded  as  follows  :  "  Under  the  term  '  appurtenances,'  as  used 
in  the  mortgage  in  question,  only  such  property  passes  as  is 
indispensable  to  the  use  and  enjoyment  of  the  franchises  of  the 
company.  It  does  not  include  property  acquired  simply  because 
it  may  prove  useful  to  the  company  and  facilitate  the  discharge  of 
its  business.  A  distinction  is  made  in  such  cases  between  what 
is  indispensable  to  the  operation  of  a  railway  and  what  would  be 
only  convenient.  Bank  v.  Tennessee  (1881)",  104  U.  S.  493,  4DG. 
The  elevator  in  question  was  at  all  times  under  an  independent 
management,  and  was  used  in  the  same  manner  as  any  other 
warehouse  not  on  the  premises  of  the  railway  company  to  which 
it  sent  cars  for  freight."  ^ 

Whether  a  hotel  erected  by  the  company  is  "  appurtenant"  to 
the  road  depends  upon  whether  the  purpose  is  to  use  it  for  the 
convenience  and  comfort  of  the  employees  and  passengers,  thereby 
contributing  to  the  proper  conduct  of  the  business  of  the  com- 
pany as  a  carrier.  If  the  building  fulfils  that  purpose  it  will 
pass  as  an  appurtenance.^ 

This  ruling  was  approved  in  a  late  Missouri  case,  where  the 
same  mortgage  was  under  discussion.  The  court,  however,  laid 
more  stress  upon  the  fact  that  after-acquired  "  real  estate  "  was 
referred  to  in  unambiguous  terms.  For  this  reason,  it  was  said, 
the  effect  of  tlie  mortgage  did  not  depend  on  the  technical  mean- 
ing of  tiie  word  "  appurtenances,"  and  it  was  not  confined  to  such 

^  Hninphreysu.  McKissock  (1891),  140  iiatod  points,  "as  said  railroad  is  or  may 

U.  S.  304.  lie  hereafter  constructed,  maintained,  op- 

2  IJiiited   States  Trust  Co.  v.  'Wabash,  crated,  or  acq\iired,  togetlier  with  all  the 

St.  Louis,   &  Pac.  H.  f'o.  (1887),  32  Fed.  privih'^es,    rights,   franchises,  real  estate, 

Re|).  480.     'J'lie  moi-t;,'age  in  tliis  case  cov-  etc.,  and  other  appurtenances  thereto  be- 

cred  the  entire  line  of  road  between  desig-  longing." 


§  231]  WHAT    THE    MOllTGAGE    COVERS.  255 

real  estate  as  is  acquired  for  the  riglit  of  way,  depot  grounds, 
sitJe  tracks,  etc.  Although  the  words  did  not  inchide  real  estate 
not  used  in  connection  with  the  r(jml,  they  must  be  taken  to  com- 
prehend any  real  estate  which  was  acquired  for  use  in  its  opera- 
tion. Of  this  character  was  the  real  estate  bought  as  a  site  of  a 
building.^ 

If,  on  the  other  hand,  the  building  is  merely  an  ordinary  hotel 
for  the  entertainment  of  many  guests  that  may  apply  for  accom- 
modation, nnd  neither  solely  nor  in  part  a  structure  designed  to 
subserve  the  convenience  of  passengers  or  employees,  it  is  not 
covered  by  the  word  "  appurtenances."  ^ 

In  a  Pennsylvania  case  the  court  upheld  a  finding  of  a  jury 
that  lots  of  land  across  the  mere  edge  of  which  the  track  was 
laid,  but  which  were  not  in  any  other  way  used  for  railroad 
purposes,  but  which  had  been  held  for  many  years  after  the 
original  intention  had  been  abandoned,  were  not  appurtenant  to 
the  railroad.^ 

But  an  essentially  different  case  is  presented  when  the  track 
is  laid  along  the  edge  of  lots,  and  the  remainder  of  them  either 
actually  used  for  facilitating  the  business  of  transportation,  or 
held  with  the  bona  fide  intention  of  applying  them  to  such  uses  at 
some  future  time.* 

Lands  to  which  the  company  has  no  valid  title  will  not,  of 
course,  pass  under  a  mortgage  purporting  to  convey  "  the  lands 

1  OmaLa  &  St.  Louis  Ry.  Co.  v.  Wa-  *  Knevals  v.  Florida  Central  R.  Co. 
bash,  St.  Louis,  &  Pac.  R.  Co.  (1891),  (1894),  13  C.  C.  A.  410  ;  s.  c.  66  Fed. 
108  Mo.  298  ;  s.  c.   18  S.  W.  Rep.  1101.     Rep.  224. 

Compare  the  remarks  of  the  court  in  New  There  the  lots  in  question,  which  ex- 
Orleans  Pacific  Ry.  Co.  v.  Parker  (1891),  tended  in  part  into  the  water  of  a  harbor, 
143  U.  S.  42,  referred  to  above.  were  purchased  for  the  purpose  of  furnish- 

2  Miss.  Valley  R.  Co.  v.  Chicago,  St.  ing  terminal  facilities  where  a  projected 
Louis,  &  New  Orleans  R.  Co.  (1881),  58  system  of  lines  was  intended  to  reach  the 
Miss.  896.  The  court  conceded  the  sound-  sea,  and  subsequently  occupied  by  throw- 
ness  of  the  general  principle  that  the  ing  out  embankments  or  building  wharves, 
things  that  may  be  deemed  essential  or  until  much  of  the  comjiany's  business  was 
xiseful,  and  therefore  appurtenant  to  the  tran.sacted  on  the  extensions  thus  secured, 
great  work  of  building  and  operating  a  Uiider  these  circumstances  the  court  held 
railroad,  will  frequently  be  more  extensive  that  the  appropriation  for  railroad  ]iur- 
and  varied  ia  their  character  than  those  poses  was  virtually  complete  as  rcganls 
which  can  probably  be  regarded  as  accre-  the  whole  tract,  and  refused  to  exce[)t  any 
tions  to  the  business  of  private  persons,  of  it  from  the  lien  of  the  mortgage,  or  to 
but  held  that  the  property  in  question  countenance  the  narrow  doctrine  put  for- 
could  not  possibly  be  regarded  as  either  ward  by  counsel,  that  only  land  which  is 
necessary  or  legitimate  to  the  business  of  in  a  strict  sense  "necessary"  for  the  rail- 
the  railroad  corporation.  road  is  "appurtenant." 

*  Shamokin   Valley    R.   Co.   v.   Liver- 
more  (1864),  47  Pa.  St.  465. 


256  RAILWAY   BONDS    AND   MORTGAGES.  [CHAP.  X. 

appertaining  to  the  road."  For  example,  such  a  phrase  can  have 
no  operation  as  regards  lands  conveyed  to  the  company  in  excess 
of  the  amount  authorized  by  a  statute  passed  for  the  purpose  of 
aiding  the  construction  of  the  road  by  a  land-grant.^ 

§  232.  What  Personalty  -will  pass  under  the  Term  "  Appurte- 
nances."—  The  clause  "all  other  personal  property  in  any  way 
belonging  to  or  appertaining  to  the  railroad  of  the  said  company" 
will  not  embrace  "  canal-boats  "  acquired  to  be  used  in  connection 
with  the  business  of  the  line,  but  beyond  its  terminus,  and  not 
subservient  to  railroad  uses  excepting  so  far  as  they  facilitated 
the  traffic  in  this  way.^ 

It  has  also  been  held  that  railroad  chairs,  never  actually  used 
in  the  construction  of  the  track,  are  not  embraced  under  the  term 
"appurtenances."^ 

It  should  be  observed  that  many  of  the  cases  in  which  the 
mortgage  is  construed  which  contains  the  word  "  appurtenances  " 
do  not  turn  so  much  upon  tlie  meaning  of  that  word  as  upon  the 
proper  application  of  the  principle  that  property  covered  in  gen- 
eral terms  will  not  pass  unless  it  is  acquired  for  railroad  purposes. 
The  present  section  should,  therefore,  be  read  in  connection  with 
the  one  (§  205)  in  which  the  wider  question  is  the  controlling- 
feature. 

Article  X.  —  What  is  covered  by  the  Word  "  Undertaking." 

§  233.  What  the  Word  "Undertaking"  embraces  -when  used  in 
Instruments  creating  Charges  on  Railroad  Property.  —  The  earliest 
case  on  this  point  was  decided  largely  with  reference  to  the  fact 
that  the  mortgagor  company  alone  was  authorized  by  the  en- 
abling act  to  gather  tolls.  The  inference  drawn  was  that  a  mort- 
gage covering  its  undertaking  did  not  amount  to  a  demise  of  the 
land,  nor  empower  the  mortgagee  to  take  possession  of  the  road. 
Any  other  construction  would,  it  was  said,  enable  the  mortgagee 
to  put  an  end  to  the  undertaking,  inasmuch  as  he  has  no  power 
to  levy  the  tolls  ;  and  this  supposition  would  be  quite  inconsistent 
with  the  evident  pui-pose  of  the  act,  which  is  that  the  borrowed 
money  shall  be  repaid  by  the  carrying  on  of  the  undertaking  by 
the  company  itself.* 

1  St.  Paul,  etc.  Py.  Co.  v.  Sf.  Piinl,  *  Myatt  v.  St.  Ilolens,  etc.  Ey.  Co. 
(•t<-.  Ry.  Co.  (\f^m\  r>7  ?(■(].  K-'i).  272.  (1841),"  2  Q.    R.  364,    per  Coleridge,   J., 

2  Parish  v.  Wheeler  (1860),  22  N.  Y.  who  pointed  out  that  the  intention  of  the 
404.  le,i,'islatnre  was  made   slill  clearer  by  the 

3  Fanners'  I-.  &  T.  Co.  v.  Conimereial  ])rovision  declarin.t,'  that  the  mortgagees 
P.Miik  (1800),  11  Wis.  207;  s.  c.  15  Wis.  should  not  bo  entitled  to  vote  as  share- 
424  (1862).  holders. 


§  234.]  WHAT   THE   MORTGAGE   COVERS.  257 

This  ruling  was  followed  by  another,  to  the  effect  that  "  an 
assignment  of  the  '  undertaking'  of  a  railroad  com))any,  and  all 
tile  tolls  and  sums  of  money  arising  by  virtue  "  of  the  act  incorpo- 
rating it,  operates  as  a  pledge  of  the  tolls  and  property  of  the 
company  as  proprietors,  but  not  their  stock  or  property  as  car- 
riers, or  the  soil  of  the  railway  itself.^ 

But  the  meaning  of  the  word  was  not  thoroughly  settled  until 
the  delivery  of  the  well-known  opinion  of  Lord  Cairns  in  Gardner 
V.  London,  etc.  Ry.  Co. ,2  where  the  nature  and  extent  of  the 
power  of  debcntui'c-holders  to  enforce  their  security  against 
the  company's  property,  so  far  as  that  question  depended  on  the 
effect  of  the  pledge  of  the  "  undertaking,"  were  thus  defined. ^ 

§  234.  What  the  Word  "Undertaking"  embraces  ■when  used  in  In- 
struments creating  Charges  on  Corporate  Property  other  than  Railw^ays. 
—  The  word  "undertaking"  is  not  invariable  in  meaning.  The 
construction  placed  upon  it,  as  it  is  used  in  railway  debentures,  is 
attributable  to  the  peculiarity  of  the  subject-matter  on  which 
those  instruments  operate,  —  that  is  to  say,  a  permanent  railway, 
known  to  every  one  to  be  permanent,  and  incapable  of  being  mort- 
gaged, sold,  or  dealt  with  in  any  way.  A  debenture  bond  of  a 
steamboat  company  "  charging  the  undertaking  and  all  sums  of 

1  Hart  V.  Eastern  Union  Ry.  Co.  nected  with  it  may  be  subjected  tlirongh 
(1862),  7  Exch.  246  ;  8  E.xch.  116.  the  k^gal  operation  and  consequences  of  a 

2  L.  R.  2  Ch.  App.  202  (1867).  judgment  recovered  against  it,  the  undei- 

3  Lord  Cairns  used  tliese  words  :  "The  taiving,  so  far  as  these  contracts  of  mort- 
object  and  intention  of  Parliament,  how-  gage  are  concerned,  is,  in  my  opinion, 
ever,  in  the  case  of  each  of  these  various  made  over  as  a  thing  complete  or  to  lie 
undertakings,  was  clearly  to  create  a  rail-  completed  ;  as  a  going  concern,  with  in- 
way  which  was  to  be  made  and  main-  ternal  and  parliamentary  powers  of  man- 
tained,  by  which  tolls  and  profits  were  to  agement  not  to  be  interfered  with  ;  as  a 
be  earned,  which  was  to  be  worked  and  fruit-bearing  tree,  the  produce  of  which  is 
managed  by  a  company  according  to  cer-  the  fund  dedicated  by  the  contract  to  se- 
tain  rules  of  management,  and  under  a  cure  and  to  pay  the  debt.  The  living  and 
certain  responsibility.  The  whole  of  this,  going  concern  thus  created  by  the  legisla- 
when  in  ojieration,  is  the  work  contem-  ture  must  not,  under  a  contract  pledging 
plated  by  the  legislature,  and  it  is  to  this  it  as  security,  be  destroyed,  broken  up,  or 
that,  in  my  opinion,  the  name  of  '  under-  annihilated.  The  tolls  and  suras  of  money 
taking '  is  given.  Moneys  are  provided  ejnsdem  generis  —  that  is  to  say,  the  earn- 
for,  and  various  ingredients  go  to  make  up  ings  of  the  undertaking —  must  be  made 
the  undertaking  ;  but  the  term  '  under-  available  to  satisfy  the  mortgage  ;  but,  in 
taking'  is  the  proper  style,  not  for  the  my  opinion,  the  mortgagees  cannot,  under 
ingredients,  but  for  the  completed  work,  their  mortgages,  or  as  mortgagees,  —  by 
and  it  is  from  the  completed  work  that  seizing,  or  calling  on  this  court  to  seize, 
any  return  of  moneys  or  earnings  can  arise,  the  capital,  or  the  lands,  or  the  proceeds  of 
It  is  in  this  sense,  in  my  opinion,  that  the  sales  of  land,  or  the  stock  of  the  under- 
'  undertaking '  is  made  the  subject  of  a  taking,  either  prevent  its  completion,  or 
mortgage.  Whatever  may  be  the  liability  reduce  it  into  its  original  elements  when 
to  which  any  of  the  property  or  effects  con-  it  has  been  completed." 

17 


258 


EAILWAY   BONDS   AND   MORTGAGES. 


[chap.  X. 


money  arising  therefrom,  and  all  the  estate,  right,  title,  and 
interest  of  the  company  therein,  with  the  payment "  of  the  sum 
named,  with  interest  until  the  repayment  of  that  sum,  does  not 
cover  merely  the  income  from  the  business,  but  all  the  property 
of  the  company,  both  that  which  exists  at  the  date  of  the  de- 
benture and  that  which  may  afterwards  be  acquired.  The 
meaning  of  the  debenture  is  that  the  company  will  continue 
to  transact  its  business,  and  that  the  debenture-holder  cannot 
interfere  until  either  the  interest  is  in  default,  or  the  principal 
is  not  repaid  when  it  matures.  This  being  the  relation  between 
the  parties,  the  conclusion  necessarily  follows  that  the  moment 
the  company  comes  to  be  wound  up,  and  the  pro])ei'ty  has  to  be 
realized  upon,  the  riglits  of  the  debenture-holders  attach,  and  that 
the  general  creditors  can  touch  nothing  till  they  are  paid.^ 


1  In  re  Panama,  etc.  Co.  (1870),  L.  E. 
5  Ch.  App.,  per  Gifford,  L.  J.  See  In  re 
Streatham  &  General  Estates  Co.  (1897), 
Lu  R.  1  Ch.  15,  where  debentures  charged 
the  undertaking  and  all  its  "  property  what- 
soever and  wheresoever,  both  present  and 
future."  The  company  went  into  liquida- 
tion. The  debentures  were  held  not  to 
cover  the  uncalled  capital  as  it  existed  at 
the  commencement  of  the  liquidation,  dis- 
tinguishing Ex  parte  Stanley,  33  L.  J. 
Ch.  535. 

What  passes  under  a  mortgage  of  the 
•'undertaking  :  "  see  Legg  v.  Mathieson, 
2  Giff.  71  ;  Wickham  v.  New  Brunswick, 
etc.  Ry.  Co.,  L.  E.  1  P.  C.  64. 

What  does  not  pass  :  see  King  v.  Mar- 
shall, 33  Beav.  565  ;  Moor  %j.  Anglo-Italian 
Bank,    10   Ch.    Div.   681.     Charge   upon 
after-acquired   property  :   see  In  re  Gen- 
eral South  American  Co.,  2  Ch.  Div.  337 
Willink  V.   Andrews,  16    Ir.  C.   L.   201 
Blooner  v.  Co.,  L.   R.  16  Eq.   Cas.  384 
Tailby  V.  Receiver  (1888),  13  App.  Cas. 
546. 

For  a  recent  definition  of  a  "float- 
ing security"   in   England,   see  Govern- 


ments Stock,  etc.  Co.  V.  Manila  Ey.  Co. 
(1897),  1  L.  R.  App.  Cas.  86,  where  Lord 
Macnaghten  says:  "A  floating  security 
is  an  equitable  charge  on  the  assets  for 
the  time  being  of  a  going  concern.  It 
attaches  to  the  subject  charged  in  the 
varying  condition  in  which  it  happens  to 
be  from  time  to  time.  It  is  of  the  essence 
of  such  a  charge  that  it  remains  dormant 
until  the  undertaking  charged  ceases  to 
be  a  going  concern,  or  until  the  person  in 
whose  favor  the  charge  is  created  inter- 
venes. His  right  to  intervene  may,  of 
course,  be  suspended  by  agreement.  But 
if  there  is  no  agreement  for  suspension, 
he  may  exercise  his  right  whenever  he 
pleases  after  default." 

The  following  are  statutes  of  some 
of  the  States  referring  to  mortgages  of 
"after-acquired"  propert}"*-  Iowa,  Code 
1884,  McClain's,  §  1995,  power  to  mort- 
gage after-acquired  property.  Minn., 
Gen.  St.  1891,  §  2530,  same.  Nebr., 
Comp.  Stats.  1895,  §  1822,  same.  N.  Dak., 
Code  1895,  §  2947,  same.  Okl.,  Stats. 
1893,  §  1020,  same.  Utah,  Comp.  L.  1888, 
§  2370,  same. 


§  235.] 


PRIOKITIES   BETWEEN   MORTGAGES,   ETC. 


259 


CHAPTER  XI. 

PRIORITIES   BETWEEN   MORTGAGES   AND   OTHER   OBLIGATIONS   OF   THE 

COMPANY. 


Art.  I. — Priorities  considered  with- 
out Reference  to  the  Ef- 
fect OF  AN  After-acquired 
Property  Clause. 
§  235.  Existing  Liens  are  not  displaced 
by  Mortgage. 

236.  Priorities  as  affected  by  Regis- 

tration Laws. 

237.  Priorities  as  Dependent  on  the 

Terms  of  the  Decree  ordering 
the  Sale  at  which  the  Mort- 
gagor purchased  the  Property. 

238.  Priority  of  Judgment  Lien  es- 

tablished by  State  Law  rec- 
ognized by  Federal  Courts. 

239.  Claims  not  protected  by  Specific 

Lien  necessarily  postponed  to 
Later  Jlortgage. 

240.  Existing  Mortgage,  how  far  af- 

fected by  Creation  of  Subse- 
quent Obligations.  General 
Principles. 

241.  Traffic  Agreement,   when   not  a 

Lien  on  the  Corporate  Prop- 
erty. 

242.  Priorities  expressly  reserved  may 

be  lost  by  Estoppel. 

243.  Priorities  not  disturbed  by  Con- 

solidation. 
Art.  IL  —  Priorities  considered  with 
Reference  to  the  Special 
Effect    of    an    After-ac- 
quired  Property   Clause. 
§  244.    General  Rule. 
245.    After-acquired    Property    passes 
cu7n  onere. 


% 

246. 

247. 

248. 

Art 

in. 

§249. 

250. 

251. 

252. 
253. 


254. 


255. 


256. 


257. 


257  a, 


Vendor's  Lien,  how  far  preferred 
generally. 

Priority  of  Vendor's  Lien  where 
the  Property  sold  is  a  Fix- 
ture. 

Lien  when  defeated  by  Vendor's 
Acts. 

—  Priority  of  Mortgages 
as  modified  by  Legisla- 
tion IN  Favor  of  Certain 
Classes  of  Creditors. 

General  Statement. 

Lien  of  Mortgage  not  displaced 
by  Subsequent  Legislation. 

General  Lien  Laws,  how  far  ap- 
plicable to  Railroads. 

Waiver  of  Mechanic's  Lien. 

Statutes  creating  Mechanics' 
and  Laborers'  Liens,  strictly 
construed. 

No  Lien  obtainable  by  Contrac- 
tor except  in  Manner  pre- 
scribed by  Statutes. 

Bondholders,  when  not  bound 
by  Proceedings  under  these 
Statutes. 

Stockholder  in  Construction 
Company  which  floats  and 
guaranties  Bonds,  entitled  to 
claim  Lien. 

Statutes  declaring  Liens  in  Fa- 
vor of  Debts  arising  from  the 
Operation  of  the  Road,  Effect 
of. 

Priorities  in  Case  of  English 
Debentures. 


Article  I.  —  Priorities  considered  without  Reference  to  the 
Special  Effect  op  an  "  After-acquired  Property  "  Clause.^ 

§  235.    Existing  Liens  are  not  displaced  by  Mortgage.  —  Except  in 
SO  far  as  the  registration  laws  have  modified  the  practical  applica- 

^  See    also    Chap.    XXXIV.,    disti'ibu-     priorities  so  far  as  they  depend  on  the  va- 
tion  of  proceeds  ;  Chaps.  I.  and  VII.,  as  to     lidity  of  the  bonds ;    Chaps.  II.  and  III., 


260  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  XI. 

tion  of  the  principle  embodied  in  the  maxim,  qui  prior  est  in 
tempore  prior  est  in  jure  (see  next  section),  it  is  clear  that  no 
existing  lien  can  be  displaced  by  a  mortgage. 

This  rule  is  applicable  in  a  case  where  a  judgment  lien  was 
fastened  on  the  corporate  property,  while  the  persons  who  organ- 
ized the  corporation  were  carrying  on  business,  after  having  taken 
some  steps  towards  organization,  but  before  such  organization 
was  completed.  Third  persons  should  not  suffer  from  such  an 
ii-regularity ;  and  since  the  corporators  were  holding  themselves 
out  as  a  corporation  when  the  lien  was  claimed  to  attach  to  their 
property,  it  will  be  preferred  to  the  lien  of  a  mortgage  executed 
after  the  organization  is  legally  perfected.^ 

So  also,  where  the  superiority  of  the  judgment  lien  has  once  been 
fixed  in  accordance  with  the  laws  prevailing  at  the  time  of  its 
rendition,  the  creditor  thus  acquires  a  vested  right  in  the  property 
to  which  the  lien  attaches,  and  he  cannot  be  deprived  of  such 
right  by  subsequent  legislation  whicli  validates  a  void  mortgage 
on  the  same  property ,2  or  makes  the  claims  of  certain  employees 
for  wages  a  paramount  claim  on  that  property.^ 

§  280.  Priorities  as  affected  by  the  Registration  Laws.  —  The 
effect  of  the  registration  laws  in  modifying  the  operation  of  the 
rules  of  equity  by  which  priorities  are  determined  is  too  exten- 
sive a  subject  to  enter  upon  in  the  present  treatise,  especially  as 
there  are  no  rules  specially  applicable  in  this  connection  to  cor- 
porate obligations.  In  the  present  section  we  shall  merely  collect 
such  cases  under  this  head  as  have  a  direct  bearing  on  the  rights 
of  the  holders  of  corporate  securities. 

The  necessary  effect  of  the  registration  laws  is  to  postpone  a 
judgment  lien  which  attaches  after  the  record  of  a  duly  executed 
mortgage  to  the  lien  of  that  mortgage.* 

as  to  priorities  so  far  as  dependent  on  of  material  and  supply  men  in  railroad 
whether  a  bondholder  is  a  bona  fide  pur-  foreclosures,  see  article  in  30  Am.  Law  liev. 
chaser  or  not;  Chap.  XXVIII.,  as  to  520  (1896).  On  priority  over  mortgage 
priority  of  "  preferential  claims."  On  the  of  debts  contracted  by  railroad  before  re- 
priority  of  claims  for  labor  and  materials  ceivership,  see  article  in  39  Cent.  L.  J.  241 
over  lien  of  railroad  mortgages,  see  article  (1891). 

by  Charies  Phauncpy  Savage,  21  Cent.  L.  J.  ^  Bergen  v.  Porpoise  Fishing  Co.  (1886), 

125  (1885).    On  the 'rights  of  material-men  42  N.  J.  Eq.  397  ;  s.  c.  2  Cent.  Kep.  461  ; 

and   employees    of  railroad   companies  as  8  Atl.  Rep.  523. 

against  mortgagees,  see  article  by  George  2  "Williamson  v.   New  Jersey  Southern 

Tucker  Bispham,  6  So.  L.  Rev.  N.  S.  535  R.  Co.   (1878),  29  N.  J.  Eq.  311  ;  Coe  v. 

(1880).     On  postponing  the  priorities   of  Xew  Jersey  ]\lidlaiid  Ry.  Co.   (1879),  31 

fir.st  liens,  see  article  in  13  Am.  L.  Rev.  40.  N.  J.  Eq.  105. 

On  what  claims  are  prior  liens  to  railway  ^  Coe  v.  New  Jersey  ^Midland  Ry.  Co. 

mortgages,  see  3  Cent.  L.   J.  636  (1876).  (1879),  31  N.J.  Ei].  105. 

On  liens  for  railroad  supplies,  see  article  *  Morton  v.  New  Orleans  &  Sehiia  Ry. 

in  4  Cent.  L.  J.  544  (1877).      On  rights  Co.  (1885),  79  Ala.  590. 


§  236.]  PRIORITIES  BETWEEN   MORTGAGES,  ETC.  261 

A  like  preference  is  given  to  an  unrecorded  mortgage  of 
which  the  judgment  creditor  has  actual  notice,  and  this  priority 
prevails  against  both  the  creditor  himself  ^  and  his  assignee. 
Whether  the  latter  has  or  has  not  notice  in  such  a  case  is 
immaterial.^ 

If  a  railroad  mortgage  is  properly  recorded  in  some  of  the 
counties  through  which  the  road  passes  and  not  in  others, 
the  judgment  lien  will  prevail  as  to  the  latter  portion  of  the 
property.^ 

The  converse  question,  namely,  whether  a  judgment  is  inferior 
or  not  to  a  lien  of  which  the  creditor  has  no  notice,  either  actual 
or  constructive,  must  be  decided  with  reference  to  the  effect  of 
the  registration  laws,  which  in  this  respect  may  either  leave  the 
judgment  creditor  to  his  common-law  rights,  or  place  him  in  the 
favored  position  of  a  subsequent  purchaser  without  notice.* 

Where  a  statute  has  the  former  effect,  the  lien  of  the  judgment 
is  deemed  to  attach  merely  to  the  interest  actually  possessed  by 
the  defendant,  and  if  his  ownership  is  subject  to  secret  equities, 
the  operation  of  the  judgment  lien  is  proportionately  contracted.^ 

But  although  the  registration  laws  may  protect  the  judgment 
creditor  against  secret  liens,  and,  through  him,  the  purchaser  at 
the  execution  sale,  this  protection  does  not  extend  to  one  purchas- 
ing at  an  execution  sale  under  a  judgment  against  a  subsequent 
grantee  of  the  property  burdened  with  the  secret  lien,  even  though 
the  grantee  has  notice  of  such  lien.^ 

^  Mead  v.   New  York,   Housatonic,  &  the  assignee  of  a  creditor  who  had  obtained 

Northern  R.  Co.  (1879),   45  Conn.    199;  judgment  against  a  company  formed   by 

Mississippi   Valley   Co.    v.    Chicago,    St.  consolidation  of  two  other  companies,  the 

Louis,  &  New  Orleans  R.  Co.   (1881),  58  obligations  of  which  it  assumed.     Prior  to 

Miss.  896.  the  consolidation,  one  of  the  companies  had 

2  Butler  V.  Rahm  (1877),  46  Md.  541.  executed  a  mortgage  on  its  property  which 
Compare  Farmers'  Loan  &  Trust  Co.  v.  was  not  recorded.  The  court  distinguished 
Heudrickson  (1857),  25  Barb.  484  ;  Bement  the  case  from  one  in  which  the  plaintiff 
V.  Plattsburgh  &  Montreal  R.  Co.  (1866),  might  have  been  the  creditor  of  the  mort- 
47  Barb.  104.  gagor  himself,  and  held  that  the  protection 

3  Ludlow  V.  Clinton  Line  Railroad  Co.  which  the  registration  laws  would  have 
(1861),  1  Flip.  25.  afforded    under   the   latter   circumstances 

*  Freeman  on  Judgments,  §  366  (a),  could  not  be  extended  to  the  creditors  of 
Against  secret  vendors'  liens  many  courts  subsequent  grantees  of  the  mortgagor, 
have  held  that  the  creditor  should  be  pro-  Judgments  for  penalties  under  a  statute  of 
tected,  irrespective  of  the  recording  stat-  Arkansas  prescribing  a  penalty  for  excessive 
utes.  Warvelle  on  Vendors,  p.  701 ;  Fisk  charges  for  passage  or  freight  against  a 
V.  Potter  (1865),  2  Abb.  Ct.  App.  Dec.  138.  railroad  company  were  ordered  to  be  paid 
^  Freeman  on  Judgm.,  loc.  cit.  in  a  foreclosure  suit  in  preference  to  the 
^  Mississippi  Valley  Co.  v.  Chicago,  St.  bondholders  in  Mercantile  Trust  Co.  v.  St. 
Louis,  &  New  Orleans  R.  Co.  (1881),  58  Louis  &  S.  F.  Ry.  Co.  (Ogden  etai,  Inter- 
Miss.  896.      In  this  case  the  plaintiff  was  veners),  (1895),  69  Fed.  Rep.  193. 


262  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  XI. 

Where  the  other  doctrine  prevails,  the  lien  of  a  mortgage  will 
not  prevail  against  that  of  a  subsequent  Judgment,  obtained  with- 
out notice  of  the  existence  of  the  mortgage,  unless  it  has  been 
duly  registered  before  the  rendition  of  the  judgment.^ 

Holders  of  mortgage  bonds  of  a  corporation  have  a  lien  on  the 
mortgaged  property  of  the  corporation  relating  back  to  the  date 
of  record  of  the  mortgage,  and  the  mortgage  from  that  date  will 
be  deemed  an  incumbrance  upon  the  mortgaged  property  prior  to 
claims  for  mechanics'  liens  and  the  like  for  improvements  made 
subsequent  to  the  record  of  the  mortgage.^ 

Under  the  general  system  in  force  in  this  country,  the  mere 
fact  that  the  lienor  holds  some  fiduciary  relation  to  the  company 
would  probably  not  make  his  omission  to  register  his  lien  fatal  to 
the  extent  of  incapacitating  him  from  setting  it  up  against 
unsecured  creditors ;  ^  but  this  consequence  follows  if  such  a 
lienor  fails  to  comply  with  section  43  of  the  English  Companies 
Act  of  1862,  requiring  incumbrances  on  the  property  of  any  com- 
pany formed  under  that  act  to  be  registered.  Thus  directors  who 
take  a  mortgage  on  the  corporate  property  and  omit  to  register 
it,*  or,  in  registering  it,  give  no  description  of  the  property,^  will 
not  be  permitted  to  set  it  up  against  the  general  creditors. 

The  same  rule  is  applicable  where  a  solicitor  is  employed  in 
a  certain  transaction,  and  receives  a  charge  on  the  property  as  a 
security  for  his  costs.^ 

But  the  bankers  of  a  company  are  not  its  officers  in  such  a 
sense  as  to  invalidate  to  this  extent  unregistered  mortgages  given 
to  them  by  the  company^ 

Nor  is  a  shareholder  who  takes  a  debenture,  charging  the  entire 
property  of  the  company,  precluded  from  asserting  the  priority  of 
his  lien  against  the  general  creditors  of  the  company,  even  though 

1  Farmers'  Loan  &  Trust  Co.  v.  St.  Jo.  Eastern  R.  Co.  (Iowa,  1875),  8  Am.  Ey. 
&  Denver  City  R.  Co.  (1875),  3  DiU.  Rep.  82;  Reed's  Appeal  (1888),  122  Pa. 
412.  St.  565. 

2  Clentral  Trust  Co.,  Trustee,  w.  Conti-  '  See,  however,  the  decisions  cited  in 
nental  Iron  Works  (1893),  51  N.  J.  Eq.  Chapter  VIII.,  as  to  the  results  in  some 
605;  s.  c.  28  Atl.  Rep.  595.  The  Court  States  of  failing  to  comply  with  the  Chattel 
of  Errors  and  Appeals  said  :  "  Bonds  of  Mortgage  Acts. 

corporations   secured  as  are   these    bonds  *  In   re   Wynn  Hall  Coal  Co.    (1870), 

are  dealt  with  in  commercial  transactions,  L.  R.  10  Eq.  515. 

and  are  treated  almost  without  exception  ^ /?t  re  Nature  Iron  Ore  Co.  (1876),  L.  R. 

hy  the  courts  as  a  class  by  themselves,  not  2  Ch.  Div.  345. 

subject  in  iill  resiK'cts  to  the  stricter  rules  ^  Ex  parte   Valpy  &   Chaplin    (1872), 

which    pertain  between  natural  persons."  L.  R.  7  Ch.  App.  289. 

See  on  this  j)oint  Clallin  v.   h'ailroad  Co.  ''  Li   re   General    Provident   Ass.    Co. 

(1880),  4  Hughes,  12  ;    Ncilson  v.  Iowa  (1872),  L.  R.  14  Eq.  507. 


§§  237-240.]         PRIORITIES   BETWEEN   MORTGAGES,   ETC.  263 

the  officers  have  not  performed  the  duty  incumbent  on  them  of 
keeping?  the  register  of  liens  in  a  proper  form.^ 

§  237.  Priorities  as  Dependent  on  the  Terms  of  the  Decree  order- 
ing the  Sale  at  which  Mortgagor  purchased  the  Property.  —  Any  lia- 
bility which  a  purchaser  at  a  judicial  sale  is  required  to  assume  ?3 
a  condition  of  acquiring  the  property  constitutes  a  lien  thereon 
which  is  paramount  to  a  later  deed  of  trust  executed  by  the  pur- 
chaser. The  mortgagee  under  such  circumstances  is  bound  to 
know  that  the  title  of  the  mortgagor  is  based  on  the  decree,  and 
any  order  made  when  the  sale  is  confirmed.^ 

§  238.  Priority  of  Judgment  Lien  established  by  State  Statute 
is  recognized  by  Federal  Courts.  —  If  State  legislation  makes  a 
judgment  for  personal  injuries  a  lien  on  the  railroad  property 
superior  to  the  lien  of  all  mortgages  executed  after  a  certain 
date,  this  lien  will  be  recognized  in  a  federal  court,  and  de- 
clared to  extend  not  only  to  the  costs  in  that  court  itself,  but 
also  to  those  incurred,  during  the  progress  of  the  action,  in  the 
State  court.^ 

The  lien  of  a  judgment  rendered  in  the  Circuit  Court  of  the 
United  States  attaches  to  the  property  of  the  debtor  through 
the  district  in  which  it  is  held,  as  does  that  of  a  judgment  in 
the  State  court  to  the  property  in  the  county  in  which  it  is 
rendei-ed.^ 

§  239.  Claims  not  protected  by  Specific  Liens  are  necessarily  post- 
poned to  a  Later  Mortgage  on  the  Corporate  Property.  —  The  opera- 
tion of  this  rule  is  not  affected  by  the  fact  that  the  mortgagor  is  a 
purchaser  of  the  property  of  the  company  by  whom  the  debt  was 
incurred,  and  has  agreed  to  assume  and  pay  it  as  a  part  of  the 
consideration  of  the  purchase.  Such  an  agreement  does  not  invest 
the  claim  with  any  higher  dignity  than  it  previously  possessed. ^ 

§  240.  Existing  Mortgage,  how  far  affected  by  Creation  of  Sub- 
sequent Obligations.  —  General  Principles.  —  That  a  lien  created  on 
the  property  after  the  execution  of  a  valid  and  duly  recorded 
mortgage  must,  apart  from  the  effect  of  the  registration  laws, 
take  rank  after  the  mortgage  unless  the  mortgagee  waives  his 

1  In  re  General  South  American  Co.  line  of  the  road  passing  through  more  than 
(1876),  L.  R.  2  Ch.  Div.  337.  one  county,  a  sale  of  the  road  as  an  entirety 

2  Central  Trust  Co.  v.  Sloan  (1885),  65  must  be  made  according  to  the  manner 
Iowa,  655  ;  s.  c.  23  Am.  &  Eng.  R.  R.  Cas.  prescribed  by  the  statutes  of  the  State  in 
398  ;  22  N.  W.  Reji.  916.  which  it  is  situated  for  the  sale  of  a  tract 

2  Central  Trust  Co.  i-.  Central  Iowa  Ry.  of  land  lying  in  different  counties. 
Co.  (1889),  33  Fed.  Rep.  889.  6  pogg  v,  Blair  (1889),  133  U.  S.  534  ; 

*  Ludloww.  Clinton  Line  R.  Co.  (1861),  .s.  c.  10  Sup.  Ct.  Rep.   338.     See  further, 

1  Flip.  25.     Under  such  a  judgment,  the  Chap.  XXXIV.  (distribution  of  proceeds). 


264  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  XI. 

paramount  right,  or  unless  he  has  taken  his  security  subject  to 
the  contingency  of  its  being  postponed  to  subsequent  claims  the 
creation  of  which  was  contemplated  at  the  time  the  contract  Avas 
entered  into,  is  a  proposition  which  necessarily  results  from  the 
legal  relations  created  between  the  parties  by  the  instrument. 
The  rule  itself  is  illustrated  by  the  well-settled  doctrine  that  a 
properly  executed  and  duly  recorded  mortgage,  given  by  a  rail- 
road company  on  its  road-bed  or  other  property,  creates  a  lien 
which  cannot  be  displaced  thereafter,  either  directly  by  a  mort- 
gage, or  indirectly  by  a  contract  between  the  company  and  a  third 
party  for  the  erection  of  buildings  or  other  works  of  original 
construction.^ 

Still  less  is  a  sub-contractor  whose  agreement  is  wholly  with 
the  principal  contractor  entitled  to  have  a  mere  money  judgment 
which  he  obtains  against  the  company  declared  a  lien  on  the 
property  prior  to  that  of  an  earlier  mortgage  on  the  same 
property.'-^ 

Bondholders  secured  by  a  mortgage  executed  and  recorded 
before  the  passage  of  the  Ky.  act,  March  27,  1888,  giving  a  lien 
for  consti'uction  of  a  railroad,  declaring  this  "  said  lien  shall  be 
prior  and  superior  to  all  other  liens  theretofore  or  thereafter  created 
thereon,"  will  have  priority  under  their  mortgage  lien  over  the 
lien  of  contractors,  even  though  their  bonds  may  have  been  issued 
to  them  subsequently  to  the  passage  of  the  act.^ 

The  first  exception  to  the  rule  finds  an  illustration  in  a  case 
where  the  bondholders  consented  to  the  issuance  of  new  bonds 
which  were,  by  express  stipulation,  to  be  preferred  to  their  own. 

1  Toledo,  D.  &  B.  K.  Co.  v.  Hamilton  mortgage  bonds  thereon,  a  mechanic's  lien 
(1890),  134  U.  S.  296;  s.  c.  10  Sup.  Ct.  attaches  to  the  mortgaged  premises,  the 
Rep.  546.  On  debentures  fxprcvs^y  subject  holdei-s  of  such  mortgage  bonds,  without 
to  prior  debentures,  see  3  Rep.  (Cliy.)  363.  actual  notice  of  the  mechanic's  lien,  have 

2  Coe  V.  East  &  West  R.  Co.  of  Ala-  a  lien  on  the  mortgaged  premises  relating 
bama  (1892),  52  Fed.  Rep.  531.  back  to  the  time  the   mortgage  was  re- 

8  Central   Trust  Co.   of  New  York  v.  corded,  prior  and  superior  to  that  of  the 

Louisville,  St.  L.  &  Texas  R.  Co.   (1895),  mechanic's  lien.       See  also  Reed's  Appeal 

70  Fed.  Rep.  2S2.    See  Claflin  v.  Railroad  (1888),  122  Pa.  St.  565  ;  s.  c.  16  Atl.  Rep. 

Company  (1880),  8  Fed.  Rep.  118;  Cen-  100;   Neilson    v.    Iowa    Eastern    R.    Co. 

tral  Trust  Co.  v.  Continental  Iron  Works  (Iowa,  1875),  8  Am.  Ry.  Rep.  82,  88  ;  Kew- 

(1893),  51  N.  J.  Eq.  605  ;  .s.  c.  28  Atl.  gass  v.  Atlantic  &  D.  Ry.  Co.  (Central  Car 

Rep.  595,  hohling  that  mortgages  for  future  Trust  Co.,  Intervener),  (1 S93),  56  Fed.  Rep. 

advances  operate  from  the  time  of  record-  676,  which  appcfar.s  to  t;ike  a  contrary  view, 

ing,  although  the  ailvances  are  not  made  and  which  the  court,  in  Central  Trust  Co.  of 

until  a  subseipient  date,    and  they   have  New  York  r.  Louisville,  St.  L.  &T.  R.  Co., 

))riority  for  all  advances  made  before  actual  siijrrn,  said  did  not  clearly  show  that  the 

notice  of  subseriuentiiicumlirances.    When  (juestion  there  was  material,  and,  it  was 

between  the  time  of  the  execution  and  re-  plain,  it  was  not  presented  and  argued, 
cording  of  u  mortgage,  and  the  issue  of  the 


§§  241,  242.]      PRIOEITIES   BETWEEN   MORTGAGES,  ETC.  265 

Such  a  transaction  was  deemed  equivalent  to  a  pledge  of  their 
interest  under  the  first  mortgage,  and  left  that  interest  otherwise 
intact  and  enforceable  subject  to  the  new  lien.  In  such  a  case  an 
equitable  lien  is  created  taking  precedence  of  the  mortgage,  as 
against  all  the  bondholders  who  assent  to  the  contract.  The 
others  retain  all  their  rights  under  the  mortgage,  but  gain  nothing 
except  such  increased  value  as  their  security  may  acquire  from  the 
transaction.^ 

A  second  exception  to  the  general  rule  arises  in  those  cases 
where  the  mortgagees  take  their  security  subject  to  the  rights 
created  by  laws  which  confer  a  more  or  less  absolute  priority  of 
claims  of  certain  kinds,  or  to  the  analogous  rights  which,  under 
the  prevailing  practice  of  courts  of  equity  in  foreclosure  suits,  are 
accorded  to  creditors  of  a  few  specified  classes.  The  cases  deal- 
ing with  rights  of  the  latter  description  will  be  reviewed  in  a  sub- 
sequent chapter  (Chap.  XXVIII.,  preferential  debts).  The  statutes 
enlarging  the  common-law  rights  of  persons  who  furnish  labor  and 
materials  are  referred  to  in  Article  III.  of  the  present  chapter,  in 
so  far  as  they  have  been  discussed  in  cases  bearing  upon  the  rights 
of  the  holders  of  corporate  securities. 

§  241.  Traffic  Agreement,  when  not  a  Lien  on  tlie  Corporate  Property. 
—  An  agreement  between  two  companies  providing,  among  other 
things,  for  the  use  of  a  portion  of  the  road  of  one  of  them  by  the 
other,  does  not  create  an  obligation  running  with  the  land,  so  as 
to  be  entitled  to  precedence  over  a  subsequent  mortgage  on  the 
property  of  either  of  the  companies,  although  it  is  stipulated  that 
"  the  contract,  and  any  damages  for  the  breach  of  the  same,  shall 
be  a  continuing  lien  upon  the  roads,  and  their  equipment  and  in- 
come, into  whosesoever  hands  they  may  come."  ^ 

§  242.  Priority  expressly  reserved,  may  be  lost  by  Estoppel.  — 
Although  a  construction  contract  antedating  the  mortgage  has 
been  so  drawn  as  to  give  the  contractor  a  paramount  lien  upon 
the  property,  as  where  it  is  provided  that  he  shall  retain  the  pos- 
session of  the  road,  and  receive  its  issues  and  profits  until  the 
completion  of  the  contract,  yet  if  the  contractor  transfers  bonds 
received  by  him  as  payment  for  work,  such  bonds  giving  the 
trustees  a  right  of  entry  upon  default,  he  will  be  estopped,  as 

1  Poland    V.    Lamoille   Valley   R.    Co.  to  debentures,  see  (1897),   1  L.   R.  App. 

(1879),    52  Vt.   144.      Compare  the  cases  Cas.  81 ;    s.  c.  2  Chy.  551  ;    also  Co.  v. 

where  bondholders  surrender  their  bouds  Brunton,   4  Rep.  (Q.  B.)  58. 

and  accept  new  evidences  of  debt,  Chap.  "  Des  lloines  &  Fort  Dodge  R.  Co.  v. 

II.,  a7ite ;   Chap.   XIII.  (statutory  liens);  Wabash,  St.  Louis,  &  Pac.  R.  Co.  (1890), 

Chap.  XXXI V.  (distribution  of  proceeds).  135  U.  S.  576  ;  40  Am.  &  Eng.  R.  R.  Cas. 

Od  priority  of  subsequent  mortgage  bonds  694  ;  10  Sup.  Ct.  Rep.  753. 


266  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  XI. 

against  those  trustees,  from  asserting  his  right  of  possession 
under  his  contract.  The  transfer,  therefore,  will  operate  as  a 
waiver  of  his  rights  under  that  contract.^ 

§  243.  Priorities  not  disturbed  by  Consolidation. ^ — The  general 
rule  is  that,  if  no  arrangements  are  made  respecting  the  liabilities 
of  a  corporation  which  consolidates  with  another,  the  liabilities  of 
the  constituent  companies  are  enforceable  against  the  new  one,  in 
the  same  way  as  if  no  change  had  been  made.^ 

But  it  is  usual  to  embody  in  statutes,  whether  general  or  spe- 
cial, authorizing  consolidation  a  provision  recognizing  this  rule 
in  terms  of  greater  or  less  precision,  and  the  decisions  dealing 
with  the  liabilities  of  consolidated  companies  have  practically 
turned  upon  the  construction  of  such  provisions. 

The  fact  that  a  statute  incorporating  a  consolidated  company 
declares  that  such  consolidation  "  shall  in  no  way  affect  the 
rights  of  the  creditors "  of  the  constituent  companies,  operates 
as  constructive  notice  to  all  the  world  of  the  existence  of  any 
claims  still  outstanding  against  those  companies.  Purchasers 
of  the  bonds  of  the  consolidated  company,  therefore,  will  be 
subordinated  to  the  holders  of  unpaid  bonds  secured  by  a  mort- 
gage on  the  property  of  one  of  the  constituent  companies,  so 
far  as  regards  that  property  itself,  although  the  new  bonds  are 
issued  as  first-mortgage  bonds  under  a  statute  the  terms  of 
which  are  such  that  the  offer  of  the  bonds  amounts  to  an  official 
certification  that  all  prior  liens  on  the  road  have  been  paid  and 
cancelled.* 

The  New  York  act  of  1869  (ch.  917),  which  authorized  the  con- 
solidation of  railroad  companies,  provided  that  "  all  debts  and 
liabilities  incurred  by  either  of  the  (constituent)  corporations  ex- 
cept  mortgages^  shall  thenceforth  attach  to  such  new  (consolidated) 
corporation."  It  has  been  held  that  this  provision  does  not  deprive 
the  holder  of  bonds  of  one  of  the  constituent  compauics  from  suing 
on  the  bonds  themselves.  The  word  "  mortgages  "  in  such  a  case 
cannot  be  construed  as  meaning  "  mortgage  debts,"  and  the  ex- 
ce))tion  merely  expresses  the  inteution  of  the  legislature  that  the 
property  lien  of  the  mortgages  shall  be  confined  to  the  property 
theretofore  held  by  each  of  the  consolidating  companies.^ 

1  Allen  V.   Dallas   &   Wichita   R.    Co.  »  Thompson  on  Corp.,  §  372. 
(1878),  3  Woo(1h,  316.  *  Spence  v.  Mobile  &  Montgomery  'Ry. 

2  On  the  general  suV)ject  of  tho  liability     Co.  (1885),  79  Ala.  576. 

of  a  connolidateil  company  for  the  debts  ''  Polhomus  v.  Fitchburg  Railroad  C(\ 

of  its  predecessors,  see  note,  23  Lawyers'  (1890),  123  N.  Y.  502  ;  s.  c.  46  Am.  & 
Il.-p.  Ann.  231.  Eng.  R.  R.  Cas.  330;  26  N.  E.  Rep.  31. 


§  244.]  PRIORITIES   BETWEEN   MORTGAGES,   ETC.  267 

Article  II.  —  Priorities  considered  with  Reference  to  the 
Special  Effect  of  an  "  After-acquired  Property  "  Clause. 

§  244.  The  General  Rule  is  that  a  mortj^age  of  after-acquired 
property  binds  that  property  as  against  the  mortgagors  and  all 
persons  claiming  under  them,  except  purchasers  for  value  and 
without  notice,  and  against  junior  judgment-creditors.^ 

It  will,  therefore,  prevail  against  a  subsequent  mortgagee  with 
actual  or  constructive  notice  of  its  existence  ;2  or  against  a  com- 
pany which,  with  notice  of  the  lien,  purchases  the  various  rights 
and  interests  of  another  company  in  a  road  which  is  in  process  of 
construction,  and  upon  which  a  mortgage  with  the  usual  "  after- 
acquired  property  "  clause  has  been  given.  In  such  a  case  the 
lien  covers  the  entire  road,  and  not  merely  the  completed  part  in 
payment  for  which  the  bonds  were  issued,  and  the  purchasers  take 
their  acquisition  cum  07iere,  and  the  lien  is  in  no  way  displaced 
after  the  road  has  been  built  by  them.^ 

The  title  of  the  purchasers  of  certificates  for  public  lands  to  be 
received  by  the  company  on  the  completion  of  its  road,  if  those 
purchasers  have  no  notice  of  the  trust  deed,  will  be  preferred  to 
the  claims  of  the  bondholders.^ 

One  who  purchases  the  personal  property  of  the  company  with 
knowledge  of  the  fact  that  it  is  covered  by  a  mortgage  containing 
an  "  after-acquired  property  "  clause,  and  that  this  mortgage  ex- 
pressly provides  that  no  such  sale  shall  take  place  except  with 
the  assent  of  the  trustees,  stands  in  the  position  of  a  purchaser 
with  full  notice  of  the  prior  equities  of  the  bondholders.  His 
rights  in  the  property,  therefore,  are  inferior  to  those  of  the  bond- 
holders and  of  a  company  to  whom  the  road  passes  in  subsequent 
foreclosure  proceedings.^ 

A  subsequent  attachment  or  judgment  lien  is  also  postponed  to 
the  after-acquired  clause.^ 

1  Stevens  v.  Watson  (1865),  4  Abb.  Ct.  Farmers'  Loan  &  Trust  Co.  v.  Commercial 
App.  Dec.   302.     In  Little  Rock   &  Fort     Bank  (1860),  11  Wis.  207. 

Smith  Ry.   Co.  v.   Page  (1880),    35  Ark.  3  \Yade  v.  Chicago,  S.  &  St.  Louis  R. 

304  ;  s.  c.  7  Am.  &  Eng.  R.  R.  Gas.  36,  it  Co.  (1893),  149  U.  S.   327  ;  s.  c.  13  Sup. 

was  said  that  "equity  binds  everybody  to  Ct.  Rep.  892. 

respect  the  equitable  lien  [created  by  the  *  Campbell  v.  Tex.  &  New  Orleans  R. 

after-acquired  clause],  who  knows  of  it,  or  Co.  (1872),  2  Woods,  263. 

without  knowing  of  it,  has  got  the  prop-  ^  Little  Rock  &  Fort  Smith  Ry.  Co.  v. 

erty  without  valuable  consideration."  Page  (1880),  35  Ark.  304  ;  s.  c.  7  Am.  & 

2  Morrill  v.  Noyes  (1863),  56  Me.  458  ;  Eng.  R.  R.  Cas.  36. 

Willink    V.    Morris    Canal    &    Bkg.     Co.  ^  Seymour  v.  Canandaigua  &  Niagara 

(1843),  4  N.  J.  Eq.  377  ;  Steven  V.  Wat-     Falls    R.     Co.     (1857),    25    Barb.     284; 
son   (1865),   4  Abb.  Ct.  App.   Dec.    302  ;     Loudenslager   v.  Benton    (1861),  4    Phil. 


268  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  XL 

But  this  rule  must  of  course  be  considered  with  reference  to 
the  very  important  exceptions  introduced  by  the  legislation  which 
lias  raised  certain  debts  incurred  in  construction  or  in  the  opera- 
tion of  the  road  to  a  favored  position,  and  by  the  decisions  of 
courts  of  equity  regarding  the  so-called  preferential  debts.  With 
regard  to  preferential  debts  it  should  be  remembered  that,  although 
such  debts  have  frequently  been  reduced  to  judgment  before  being 
presented  as  claims  against  the  property  of  the  company,  their  pri- 
ority over  the  mortgage  is  not  in  the  least  dependent  upon  whether 
judgment  has  been  obtained  or  not.  It  is  not  necessary  to  the 
right  of  intervention  to  participate  in  a  trust  fund  in  custodia 
legls,  that  the  intervener  should  first  obtain  judgment  at  law,  or 
that  he  should  have  any  lien  on  the  fund.^ 

§  245.  After-acquired  Property  passes  cum  onere.  —  A  mortgage 
intended  to  cover  after-acquired  property  can  only  attach  itself  to 
such  property  in  the  condition  in  which  it  comes  into  the  mort- 
gagor's hands.  If  the  property  is  already  subject  to  mortgages 
and  other  liens,  the  general  mortgage  does  not  displace  them, 
although  they  may  be  junior  to  it  in  point  of  time.  It  only 
attaches  to  such  interest  as  the  mortgagors  acquire,  —  no  more, 
no  less.2 

Thus  the  lien  of  a  prior  mortgage  on  a  purchased  road  will 
take  precedence  of  a  general  mortgage  on  the  property  of  the 
purchasing  company.^ 

Similarly,  if  a  railroad  company,  by  accepting  the  benefit  of  a 
contract  made  by  another  company,  whose  road  it  acquires,  estops 
itself  from  repudiating  the  contract,  it  will  take  the  road  with  the 
obligation  of  doing  that  which  was  the  consideration  of  the  con- 
tract, and  the  trustees  of.f  a  mortgage  covering  the  road  will  also 
take  the  property  cum  onere ^ 


382  ;  Coe  v.  Knox  County  Bank  (1859),  v.  Whitaker  (1887),  68  Tex.  630  ;  s.  c.  5 

10  Ohio,    412;  Dunham  v.   Isett   (1863),  S.  W.  Rep.  448. 

15  Iowa,  284  ;  Stevens  v.  Watson  (18G5),  i  Farmers'  Loan  &  Trust  Co.   v.   Mis- 

4   Abb.   Ct.   App.    Dec.    302;    Covey   v.  souri,  L  &  N.  Ey.   Co.  (1884),   21   Fed. 

Pittsburg,   Ft.  Wayne,  k  Chicago  R.  Co.  Rep.  264  ;  s.  c.  17  Am.  &  Eng.  R.  R.  Cas. 

(1858),  3  Phil.   173;    Howe   v.   Freeman  314,  citing  Barton  y.  Barbour  (1881),  104 

(1860),  14  Gray,  566  ;  Hamlin  v.  Jerrard  U.  S.  126. 

(1881),  72  Me.  62  ;  s.  c.  4  Am.  &  Eng.  R.  ^  United  States  v.  New  Orleans  Rail- 

R.   Cas.   488;  United  Stales  v.  New  Or-  road  (1870),  12  Wall.  362. 

leans    Railroad    (1870),    12    Wall.     362  ;  »  Branch  &  Sons  v.  Atlantic  &  Gulf  R. 

Fosdick   V.  Schall  (1878),  99  U.   S.  235;  Co.  (1879),  3  Woods,  481. 

Peniiock    v.   Coe    (1860),    23    How.    117;  *  Coe    v.    Delaware,    Lackawanna,    & 

Calhoun    v.   M.-mphis    H.    Co.    (1829),    2  Western  R.  Co.  (1881),  34  N.  J.  Eq.  266 ; 

Flip.  442  ;  Meyer  v.  .Johnston    (1875),   53  8.  c.  4  Am.  &  Eng.  R.  R.  Cas.  513. 

Ala.    337  ;    St.  Louis,  A.   &   T.    R.   Co. 


§  245.]  PRIORITIES   BETWEEN    MORTGAGES,  ETC.  269 

So  also  the  lien  for  damages  assessed  against  a  company  for 
land  condemned  by  it  for  its  right  of  way  is  superior  to  the  lien 
of  a  prior  mortgage  covering  the  property  ;  ^  and  the  same  rule 
holds  in  regard  to  a  claim  for  consequential  damages  resulting 
from  the  construction  and  maintenance  of  a  railroad  on  a  street.^ 

A  riglit  of  a  similar  character  is  created  where  the  com- 
pany, instead  of  taking  proceedings  in  eminent  domain,  enters 
into  a  written  contract  with  the  landowner,  after  the  track  has 
been  constructed  over  his  property,  stipulating  to  pay  him  a  cer- 
tain amount  in  cash,  and  perform,  within  a  certain  time  and 
under  a  certain  penalty,  work  which  was  necessary  in  order  to 
give  convenient  access  to  the  lot,  and  the  landowner  agrees  at 
the  same  time  to  give  the  company  a  right  of  way  over  the  land, 
he  himself  retaining  the  legal  title.  Here  the  company's  title  is 
at  most  merely  equitable ;  and  a  mortgagee  of  the  company,  being 
chargeable  with  notice  of  the  nature  of  that  title  and  the  circum- 
stances under  which  the  company  has  possession  of  the  land, 
cannot  be  regarded  as  a  bona  fide  purchaser  for  a  valuable  con- 
sideration. He  takes  only  the  equitable  rights  of  the  company, 
and  takes  them  with  the  obligation  of  doing  the  work  which  the 
contract  called  for.^ 

In  Pierce  v.  Emery  *  it  was  held  that  the  lien  of  a  mortgage  em- 
bracing after-acquired  personalty  would  prevail  against  a  later 
mortgage  given  by  the  company  to  secure  a  party  who  had  ad- 
vanced money  to  pay  the  government  duties  on  certain  materials 
within  the  scope  of  the  mortgage,  and  had  allowed  these  materials 
to  pass  into  the  possession  of  the  company.  Tlie  court  also 
refused  to  accept  the  view  that  the  lien  of  the  government  was 
transferred  to  the  lender  of  the  money  by  which  it  was  discharged. 
Tlie  latter  ruling  is  doubtless  correct ;  for  it  is  a  familiar  prin- 
ciple that  the  benefit  of  a  lien  does  not  pass  to  one  who  discharges 
it  merely  because  he  had  discharged  it.  But  the  former  position 
seems  to  be  inconsistent  with  the  doctrine  laid  down  at  the  begin- 
ning of  this  section  ;  provided,  that  is  to  say,  the  mortgage  secur- 
ing the  lender  of  the  money  was  given  simultaneously  with  and 

^  Western    Penn.   R.   Co.  v.  Johnston  2  Mercantile  Trust  Co.  v.  Pittsburg  & 

(1868),  59  Pa.  St.  290.    Under  the  constitu-  Western    R.    Co.    (1887),    29    Fed.    Eep. 

tion  of  Pennsylvania  the  conipau}'  has  no  732. 

title  or  interest  of  any  kind  in  the  land,  ^  Hooper  v.  Savannah  &  Memphis  R. 

not  even  an  easement,  until  the  proprietor  Co.  (1881),  69  Ala.  529  ;  s.  c.  14  Am.  & 

has   been   paid  therefor,    or  his  damages  Eng.  R.  R.  Cas.  256. 
secured.      To  the  same  effect  see    Coe  v.  ^  32  N.  H,  484  (1856). 

New  Jersey  Midland  Ry.   Co.  (1879),   31 
N.  J.  Eq.  105. 


270  RAILWAY   BONDS   AND    MORTGAGES.  [CHAP,  XI. 

as  a  part  of  the  arrangement  resulting  in  the  discharge  of  the 
lien,  —  an  important  point,  upon  which  the  report  throws  no  light. 
There  is  no  apparent  reason  why  the  reservation  of  a  lien  on  per- 
sonalty should  be  a  privilege  conceded  to  a  vendor  alone.  Doubt- 
less the  view  of  the  court  was  largely  influenced  by  the  ground 
taken  as  to  the  principle  on  which  an  "  after-acquired  property  " 
clause  operates ;  viz.,  that  a  railroad  is  an  entire  thing,  and  it  is 
very  questionable  whether  the  more  generally  received  doctrine 
regarding  such  a  clause,  as  being  in  effect  an  executor}-  agree- 
ment, can  be  reconciled  with  the  decision  here  rendered. 

§  246.  Vendor's  Lien,  how  far  preferred  generally.^  —  If  a  ven- 
dor's lien  is  reserved  upon  property  sold  either  by  a  formal  pur- 
chase-money mortgage,  a  purchase-money  bond,  or  in  any  other 
manner,  it  will  be  given  precedence  of  the  lien  attaching  to  the 
same  property  by  virtue  of  the  "  after-acquired  property  ''  clause 
of  a  prior  general  mortgage  executed  by  the  mortgagor.^ 

In  New  York,  however,  a  doctrine  which  seems  scarcely  recon- 
cilable with  the  cases  just  cited  has  been  propounded,  the  court 
holding  that  where  a  landowner  sells  land  to  a  railroad  company 
and  reserves  a  lien  for  the  purchase-money,  the  circumstances  con- 
stitute a  case  in  which  a  secret  equitable  lien  and  a  recorded  legal 
lien  attach  simultaneously  to  the  same  property,  and  for  this  reason 
the  mortgage  must  be  given  preference.^ 

This  view  that  the  after-acquired  clause  creates  a  legal  lien 
appears  to  be  contrary  to  the  theory  of  Pennock  v.  Coe  *  and  other 
cases  which  are  based  upon  the  principle  that  mortgages  of  after- 
acquired  property  are  given  effect  because  they  raise  an  executory 
contract  for  valuable  consideration  which  the  contractee  is  entitled 
to  have  specifically  performed.^     (See  Chap.  X.) 

It  is  true  that  the  court  attached  great  importance  to  the 
fact  that  the  vendor  had  been  agent  for  the  company  in  procuring 
lands  for  railroad  purposes,  but  it  is  plain  that  the  decision  was 

1  Tliis  and  the  following  sections  should  v.  Pine  Mountain  Iron  &  Coal  Co.  (1896), 
be  read  in  connection  with  Chapter  XIV.,  76  Fed,  Kep.  624  ;  New  York  Security  & 
on  car  trusts.  Trust   Co.    v.   Capital    Ry.    Co.    (Phoenix 

2  United  States  v.  New  Orleans  Rail-  Ironwoi'ks,  Intervener),  77  Fed.  Kep.  529 ; 
road  (1870),  12  Wall.  362  ;  Williamson  v.  Brady  v.  Johnson,  75  Md.  445  ;  Gait  v. 
New  Jersey  Southern  R.  Co.  (1877),  28  Erie  &  N.  R.  Co.,  15  Grant's  Ch.  (Up. 
N.  J.  Eq.  277  ;  Frank  v.  Denver  &  R.  G.  Can.)  637. 

R.  Co.  (188.0),  23  Fed.  Rep.  123;  Meyer  u.  8  risk    v.  Potter   (1865),   2  Abb.   Ct. 

Johnston   (1875),   53  Ala.  237;  s.  c.  15  App.  Dec.  138. 

Am.  Hy.  Rep.  4G7  ;  Loomis  v.  Davenport  *  23  How.  117. 

&  St.  Paul  ]{.  Co.  (1882),  3  McCrary,  4S9  ;  *  This  principle  is  fully  recognized  in 

Manliattnn  Trust  Co.  v.  Sioux  City  Cable  N.-w  York.     See  Kribbs  v.  Alford  (1890), 

Ry.  Co.  (189G),  76  Fed.  Rep.  658  ;  Blake  120  N.  Y.  519 ;  s.  c.  24  N.  E.  Rep.  Sll. 


§  247.]  PEIORITIES   BETWEEN   MORTGAGES,   ETC.  271 

intended  to  rest  on  the  more  general  principle  also.  The  whole 
question  hinges  on  the  correctness  of  the  assumption  that  the  lien 
of  the  after-acquired  clauses  is  of  a  legal  nature.  That  assump- 
tion is  not  borne  out  by  the  authorities. 

If  the  property  sold  is  personalty,  the  equitable  rule  will  some- 
times be  qualified  by  tlie  laws  regarding  registration.  Thus  a 
federal  court  sitting  in  Iowa  has  held  that  verbal  unrecorded 
agreements,  that  the  title  to  personalty  shall  remain  in  the  vendor 
until  the  property  is  paid  for,  are  invalid  and  ineffectual  against  a 
general  mortgage  covering  the  same  property.^ 

The  riglits  of  the  vendor  of  personalty  who  is  induced  by 
fraudulent  means  to  part  with  his  property  under  color  of  a 
contract  to  purchase  are,  as  against  a  mortgage,  the  same  as 
those  of  a  vendor  who  explicitly  reserves  a  lien.  No  title  in 
such  a  case  passes  to  the  vendee,  and  the  property  may  be  re- 
claimed at  any  time  before  it  passes  into  the  hands  of  a  bona  fide 
purchaser.^ 

§  247.  Priority  of  a  Vendor's  Lien  where  the  Property  sold  is  a 
Fixture.  —  This  question  depends  upon  which  class  of  fixtures  the 
subject  of  the  agreement  belongs  to.  In  the  present  point  of  view 
there  is  a  radical  distinction  between  articles  which  actually  be- 
came part  of  the  realty  and  those  which  are  merely  attached  to  the 
realty  in  such  a  manner  that  they  may  be  detached  therefrom 
without  being  destroyed  or  materially  injured,  and  without  the 
destruction  of,  or  material  injury  to,  the  things  real  with  which 
they  are  connected.  In  the  former  class  is  reckoned  personalty 
which  is  worked  up  into  bridges,  depots,  and  other  structures,  or 
used  for  laying  the  track.  The  rule  as  to  personalty  of  this 
description  is  that,  by  no  agreement  of  the  vendor  can  it  be 
made  to  retain  its  character  as  personalty,  so  far  as  the  mort- 
gagee is  concerned.'^ 

So  also  the  mortgage  will  prevail  against  an  agreement  made 
by  a  bridge  company  that  the  bridges  built  by  it  should  continue 
to  be  its  property  until  fully  paid  for,  and  that  in  default  of  such 

1  Taylor  v.  Burlington,  C.  R.  &  M.  (1870),  11  Wall.  459,  where  a  vendor's 
Ry.  Co.  (1877),  4  Dill.  570.  The  seller  in  lien  on  rails  was  postponed  to  the  mort- 
this  case  claimed  a  mechanic's  lien  also  gage,  after  they  had  become  part  of  the 
upon  the  property  (locomotives),  but  did  track.  This  case  was  decided  with  refer- 
not  prevail  on  this  ground  either,  as  he  ence  to  the  law  of  the  State,  where  there 
had  taken  "collateral  security"  within  was  no  special  statute  for  the  benefit  of 
the  meaning  of  the  statute.  material-men.     Compare   the   remarks  in 

'•^  Williamson  v.  New  Jersey  Southern  Fosdick  v.   Schall  (1878),  99  U.  S.   235  ; 

W.  Co.  (1S7S),  29  N.  J.  Eq.  311  ;  s.  c.  15  ]\lcGraw    v.    Jlemphis    &    Ohio    R.    Co. 

Am.  Ry.  Rep.  572.  (1868),  5  Cold.  (Tenn.)  434. 

8  Galveston      Railroad      v.     Cowdrey 


272 


RAILWAY   BONDS    AND   MORTGAGES. 


[chap.  XI. 


payments  they  should  have  the  right  to  remove  the  materials  used 
for  the  bridges.^ 

In  the  second  class  will  fall  personalty,  such  as  telegraph  poles 
erected  on  the  right  of  way.  As  to  these  an  agreement  that  they 
shall  retain  the  character  of  personalty  is  valid  without  the  assent 
of  the  mortgagee.^ 

So  the  lien  of  a  vendor  of  machinery  which  has  been  attached 
to  property  subject  to  a  mortgage  covering  after-acquired  property 
ranks  above  the  lien  of  the  mortgage.^ 

§  248.  Lien  when  defeated  by  Vendor's  Acts.  —  A  vendor's  lien 
may  be  lost  by  ladies  in  setting  it  up,  as  where  it  is  not  asserted 
till  after  the  foreclosure  sale.* 

An  estoppel  on  the  ground  of  laches  and  want  of  caution  is  more 
readily  inferred  in  the  case  of  a  vendor  who  has  been  an  agent  for 
the  company  in  procuring  lands  for  its  use.^ 

Or  the  vendor's  conduct  may  be  such  that  he  is  estopped  as 
against  the  mortgagees  from  asserting  his  claim  to  the  property ; 
as  where  he  puts  the  vendee  into  possession  of  the  land,  and  ex- 
ecutes and  places  in  the  hands  of  the  latter  a  deed  for  the  land 
sold,  with  an  understanding  that  the  deed  should  not  be  considered 
as  delivered  until  the  purchase-money  had  been  paid,  and  the  ven- 
dee afterwards  puts  the  deed  on  record  and  mortgages  the  land 
for  value.^ 


^  Porter  v.  Pittsburg  Bessemer  Steel 
Co.  (1887),  122  U.  S.  267  ;  s.  c.  7  Sup. 
Ct.  Rep.  1206.  The  court  said:  "The 
bridges  became  a  part  of  the  permanent 
structure  of  the  railroad,  as  much  so  as 
the  rails  laid  n])on  the  bridges,  or  upon 
the  railroad  outside  the  bridges.  What- 
ever is  the  rule  ap])licable  to  locomotives 
and  cars  and  loose  property  susceptible 
of  separate  ownership  and  of  se])arate 
liens,  ami  to  real  estate  not  used  for  rail- 
road purposes,  as  to  their  being  unaffected 
by  a  piior  mortgage  given  by  a  railroad 
com[iany  covering  after-acquired  proy)erty, 
it  is  well  settled  in  the  decisions  of  this 
court  that  rails  and  other  articles  which 
became  affixed  to  and  a  part  of  a  railroad 
covered  by  a  prior  mortgage  will  be  held 
by  the  lien  of  such  mortgage  in  favor  of 
bona  fide  creditors,  or  against  any  con- 
tract between  the  furnisher  of  the  prop- 
erty ami  the  railroad  company  containing 
Ktipulation.s  like  those  in  the  j)resent 
case." 


"  Western  Union  Tel.  Co.  v.  Burling- 
ton, C.  R.  &  N.  R.  Co.  (1882),  3  McCrary, 
130.  In  Haven  v.  Emery  (1856),  33  N. 
H.  66,  the  language  of  the  court  would 
indicate  that  it  regarded  rails  as  being 
in  the  same  category.  But  the  case  deals 
with  the  rights  of  a  subsequent  mort- 
gagee, who  had  notice  of  an  agreement 
between  the  vendor  and  the  company  that 
the  rails  should  be  the  property  of  the 
former  until  paid  for.  The  case,  there- 
fore, is  not  parallel  to  those  in  which  the 
rights  of  a  prior  mortgagee  claimed  under 
an  "  after-ac(iuired  property  "  clause  are 
in  question. 

8  Wood  V.  Holly  ilanufacturing  Co 
(1893),  100  Ala.  326;  s.  c.  13  So.  Rep. 
948. 

4  Pierce  v.  Milwaukee  R.  Co.  (1SG9), 
24  Wis.  .551. 

6  Fisk  V.  Potter  (1865),  2  Abb.  Ct. 
App.  Dec.  138, 

^  Resor  v.  Ohio  &  Mississippi  R.  Co. 
(1866),  17  Ohio  St.  139. 


§§  249,  250.]        PRIORITIES   BETWEEN   MORTGAGES,    ETC.  273 

If  the  vendor  of  personalty  by  his  acts  turns  a  conditional  de- 
livery into  an  absolute  one,  his  position  will  be  changed  to  that  of 
a  general  creditor  of  the  company.^ 

Article  III.  —  Priority  of  Mortgages  as  modified  by  Legis- 
lation IN  Fav^or  of  Certain  Classes  of  Creditors. 

§  249.  General  Statement.  —  All  the  States  have  passed  statutes 
the  general  result  of  which  has  been  to  place  the  claims  of  mechanics 
and  material-men  in  a  more  favored  position  than  they  occupied 
under  common-law  rules,  and  in  some  jurisdictions  the  same  policy 
has  been  pursued  with  regard  to  other  debts  arising  out  of  the 
operation  of  the  road.  To  enter  upon  a  discussion  of  these  stat- 
utes would  of  course  be  altogether  beyond  the  scope  of  the  present 
treatise,  but  it  will  be  useful  to  collect  the  decisions  in  which  these 
statutory  rights  have  actually  come  into  collision  with  those  of 
holders  of  corporate  bonds.  The  phraseology  of  the  various  stat- 
utes is  extremely  diversified,  and  the  cases  decided  in  one  State 
are  often  only  of  partial  value  as  precedents  in  another.  From 
the  point  of  view  of  a  bondholder  the  most  important  fact  to 
remember  is  that  the  statutes  belong,  broadly  speaking,  to  two 
classes,  —  that  in  which  the  legislature  has  gone  no  further  than 
to  raise  these  claims  to  the  rank  of  secured  debts,  leaving  the 
question  of  priority  to  be  decided  by  ordinary  rules,  and  that  in 
which  the  claims  have  been  given  an  absolute  priority  over  all 
mortgages  upon  the  property  of  the  debtor.^ 

§  250.  Lien  of  Mortgage  not  displaced  by  Subsequent  Legislation. 
—  The  general  rule  that  a  statute  passed  after  the  execution  of  a 
mortgage  will  not  affect  any  rights  created  by  it  has  been  applied 
to  statutes  for  the  protection  of  material-men,^  and  to  an  act  mak- 

1  Manchester  Locomotive  "Works  v.  stockholders,  and  a  formal  instrument 
Truesdale  (1890),  44  Minn.  115  ;  s.  c.  46  executed  under  the  corporation,  sealed  and 
N.  W.  Rep.  301  ;  8  Ry.  &  Corp.  L.  J.  antedated  September  13.  The  mortgage 
226.  was  held  not  to  operate  to  create  a   lien 

2  In  National  Foundry  &  Pipe  Works  prior  to  the  mechanic's  lien. 

(Lim.)  V.  Oconto  Water  Co.  et  al.  (1895),  ^  Toledo,  D.  &  B.  R.  Co.  v.  Hamilton 
69  Fed.  Rep.  1006,  a  mortgage  had  been  (1889),  134  U.  S.  296  ;  s.  c.  10  Sup.  Ct. 
executed  by  the  corporation  on  September  Rep.  546.  Upon  the  authority  of  this 
13,  1890,  by  its  officers,  without  the  au-  case  the  Circuit  Court  of  Appeals  lately 
thority  of  the  board  of  directors,  and  held,  without  any  argument,  that  an  exist- 
without  a  corporate  seal.  On  the  15th  day  ing  mortgage  on  a  railroad  cannot  be  dis- 
of  September  it  was  delivered  to  a  bank,  placed  b}'  a  lien  for  street  improvements 
which  made  an  advance  of  money  on  it.  arising  out  of  a  later  contract.  Pensacola 
On  September  15,  a  mechanic's  lien  Provisional  Municipality  v.  Xorthrop 
accrued  on  the  property  included  in  the  (189.')),  66  Fed.  Rep.  689.  Compare  also 
mortgage.  On  October  29,  1890,  the  Arbuc^kle  v.  Illinois  Midland  Ry.  Co.  et  al. 
mortgage  was  ratified  by  the  directors  and  (1876),  81  111.  429. 

18 


274 


RAILWAY   BONDS   AND   MORTGAGES. 


[chap.  XI. 


ing  judgments  against  railroad  companies  for  personal  injuries 
liens  as  of  the  date  when  the  cause  of  action  arose  prior  to  any 
mortgage.^ 

§  251.  General  Lien  Laws,  how  far  applicable  to  Railroads.  —  If 
no  special  law  relating  to  railroad  comjmnies  has  been  enacted 
for  the  benefit  of  laborers  and  material-men,  it  will  be  a  question 
whether  the  general  law  on  the  subject  is  applicable  or  not  to 
railroads.^ 

If  it  is  not  so  applicable,  claims  for  labor  done  in  the  construc- 
tion of  the  road  subsequently  to  the  execution  of  the  mortgage 
must  be  postponed  to  the  mortgage  debt,  even  though  the  claim- 
ants have  filed  a  lien  in  accordance  with  the  provisions  of  the 
statute  before  the  mortgage  was  registered.^ 

Claimants  who  rely  upon  these  statutes  must  show  that  their 
debts  were  contracted  for  labor  furnished  or  materials  used  in  the 
actual  construction  of  the  road,  and  not  merely  in  its  operation.* 

If  the  statute,  as  in  Iowa,  gives  a  lien  in  general  terms,  it  dates 
from  the  commencement  of  the  building  of  the  railway,  and  is 
prior  to  a  mortgage  executed  at  any  time  during  its.  construction, 
even  though  it  may  have  been  executed  before  the  particular 
piece  of  work  was  done  for  which  the  lien  is  claimed.^  Under 
such  a  statute  the  lien  attaches  to  the  whole  road ;  and  this  rule 
is  not  affected  by  the  fact  that  the  claimant  has  done  work  only 
on  one  division  after  the  other  was  finished,  and  under  a  distinct 
contract  with  the  company  made  after  such  completion.^ 


^  Pliinizy  v.  Augusta  &  K.  R.  Co. 
(1894),  63  Fed.  Rep.  922. 

2  The  rulingfs  vary  in  the  different 
States.  The  note  in  20  Am.  &  Eng. 
R.  R.  Cas.  502-506  cites  a  large  number 
of  authorities  on  questions  raised  by  the 
filing  of  mechanics'  liens  on  railroad 
pro]ierty.  See  Larsen  v.  Nelson  &  Fort 
Sheppard  Ry.  Co.  (1895),  4  Br.  Col.  Rep. 
151  ;  State  ex  re/,  v.  Recorder  of  Mort- 
gages, 28  La.  Ann.  534;  Farmers'  Loan  & 
Trust  Co.  V.  Can.  &  St.  Louis  R.  Co.,  127 
Ind.  250  ;  Bear  v.  Burl.,  C.  R.  &  M.  R.  Co., 
48  Iowa,  619  ;  Kilpatrick  v.  Kansas  City 
&  B.  R.  Co.,  38  Nebr.  620. 

2  Tommcy  v.  Spartanburg  &  Asheville 
R.  Co.  (1881),  4  Hughes,  640,  construing 
the  law  of  North  Carolina. 

A  Connecticut  law  giving  mechanics 
a  lien  ujion  buildings  for  work  done  and 
materials  furnishi'd  in  their  erection  has 
been  held  ajijilicabh;  to  the   buildings  of 


railroad  companies  as  well  as  those  of  indi- 
viduals. Botsford  V.  New  Haven,  Middle- 
town,  &  Willimantic  R.  Co.  (1874),  41 
Conn.  454,  explaining  Benedict  v.  Dan- 
bury  &  Norwalk  Railroad  (1856),  24  Conn. 
320.  The  Kansas  Rev.  Stats,  of  1868 
have,  it  is  held,  repealed  a  provision  in  an 
earlier  act  authorizing  a  mechanic's  lien 
on  a  railroad.  Burgess  v.  Memphis,  etc. 
R.  Co.  (1877),  18  Kan.  53. 

*  Central  Trust  Co.  v.  Texas  &  St.  Louis 
Ry.  Co.  (Waters  Pierce  Oil  Co.,  Intervener), 
(1885),  23  Fed.  Rep.  703  ;  Central  Trust 
Co.  V.  Texas  &  St.  Louis  Ry.  Co.  (Borden, 
Intervener),  (1886),  27  Fed.  Rep.  178. 

6  Taylor  v.  Builington,  C.  R.  &  M.  R. 
Co.  (1877),  4  Dill.  570. 

6  Brooks  V.  Railway  Co.  (1879),  101 
U.  S.  443.  It  was  contended  that  tho 
circumstance  of  the  road  in  question  hav- 
ing been  built  in  sections  was  enough  to 
distinguish  this  case  from  Neilson  v.  Iowa 


§  251.] 


PRIORITIES   BETWEEN   MORTGAGES,   ETC. 


275 


In  Missouri  a  like  conclusion  has  been  arrived  at.^ 
On  the    other  hand,  the  lien   under   such    a   statute   will   be 
deemed  subordinate  to  the  mortgage,  if  it  is  claimed  for  work 
done  on  a  completed  road ;  as,  for  instance,  to  replace  a  bridge.^ 

A  distinction,  however,  has  been  taken  between  those  cases  in 
which  it  is  optional  for  the  mortgagee  to  incur  the  future  lial)ili- 
ties  secured  by  the  mortgage,  and  those  in  which  the  mortgagee, 
at  the  time  the  mortgage  is  executed,  enters  into  a  valid  contract 
to  incur  expenses  in  connection  with  the  property.  In  the  latter 
case  it  has  been  held  that  a  mortgage  of  after-acquired  property 
will  take  precedence  of  a  mechanic's  lien  for  materials  furnished 
after  the  deed  was  recorded.^ 


Eastern  Co.  (1876),  44  Iowa,  71,  where 
the  Supreme  Court  of  the  State  had  held 
that  where  the  constructiou  of  the  road 
was  continuously  carried  on,  though  under 
different  contracts,  it  was  an  entire  "im- 
provement "  within  the  meaning  of  the 
statute,  and  that  the  whole  property  was 
therefore  subject  to  the  lien  of  persons 
who  did  work  under  the  later  contracts. 
This  contention  was  rejected  by  the  court 
as  extremely  technical,  and  the  principle 
laid  down  that  where  a  road  is  in  every 
other  respect  but  that  of  its  construction 
an  entirety,  that  circumstance  will  not  be 
sufficient  to  prevent  the  lien  from  attach- 
ing to  the  whole  road.  It  was  also  pointed 
out  that  the  mortgagees,  upon  any  other 
theory  than  that  of  the  entirety  of  such  a 
road,  could  only  claim  a  lien  on  the  first 
few  miles  of  the  line,  and  that  it  was  not 
easy  to  see  how  the  road  could  be  one  for 
the  purposes  of  the  mortgage,  and  several 
pieces  of  road  for  the  purposes  of  the 
mechanics.  The  case  of  Canal  Co.  v. 
Gordon  (1867),  6  WaU.  561,  relied  on  by 
the  mortgagees,  differed  in  the  essential 
point  that  the  first  section  of  the  canal 
had  been  finished  and  in  operation  for  a 
considerable  time  before  work  on  the 
second  section  was  begun,  and  for  aught 
that  appeared  in  the  report  of  the  case 
the  resumption  of  work  was  an  after- 
thought. This  construction  of  the  Iowa 
statute  was  adhered  to  in  Meyer  v.  Hornb}' 
(1879),  101  U.  S.  7-28. 

^  Knapp  V.  St.  Louis,  Kansas  City,  & 
Northern  Ry.  Co.  (1881),  74  Mo.  374  ; 
s.  c.  7  Am.  &  Eng.  R.  R.  Cas.  394.  Com- 
pare Cranston  v.  Union  Trust  Co.  (1881), 
75  Mo.   29  ;   s.  c.  11  Am.  &  Eng.  R.  R. 


Cas.  638.  In  the  first  of  these  cases  it  was 
remarked  that  although  in  foreclosing  such 
a  lien  the  whole  road  must  be  sold,  if  sold 
at  all,  only  so  much  of  the  rolling-stock  and 
other  movable  property  as  is  necessary  to 
satisfy  the  lien  need  be  sold,  if  it  is  elected 
to  proceed  against  that  part  of  the  propert}'. 

2  Taylor  v.  Burlington,  C.  R.  &  M. 
Ry.  Co.  (1877),  4  Dill.  570. 

**  Neilson  v.  Iowa  Eastern  R.  Co.  (1S75), 
8  Am.  Ry.  Rep.  82.  Here  the  bonds  were 
issued  to  a  contractor  in  part  payment  for 
the  building  and  equipment  of  the  road. 
Subse(|uent  to  the  issuing  and  recording 
of  the  mortgage,  and  when  the  contractor 
had  expended  a  large  sum  of  money  in 
pursuance  of  his  contract,  but  before  the 
issue  of  the  bonds,  material-men  acquired 
a  lien  for  ties.  Under  these  circumstances 
it  was  held  that  the  material-man  was  in 
no  better  position  than  a  second  mortgagee 
would  have  been,  if  he  had  taken  his 
security  before  the  negotiation  of  the 
bonds  secured  by  the  first  mortgage.  It 
was  further  held  that  sect.  1855  of  the  Iowa 
Code,  giving  material-men  a  specific  lien 
upon  a  building  in  preference  to  prior  liens, 
did  not  apply  to  a  case  like  the  one  in 
question,  where  the  specific  property,  when 
it  comes  into  the  hands  of  the  mortgagor, 
is  so  incorporated  with  the  other  mort- 
gaged property  that  it  cannot  be  removed 
without  a  destruction  of  the  whole.  This 
case  was  reheard  (see  44  Iowa,  71)  up(in 
a  different  theory,  put  forward  by  the 
claimant.  Instead  of  relying  on  the  rule 
that  after-acquired  property  is  subject  to 
the  liens  attaching  to  it  when  it  comes 
into  the  possession  of  the  mortgagor,  and 
seeking  to  have  the  lien  established  against 


276  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  XI. 

The  rule  under  the  lien  law  of  the  State  of  Washington,  as 
determined  by  the  State  courts  and  followed  in  the  Federal 
courts,  is  that  a  material-man  who  furnishes  materials  for  the 
construction  of  a  street  railway  can  obtain  no  lien  upon  the  struc- 
ture in  the  streets  of  a  city ;  nor  can  he  have  a  lien  upon  tlie 
power-house  and  land  for  furnishing  materials  for  the  construc- 
tion of  tracks  and  conduit  for  a  cable  road.^ 

The  Florida  act  of  June  3,  1887,  gave  a  lien  to  any  person  per- 
forming any  labor  upon  or  for  the  benefit  of  any  railroad.  In  a 
revision  of  the  statutes  of  the  State  approved  June  8,  1891,  the 
commissioners,  in  section  1727,  provided  that  any  person  perform- 
ing by  himself  or  others  any  labor  upon  any  railroad  should  have 
a  lien  upon  the  property  of  the  road.  These  statutes  have  been 
construed  to  give  a  contractor  a  lien  upon  the  road  as  against  a 
mortgagee  of  its  property.^ 

It  was  contended  in  a  Colorado  case  that  the  trust  deed  given 
by  a  canal  company  of  all  its  rights,  franchises,  ditches,  flumes, 
reservoirs,  etc.,  which  thereafter  it  might  acquire,  whether  the 
same  were  then  or  thereafter  to  be  constructed,  was  prior  to  the 
liens  of  sub-contractors  for  materials  and  labor  in  constructing, 
after  the  mortgage  was  given,  a  flume  across  a  stream  on  the  line 
of  the  right  of  way.  Upon  the  general  principle  that  a  corpora- 
tion under  such  circumstances  takes  the  property  after  acquired 
cum  onere,  the  liens  of  the  sub-contractor  were  held  to  be  prior  to 
the  trust  deed.^ 

§  252.  Waiver  of  Mechanic's  Lien.  —  A  statement  in  a  contract 
between  a  railroad  company  and  a  contractor  that  the  latter  is  to 
be  paid  out  of  a  certain  fund,  —  the  subscription  of  a  particular 
county  along  the  line,  —  is  not  such  an  acceptance  of  collateral 
security  by  the  contractor  as  will  vitiate  his  lien.  Such  a  promise 
does  not  constitute  an  equitable  assignment  of  the  fund,  and  gives 
the  contractor  no  power  to  collect  the  money  for  himself.* 

the  materials  actually  furnished,  he  con-  ^  Pacific    Eolling   Mills   Co.    v.  James 

tended  that  his  claim  fell  under  the  statu-  Street  Construction  Co.    (1895),   68  Fed. 

tory    provision    that    a    mechanic's    lien  Rep.  966  ;  s.  c.  16  C.  C.  A.  68. 
should  have  priority  over  a  mortgage  exe-  ^  Cooper  et  al.  v.  Gahoury  et  aJ.  (1895), 

cuted  upon  the  land  and  the  building  or  69  Fed.  Rep.  7  ;  s.  c.  16  C.  C.  A.  112. 
improvement,  after  the  commencement  of  8  Jm-vis  ct  nl.  v.  State  Bank  ofFt.  Mor- 

the   building    or    improvement.       It   was  gan  e<  o^.  (Colo.,  1896),  45  Pac.  Rep.  505, 

held  that  the  word  "  improvement "  here  on   authority    nf   Williamson  v.   Railroad 

meant  the  road  as  a  whole,  and  not  the  Co.,  28  N.  J.   Kq.  277;  29  N.  J.  Eq.  311; 

ties,  and  the  plaintilf's  claim  was,   upon  U.  S.  v.  New  Orleans  R.  Co.,  12  Wall.  362; 

this  groiiiiil,  declared  to  have  the  priority  Hall  v.  Mill  Co.,  16  JIo.  App.  454. 
as  against  the  mortgage.     But  the  general  *  Meyer    v.   Construction    Co.    (1879), 

principle  laid  down  in   the  first   decision  100  U.  S.  457  ;    s.    c.  21   Am.   Ry.   Rep 

was  not  impugned.  465. 


I 


§  253.]  PRIORITIES   BETWEEN   MORTGAGES,   ETC.  277 

In  Iowa,  where  the  taking  of  collateral  security  is  a  waiver  of 
a. mechanic's  lien,  it  has  been  held  that  the  taking  of  bonds  secured 
by  a  divisional  mortgage  does  not  operate  as  such  a  waiver,  inas- 
much as  the  lien  extends  to  the  whole  line,  a  distinct  thing  from 
the  one  division  the  bonds  of  which  are  taken. ^ 

§  253.  Statutes  creating  Mechanics'  and  Laborers'  Liens  are  strictly 
construed.  — These  statutes  being  in  derogation  of  the  right  of  the 
general  creditors  to  be  placed  on  an  equality  as  regards  the  pay- 
ment of  their  debts,  and  in  the  distribution  of  the  earnings  and 
the  proceeds  of  a  foreclosure  sale,  priority  will  be  granted  only  to 
the  laborers  and  material-men  who  have  perfected  their  liens 
according  to  the  technical  requirements  of  the  law.^  Thus  if  the 
lien  is  given  on  the  property  of  a  railroad  in  its  entirety,  it  can  be 
secured  only  by  filing  the  account  in  the  proper  clerk's  office  of 
every  county  or  municipal  corporation  through  which  the  road 
passes.^ 

So  also,  where  a  statute  gives  all  "  laborers  "  in  the  employ  of 
a  corporation  which  becomes  insolvent  a  lien  upon  the  corporate 
assets,  this  word  will  be  restricted  to  the  persons  who  actually 
perform  labor  or  services,  and  cannot  be  construed  so  as  to 
embrace  one  who  furnishes  the  labor  or  services  of  others,  under 
a  contract  to  do  the  whole  of  a  particular  branch  of  the  business 
of  the  corporation.'^ 

So  also  the  failure  to  sue  on  a  contractor's  lien  within  twelve 
months,  such  being  the  requirement  of  the  statute,  has  been  held 
to  be  fatal  to  the  vitality  of  the  lien.^ 

But  if  the  claim  is  on  an  open  and  current  account  for  materials 
furnished,  the  material-man  will  be  entitled  to  a  lien  for  the  whole 
amount  due,  if  the  last  item  accrued  subsequently  to  the  time 
within  which  a  lien  could  be  filed.^ 

In  some  States  the  rule  of  strict  construction  has  been  held  to 


1  Hale,  Ayer,  &  Co.  v.  Burlington,  C.  R.  first   .suggested  in  argument   and  not    in 
&  N.  R.  Co.  (1881),  13  Fed.  Rep.  203.  the  record. 

2  Jessup    V.    Atlantic    &    Gulf  R.  Co.  *  Lehigh    Coal    &   Navigation    Co.    ;•. 
(1879),  3  Woods,  441.  Central  R.  Co.  of  New  Jersey  (1878),  29 

3  Boston  &  Co.  V.  Chesapeake  &  Ohio  N.  J.  Eq.  252  ;  s.  c.  18  Am.  Ry.  Rep.  207  ; 
R.  Co.  (1882),  76  Va.  180.  In  this  case  s.  p.  Delaware,  Lackawanna,  &  Western 
the  claimants  also  asserted  that,  even  if  R.  Co.  v.  Oxford  Iron  Co.  (1880),  33  N.  J. 
they  had  no  lien  under  the  statute,  they  ¥a\.  192  ;  .s.  c.  1  Am.  &  Eng.  R.  R.  Cas.  20.i. 
had  an  equitable  priority  over  the  mort-  ^  Cherry  v.  North  &  South  R.  Co. 
gagees  ;  but  this  contention  was  rejected  (1880).  65  Ga.  633  ;  11  Am.  &  Eng.  R.  R. 
by  the  court  on  the  ground  that  the  mate-  Cas.  636. 

rials  were  furnished,  not  for  maintenance,  Central  Trust  Co.  v.  Tex.  &  St.  Louis 

but  for  construction  purposes,  and  also  on  R.  Co.  (Camden  Lumber  Co.,  Intervener), 

the  technical  ground  that   the   lien  was  (1885),  23  Fed.  Rep.  673. 


278  RAILWAY   BONDS    AND    MORTGAGES.  [CHAP.  XI. 

exclude  a  sub-contractor  of  a  sub-contractor  from  the  benefit  of 
an  act  creating  a  mechanic's  lien  in  favor  of  a  sub-contractor. ^ 

But  elsewhere  such  statutes  have  been  construed  so  as  to 
include  sub-contractors.^ 

§  25-4.  No  Lien  obtainable  by  Contractor  except  in  the  Manner 
prescribed  by  the  Statute.  —  A  contractor  who  has  secured  a  statu- 
tory lien  on  a  road,  but  failed  to  enforce  it  in  the  manner  pre- 
scribed, cannot  abandon  that  lien,  and  fall  back  on  an  alleged 
equitable  lien  arising  out  of  the  same  state  of  facts,  and  thereby 
defeat  or  postpone  an  earlier  mortgage  on  the  property.^ 

So  where  a  contractor  is  working  under  an  agreement  with  a 
construction  company,  and  not  with  the  railroad  company  itself, 
and  there  is  no  stipulation  that  he  shall  be  paid  out  of  the  bonds 
to  be  issued  to  the  construction  company  as  the  work  progresses, 
a  mere  money  judgment  obtained  by  him  against  the  company 
will  not  be  recognized  in  a  suit  to  enforce  the  bonds,  except  as  a 
lien  inferior  to  that  of  the  bonds.* 

§  255.  Bondholders,  -when  not  bound  by  Proceedings  under  these 
Statutes  unless  Parties  thereto.  —  A  proceeding  under  a  statute 
giving  labor  claims  a  priority  of  lien  upon  railroad  property,  and 
requiring  the  court  having  jurisdiction  of  the  cause  to  render 
judgment  for  the  amount  of  wages  found  to  be  due,  and  to  order 
the  railroad,  or  so  much  of  it  as  may  be  necessary,  to  be  sold 
to  satisfy  the  judgment,  is  not,  it  has  been  held,  a  proceeding  in 
rem,  there  being  no  provision  in  the  enactment  for  giving  to 
adverse  claimants  notice  by  some  form  of  publication  or  adver- 
tisement. A  judgment  rendered  in  such  a  proceeding  is,  therefore, 
not  binding  upon  the  trustees  or  the  bondholders  unless  they  were 
actually  parties  thereto.  This  result  is  not  altered  by  the  fact  that 
the  statute  declares  that,  in  the  suits  authorized  by  it,  the  plaintiff 
need  not  make  the  other  lienholders  parties,  but  that  such  lien- 


1  Kothgerber  v.  Dnpny  (1872),  64  111.  whether,  in  the  absence  of  the  statute,  the 
452  ;  Aliern  v.  Evans  (1872),  66  111.  125  ;  contractor  would  have  had  any  superior 
Arbiu'kle  v.  Illinois  Midland  Ry.  Co.  equity  on  the  fund  produced  by  the  fore- 
(1876),  81  111.  429.  The  statute  under  re-  closure  sale,  merely  deciding  that  it  was 
view  in  these  cases  gave  a  lien  for  materials  the  clear  intention  of  the  legislature  that 
"furnishedliy  contract  with  the  company."  the  contractor  should  be  restricted  to  his 

2  Peters  v.  St.  Louis  &  Iron  Mountain  statutory  lien.  That  he  could  have  no 
P.  f'o.  (1857),  24  Mo.  586  ;  Kent  v.  New  equitable  claim  i)aramount  to  the  mortga- 
York  Central  R.  Co.  (1855),  12  N.  Y.  gee,  on  the  ground  of  his  having  sui)]ilied 
628;  Redmond  v.  Galena  &  Southern  the  materials  for  tiie  road,  is  also  clear  from 
Wisconsin  R.  f'o.  (1876),  39  Wi.s.  426.  the  authorities,  .see  Chap.   XXVIII.,  post 

^  Farmers'  Loan  &  Trust  Co.  v.  Candler  (preferential  debts). 

(189.3),  92  Ga.  249;  h.  c.   18  S.   E.  Rep.  *  Coe  i>.  East  &  West  R.  Co.  of  Alabama 

540.      The    court     declined     to    inquire  (1892),  52  Fed.  Rep.  531. 


§§  256,  257.]     PRIORITIES  between  mortgages,  etc.  279 

holders  may  intervene  and  have  their  rights  adjusted.  Not  being 
obliged  to  intervene,  they  have  a  right  to  come  into  a  court  of  con- 
current jurisdiction,  and  compel  any  plaintiff  whose  claim  originated 
after  the  mortgage  was  made  to  prove  affirmatively  the  existence 
and  priority  of  his  lien  under  the  provisions  of  the  statute.^ 

§  256.  Stockholder  in  Construction  Company  ^vhich  floats  and 
guaranties  Bonds,  entitled  to  claim  a  Lien.  —  The  fact  that  a  con- 
tractor is  a  stockholder  in  a  construction  company  which  places 
the  bonds  upon  the  market,  and  guaranties  that  sufficient  money 
will  be  forthcoming  from  local  subscriptions  and  grants  to  prepare 
the  road  for  the  reception  of  the  rails,  will  not  estop  him  from  setting 
up  his  lien  against  the  mortgage.  The  remedy  for  the  breach  of 
such  a  guaranty  is  against  the  company  as  such,  and  not  against 
an  individual  stockholder  who  had  nothing  to  do  with  giving  it.^ 

§  257.  Statutes  declaring  Liens  in  Favor  of  Debts  arising  from  the 
Operation  of  the  Road,  Effect  of.  —  In  Tennessee  an  act  declares 
that  "  no  railway  company  shall  have  power  to  execute  a  mort- 
gage which  shall  be  binding  against  decrees  and  judgments"  for 
material  and  work,  or  for  damages  to  person  or  property,  in  the 
operation  of  the  road.  A  lien  obtained  under  this  act  is  binding 
on  the  road  in  the  hands  of  the  purchasers.^ 

But  a  sub-contractor  cannot  avail  himself  of  its  provisions, 
owing  to  the  peculiar  nature  of  the  remedies  to  which  he  is  con- 
fined by  the  statute  defining  his  rights  in  Tennessee.* 

The  act,  it  is  held,  does  not  violate  the  contract  of  the  State 
with  the  company.^ 

In  North  Carolina  the  statutory  priority  of  certain  claims  de- 
pends on  two  sections  of  the  Code,  —  685,  1255.  The  first  of 
these  provides  that  a  mortgage  (or  other  conveyance)  shall  be 
"  void  "  as  to  existing  creditors,  and  as  to  torts  committed  by  the 
company  prior  to  or  at  the  time  of  the  execution  of  the  deed, 
provided  the  action  to  enforce  the  claim  is  commenced  within 
sixty  days  after  its  registration.  The  second  declares  that  mort- 
gages shall  not  have  power  to  exempt  the  property  or  earnings  of 
the  corporation  from  executions  on  judgments  obtained  for  labor 
or  materials  or  torts.     It  has  been  held  that  the  beneficial  pro- 

1  Hassallv.  Wilcox  (1890),  130  TJ.  S.  Rep.  537;  40  Am.  &  Eng.  R.  R.  Cas. 
493  ;  s.  c.  9  Sup.  Ct.  Rep.  490  ;  40  Am.     358. 

&  Eng.  R.  R.  Cas.  385,  construing  Tex.  *  Central  Trust  Co.  v.  Bridges  (1893), 

Gen.  Laws,  §  79,  ch.  12.  6  C.  C.  A.  539  ;  s.  c.  57  Fed.  Rep.  753  ; 

2  Meyer  v.  Hornby  (1879),  101  U.   S.     51  Am.  &  Eng.  R.  R.  Cas.  452. 

728.  5  Fiazier  v.  East  Tennessee,  Va.  &  Oa. 

»  Frazier  v.  East  Tenn.,  Va.  &  Ga.  R.  R.  Co.  (1889),  88  Tenn.  138  ;  s.  c.  12  S.  W. 
Co.  (1889),  88  Tenn.  138  ;  s.  c.  12  S.  W.     Rep.  537  ;  40  Am.  &  Eng.  R.  R.  Cas.  35& 


280 


RAILWAY   BONDS   AND   MORTGAGES. 


[chap.  XI. 


visions  of  the  second  section  are  applicable  to  all  claims  of  the 
specified  classes,  whether  accruing  before  or  after  the  execution 
of  the  mortgage,  and  are  not  limited  by  the  proviso  in  the  former 
section  as  to  the  time  for  beginning  suit.^ 

§  257  a.  Priorities  in  the  Case  of  English  Debentures.  —  The  Cases 
cited  in  the  note  below  illustrate  questions  of  priorities  between 
debenture-holders  and  others.^ 


1  Boston  Safe  Deposit  &  Trust  Co.  v. 
Hudson  (C.  C.  A.  1895),  68  Fed.  Rep.  758, 
affirniing  Finance  Co.  of  Pennsjdvania  v. 
Charleston,  C.  &  C.  R.  Co.,  Ex  parte  Hud- 
son (1894),  61  Fed.  Rep.  369.  The  opinion 
in  the  Court  of  Appeals  contains  a  review 
of  the  decisions  on  this  statute  in  the  Su- 
preme Court  of  North  Carolina. 

As  to  liens  having  priority  to  mortgage, 
see  the  following  English  cases:  Russell  v. 
East  Anglian  Ry.  Co.,  3  McN.  &  G.  125  ; 
Im])erial  Merc.  Credit  Assn.  v.  Newry  & 
Armagh  Ry.  Co.,  I.  R.  2  Eq,  524.  Judg- 
ment creditors  subordinate  to  mortgagees: 
Potts  V.  Warwick  &  Birm.  Canal  Nav.  Co., 
Kay,  142  ;  Ames  v.  Trustees  of  Birkenhead 
Docks,  '20  Beav.  332  ;  Lord  Crewe  v. 
Edleston,  1  De  G.  &  J.  93  ;  Legg  v. 
Mathieson,  29  L.  J.  Ch.  385  ;  2  Giff.  71  ; 
Furness  v.  Caterham  Ry.  Co.,  25  Beav. 
614  ;  Harrison  v.  Cornwall  Minerals  R. 
Co.,  L.  R.  18  Ch.  Div,  334. 

Cases  involving  priorities  in  general: 
Phelps  V.  St.  Catharine's  &  N.  C.  R.  Co., 
19  Ont.  501  ;  Pittsburg,  C.  &  St.  L.  R.  Co. 
V.  Marshall,  85  Pa.  St.  187  ;  Thomas  v. 
N.  Y.  &  G.  L.  R.  Co.,  54  N.  Y.  St.  Rep. 
498  ;  Pettibone  v.  Tol.,  C.  &  St.  L.  R.  Co., 
148  Mass.  411  ;  Br.  &  Alb.  R.  Co.  v. 
Hughes,  52  Ga.  557  ;  Ream  v.  Stone,  102 
111.  359  ;  Des  Moines  &  Fort  Dodge  R.  Co. 
V.  Wat.,  St.  L.  &  Pac.  R.  Co.,  135  U.  S. 
576  ;  Bait.  &  L.  Turnpike  Co.  v.  Moale, 
71  Md.  359;  Manhattan  Trust  Co.  v. 
Seattle  Coal  Co.  (1897),  48  Pac.  Rep. 
333. 

'•^  As  between  general  creditors  and  de- 
benture-holders on  the  winding  up  of  the 
company,  see  Inre  Ojiera,  Limited  (1891), 
39  Wkly.  Rep.  705  ;  In  re  Standard  Manu- 
facturing Company  (1891),  1  Ch.  D.  627  ; 
I'll  re  General  Soutli  American  Company 
(1876),  2  Ch.  1).  337  ;  In  re  Pyle  Works 
flS89),  44  CIi.  I).  534  ;  In  re  The  Anglo- 
American  Leather  Cloth  Company,   Lim- 


ited (1880),  42  L.  T.  R.  504-507  ;  In  re 
Crumlin  Viaduct  Works  Company  (1879), 
11  Ch.  D.  755  ;  In  re  Underbank  Mills 
Company  (1885),  31  Ch.  D.  226  ;  Gorringe 
V.  Irwell  India  Rubber,  etc.  Company 
(1886),  34  Ch.  D.  128.  As  between  jMc^gf 
mcnt  or  execution  creditors  and  debenture 
holders  on  the  winding  up  of  the  company. 
In  re  Opera,  Limited,  supra  ;  In  re  Stand 
ard  Manufacturing  Co.,  supra;  In  re 
General  South  American  Co.,  supra 
Taunton  v.  Warwickshire  Sheriff  (1895) 
1  Ch.  734  ;  In  re  Bell  (1886),  34  Wkly 
Rep.  363.  Holding  that  the  debenture 
holders  have  priority  only  as  to  the 
"  undertaking,"  meaning  the  company  as 
a  going  concern,  not  upon  the  surjjlus 
lands,  as  against  judgment  creditors  who 
have  by  their  diligence  obtained  a  specific 
right  to  the  proceeds  of  the  sale.  In  re 
Hull  (1888),  40  Ch.  Div.  127.  As  be- 
tween trustee  of  debenture-holders'  deed, 
and  the  debenture-holders  themselves, 
holding  that  the  trustee  has  priority 
in  respect  of  liabilities  incurred  by  him. 
In  re  Exhall  Coal  Company,  Limited 
(1866),  35  Beav.  449.  As  between  hold- 
ers of  debentures  of  different  dates  of  issue, 
Sadler  v.  Worley  (1894),  8  R.  194  ;  In  re 
Mersey  Railway  Co.  (1895),  2  Ch.  287. 
Debentures  treated  as  valid  on  question  of 
priorities  though  irregularly  issued.  In  re 
Queensland  Land  &  Coal  Company,  Lim- 
ited (1894),  8  R.  476;  Davies  v.  Bolton  & 
Co.  (1894),  8  R.  685.  Priority  of  receiver 
of  a  company  as  to  moneys  raised  under 
court's  authority.  Greenwood  v.  Algeciras 
Railway  (1894),  7  R.  620.  As  to  priority 
of  debentures  issued  after,  first,  default  in 
payment  of  interest,  and,  second,  the  ap- 
pointment of  a  receiver,  Government 
Stock  Railway  Co.  v.  Manila  Railway 
(1895),  2  Ch.  551,  affirmed  L.  R.  App. 
Cases  (1897),  2  Ch.  p.  81,  holding  that 
the  debenture-holders  have  a  lien. 


CHAP.  XII.] 


TRUSTEES. 


281 


CHAPTER   XII. 


TRUSTEES. 


Art.  I.  —  Creation   and   Termination 
OF  THE  Trust.    Appointment 
AND  Removal  of  Trustees. 
§  258.    The  Selection  of  the  Trustee. 

259.  Legal   Capacity    of    Individuals 

and  Corporations  to  be  Trus- 
tees. 

260.  A  State  may  be  a  Trustee. 

261.  Resignation  of  Trustee. 

262.  Appointment,       Removal,      and 

Substitution  of  Trustees  by  a 
Court  of  Chancery,  generally. 

263.  Grounds  of  Removal. 

264.  Mortgage   Provisions  for  filling 

Vacancies. 

265.  Appointment   by  the   Company 

itself. 

266.  Election  by  the  Surviving  Trus- 

tees. 

267.  Statutory    Provisions  regulating 

the  Manner  of  the  Election  of 
Trustees  of  Railroad  Mort- 
gages. 

268.  Statutes  respecting  the  Election 

of  Trustees  cannot  override 
the  Provisions  of  a  Trust  Deed 
previously  executed. 

269.  Termination  of  the  Trust. 

Art.  II.  —  Nature    and     Extent     of 
the  Trustee's  Estate  and 
Powers. 
§270.    The    Precise    Character  of    the 
Interest. 

271.  The    Trustee    takes    an    Estate 

sufficient  to  enable  him  to 
execute   his  Trust. 

272.  Quality  of  Trustee's  Estate,  how 

affected  by  Statutoiy  Pro- 
visions. 

273.  Devolution  of  the  Trust  Estate. 

274.  Powers  of  Trustees  generally. 

275.  Bondholders'  Rights   under  the 

Mortgages  cannot  be  altered 
by  the  Trustees  without  their 
Consent. 


§  276.    The  Power  to  declare  the  Prin- 
cipal due. 

277.  The  Power  of  a  Trustee  to  waive 

Defaults  in  Interest  or  Princi- 
pal. 

278.  Power  of  Entry  conferred  on  the 

Trustee. 

279.  Power  of  Sale. 

280.  Trustee  not  confined  to  the  Ex- 

ercise of  a  Single  Power  only. 

281.  Special    Powers   of    Trustee   for 

Enforcement  of  the  Security 
cumulative  upon  the  Right 
of  Foreclosure. 

Art.  III.  — Notice  to  Trustee,  Effect 
of. 
§  282.  Bondholders  affected  with  No- 
tice of  Everything  learned  by 
Trustee  in  Course  of  Litiga- 
tion. 
283.  Effect  of  Notice  to  Trustee  not 
given  in  Active  Litigation. 

Art.  IV.  —  Duties    of    the    Trustees 
generally. 
§  284.    The  General  Duties  of  the  Trus- 
tee the  same  as  those  of  other 
Trustees. 

285.  The  Duties  of  a  Trustee  become 

active  when  a  Default  occurs, 
and  are  not  then  merely  min- 
isterial. 

286.  The  Duties  of  the  Trustee   are 

owed  to  the  Bondholders  sev- 
erally as  well  as  collectively. 

287.  A  Trustee's  Duties  are  personal, 

and  cannot  be  delegated. 

288.  A   Trustee   should    consult    the 

Court. 

289.  Trustee's  Duty  to  report  to  the 

Court. 

290.  Trusti-e's  Duty  to  account. 

291.  Trustee's  Duty  to  prevent  Mis- 

feasance of  Co-trustees. 

292.  Duty   of  Trustee   as  to  Invest- 

ment of  Trust  Funds. 


282 


RAILWAY   BONDS   AND   MORTGAGES. 


[chap.  XII. 


§  293.    The  Application  of  the  Money 
which  conies  into  the  Hands  of 
the  Trustees. 
Ai-t.  V.  —  Trustees  in  Possession. 

§  294.    General  Statement. 

295.  The   Eight   of   the    Trustee    to 

exercise   the   Corporate   Fran- 
chises after  entering  a  Default . 

296.  Trustee's    Duty   to    account    to 

Bondholders  for  the  Avails  of 
the  Propert}'. 

297.  Relation  of  the  Trustee  in  Pos- 

session   to   the   Mortgagor   or 
Corporation. 


§  298.  Trustee  taking  Possession  not 
an  Assignee  of  a  Lease  made 
subsequently  to  the  Mortgage. 

Suri'ender     of      Possession     by 
Trustee. 

Liabilities  to  Third  Persons. 

Trustees  in  Possession  are  within 
the  Purview  of  Statutes,  etc. 
302.    Liability  of  the  Company  while 
the  Trustees  are  in  Possession. 

Fiduciary    Position   of  Trustee, 
Acts  inconsistent  with. 

Trustee  not  compelled  to  coun- 
tersign and  deliver  Bonds. 


299. 


300. 
301. 


303. 


304. 


Article  I.  —  Creation  and  Termination  of  the  Trust. 
Appointment  and  Removal  of  Trustees.^ 

§  258.  The  Selection  of  the  Trustee. — "The  salability  of  rail- 
road bonds  depends,  in  no  inconsiderable  degree,  upon  the  char- 
acter of  the  persons  who  are  selected  to  manage  the  trust.  If 
these  persons  are  of  well-known  integrity  and  pecuniary  ability, 
the  bonds  are  more  readily  sold  than  if  this  were  not  the  case. 
It  is  natural  that  it  should  be  so,  and  on  this  account  the  trustees 
usually  appointed  in  this  class  of  mortgages  are  persons  of  good 
reputations  in  the  cities  where  the  bonds  are  likely  to  sell."  ^ 

A  railroad  mortgage  confers  upon  the  designated  trustees  spe- 
cific powers  which,  although  dormant  as  long  as  the  mortgagor 
is  solvent,  may,  by  the  occurrence  of  a  default  or  some  conduct 
which  threatens  the  interests  of  the  bondholders,  demand  the 
performance  of  duties  of  a  very  delicate  and  onerous  nature.  It 
is  true  that  the  question  whether,  under  all  the  circumstances  of 
the  case,  it  is  for  the  advantage  of  the  cestuis  que  trustent  that 
the  trustees  should  assume  control  of  the  mortgaged  property,  is 
generally,  by  the  express  terms  of  the  instrument,  a  matter  to  be 
determined  by  a  certain  portion  of  the  bondholders.  Usually, 
however,  the  bondholders  are  so  widely  scattered,  and  possess 
such  a  slender  acquaintance  with  the  facts  requisite  to  enable 


1  As  to  the  extent  to  which  bondhold- 
ers are  bound  by  the  action  of  a  trustee  in 
litigation  affecting  their  rights,  see  Parties, 
Cliap.  XXIV.  On  the  duty  of  a  trustee 
to  countersign  and  deliver  bonds,  see 
Chap.  I. 

2  Knapp  V.  Riiilroad  Co.  (1874),  20 
Wall.  117;  s.  r.  22  L.  Coijp.  ed.  328. 
Compare  Merrill  v.  Farmers'  Loan  &  Trust 


Co.  (1881),  24  Hun,  297,  where  the  court 
says:  "In  trusts  of  this  nature  respon- 
sible and  intelligent  ])arties  are  commonly 
selected  to  receive  them,  for  the  purpose 
of  assuring  the  creditors  that  they  will  be 
faitlifully  executed  for  their  benefit,  and 
their  interests  in  the  property  protected, 
as  far  us  that  can  be  done  by  fidelity  and 
attention  on  the  part  of  the  trustee." 


§  259.]  TRUSTEES.  283 

them  to  arrive  at  a  correct  decision,  that,  for  practical  purposes, 
the.  opinion  of  the  trustees  in  regard  to  the  propriety  of  sucli  a 
step  is  often  apt  to  be  of  great,  if  not  controlling,  weight ;  and 
the  effect  of  this  restrictive  provision  will  probably  be,  that  in 
most  cases  the  selection  of  the  course  to  be  adopted  will  be  as 
much  in  their  hands  as  if  no  such  limitation  had  been  placed 
upon  their  authority.  In  view  of  these  considerations,  it  seems 
clear  that  good  administrative  capacity,  and  a  knowledge  of  the 
details  of  railroad  business  in  general,  and  of  the  business  of  the 
mortgagor  company  in  particular,  if  possible,  are  qualifications 
quite  as  necessary  for  a  trustee  as  financial  ability.  In  the  early 
history  of  railroad  securities,  natural  persons  were  quite  com- 
monly chosen  as  trustees.  In  such  cases,  however,  troublesome 
questions  will  arise  as  to  filling  of  vacancies  in  case  of  death. 

Besides  this,  the  difficulty  of  finding  individuals  possessing  the 
manifold  qualifications  required  in  the  depositary  of  a  trust  of 
this  description  has  latterly  led  more  and  more  to  the  selection 
of  corporations  which,  as  they  control  a  large  capital  and  make  a 
specialty  of  this  class  of  business,  possess  in  a  far  higher  degree 
both  the  financial  standing  which  will  inspire  confidence  in  in- 
vestors, and  the  experience  and  skill  which  will  enable  them  to 
manage  the  trust  estate  to  the  best  advantage,  if  it  should  become 
necessary  to  enter  into  possession. 

§  259.  Legal  Capacity  of  Individuals  and  Corporations  to  be  Trus- 
tees.—  (a)  The  general  rule  on  this  subject  has  been  thus  stated 
by  a  well-known  text  writer  in  words  which  are  as  applicable  to 
the  trustees  of  a  railroad  mortgage  as  to  othei's :  "  Whoever  is 
capable  of  taking  the  legal  title  or  beneficial  interest  in  property 
may  take  the  same  trust  for  others.  Whatever  persons  or  cor- 
porations are  capable  of  having  the  legal  title  or  beneficial  inter- 
est cast  upon  them  by  gift,  grant,  bequest,  or  operation  of  law, 
may  take  the  same  subject  to  a  trust,  and  they  will  become  trus- 
tees. But  it  does  not  follow  that  whoever  is  capable  of  taking  in 
trust  is  capable  of  performing  or  executing  it.  Tlie  inquiry,  then, 
is  not  so  much,  who  may  take  in  trust,  as  it  is,  who  may  execute 
and  perform  a  trust."  ^ 

The  principles  here  formulated  are  applied  without  qualification 
where  the  proposed  trustee  resides  in  the  State  in  which  the  prop- 
erty to  be  mortgaged  is  situated.  The  capacity  to  accept  the 
trust  is  decided,  in  the  case  of  natural  persons,  by  the  law  of  the 
State  applicable  in  such  case,  and  as  to  corporations,  by  the  terms 
of  their  charters  or  general  statutes  under  which  they  are  organ- 

1  Perry  on  Trustees,  §  39. 


284  BAILWAY  BONDS   AND   MORTGAGES.  [CHAP.  XII. 

ized,  and  the  law  of  the  State  applicable  to  trusts.  On  the  other 
hand,  where  the  domicil  of  the  trustee  and  the  situs  of  the 
property  are  in  different  States,  it  becomes  necessary  to  consider 
whether  this  circumstance  creates  any  partial  or  complete  inca- 
pacity under  the  laws  of  either  State.  If  the  ownership  of  bonds 
to  a  certain  amount  be  a  necessary  qualification  under  the  mort- 
gage, a  candidate  for  the  office  is  not  rendered  ineligible  for  the 
reason  that  he  acquired  bonds  to  that  amount  expressly  for  the 
purpose  of  making  himself  eligible  ;  nor  will  a  sale  of  the  bonds 
after  his  election  disqualify  such  a  trustee  for  continuing  to  per- 
form the  duties  of  the  office.^ 

(b)  Non-residence  of  Natural  Person.  —  It  is  apparently  well 
settled  that  no  disqualification  on  the  ground  of  non-residence 
will  be  inferred  merely  on  grounds  of  public  policy.  Thus  where 
a  trust  deed,  by  implication,  required  the  trustees  to  be  residents 
of  another  State,  the  court,  while  waiving  the  inquiry  whether 
public  policy,  even  in  the  most  narrow  sense,  would  be  promoted 
by  limiting  the  right  to  control  and  manage  railroads  to  residents 
of  the  State  in  which  the  raih'oad  was  situated,  said  that  it  was 
very  clear  that  the  provision  was  not  against  public  policy  in  any 
such  sense  as  would  affect  the  validity  of  the  contract.  The 
stipulation  was  merely  an  innocent  provision  made  to  answer  the 
convenience  of  the  parties,  and  one  which,  in  the  absence  of  any 
legislation  forbidding  it,  they  were  at  perfect  liberty  to  make.^ 

Positive  legislation  on  this  subject  is  necessarily  circumscribed 
by  the  constitutional  provision  which  declares  that  "  the  citizens 
of  each  State  shall  be  entitled  to  all  the  privileges  and  immunities 
of  citizens  of  the  several  States."  An  Indiana  act,  therefore, 
which  declared  non-residents  to  be  incapable  of  acting  as  trustees 
has  been  held  invalid,  so  far  as  regards  citizens  of  the  United 
States,  since  they  cannot  be  denied  the  right  to  take  and  hold 
absolutely  real  or  personal  property  in  any  State  of  the  Union,  or 
to  accept  the  conveyance  of  such  property  in  trust  for  their  sole 
benefit,  or  for  the  benefit  of  themselves  and  others.^ 

1  Kichards  t>.  Merrimack  &  Connecticut  he  will  lie  treated  under  the  mortgage  as 

River  K.iilroad  (1802),  44  N.  H.  127.     The  trustee  for  tiie  liolders  of  the  bonds.    In  re 

trust  relationsliip  may  be  created  without  Bondholders  of  York  &  C.  R.  Co.  (1861), 

a  designation  of  the  mortgagee  as  trustee.  .^)0  Me.  .').^2  ;  Mason  v.  York  &  C.  R.  Co. 

Thus  where,  a  mortgage  on  railroad  proji-  (1861),  f)2  Mo.  82. 

erty  is  executed  to  an  individual  and  liis  ^  Clieever  v.  Rutland,    Burlington,    & 

a.ssigns  (and  not  to  him  as  tru.stee),  who  W.  R.  Co.  (1869),  4  Ain.  Ry.  Reii.  291. 

may  subsef|uently  become  holders  of  l)onds  "  Farn)ers'  Loan  &  Trust  Co.  v.  Chicago 

to  be  issued  to  him  by  tlie   railroad   com-  &  A.   R.   Co.    (1886),   27   Fed.  Rep.    146  ; 

pany,  should  he  assign  any  such  bouds,  s.  c.  24  Am.  &  Eng.  R.  R.  Cas.  66. 


§  259.]  TRUSTEES.  285 

(c)  Foreign  Corporations  as  Trustees.  —  In  this  subdivision  we 
consjider  the  position  of  a  corporation  which  is  foreign  to  the 
State  where  the  property  is  situated.  The  subject  must,  then,  be 
considered,  first,  from  the  point  of  view  whether  the  corporation 
can  by  the  law  of  the  State  to  which  it  belongs  take  a  trust  of 
property  in  another  State ;  and,  secondly,  whether  it  can  do  so 
under  the  law  of  the  foreign  State  where  the  property  is  situated. 
The  statutes  of  both  States  must  be  considered.  It  is  the  gen- 
eral law  throughout  the  United  States  that  foreign  corporations 
can  become  trustees  of  railroad  mortgages,  —  "foreign,"  for  the 
purpose  of  this  rule,  meaning  foreign  to  the  particular  State  of  the 
United  States  where  the  property  is  situated.  An  entirely  differ- 
ent case  is  presented  where  the  corporation  is  organized  under 
laws  of  a  State  other  than  one  of  the  United  States.  The  laws 
against  aliens  holding  lands  are  generally  such  as  to  prevent  such 
corporations  from  becoming  trustees.  As  respects  corporations, 
the  constitutional  provision  in  (b),  supra,  has  no  application. 

Presumably,  therefore,  an  act  invalidating  all  trust  deeds 
executed  to  foreign  corporations  would  be  unobjectionable  on 
constitutional  grounds.^ 

The  limitations  on  the  powers  of  foreign  corporations,  how- 
ever, so  far  as  they  concern  the  present  discussion,  have  been 
considered  chiefly  in  relation  to  the  common  provision,  statutory 
or  constitutional,  which  prohibits  such  corporations  from  "  doing 
business"  in  a  State,  except  on  certain  conditions. 

The  mere  acceptance  of  a  trust  which  is  to  be  executed  after- 
wards on  a  contingency  is  probably  not  within  the  prohibition.^ 

A  trust  mortgage  to  secure  a  debt  is  not  within  the  prohibition 

^  This  was  assumed  in  Farmers'  Loan  &  pendent  opinion  to  the  effect  stated  in  the 
Trust  Co.  V.  Chicago  &  A.  Ry.  Co.,  supra  ;  text,  but  based  its  actual  decision  that  the 
but  Judge  Greshara,  upon  a  review  of  the  trust  deed  to  the  foreign  corporation  was 
wording  of  the  statute,  concluded  that  it  voidable  merely,  and  not  void,  upon  the 
could  not  have  been  intended  to  apply  to  case  of  Sherwood  v.  Alvis  (1887),  83  Ala. 
corporation-s.  But  on  the  point  as  to  115  ;  s.  c.  3  Am.  St.  Rep.  695.  This  case, 
public  policy  referred  to  supra,  a  similar  as  explained  in  the  subsequent  decision  of 
ruling  has  been  made  in  regard  to  foreign  Dudley  v.  Collier  (1888),  87  Ala.  431,  can- 
corporations  by  Mr.  Justice  Harlan,  of  not  be  regarded  as  an  authority  for  the 
the  Supreme  Court  of  the  United  States,  point  to  which  it  was  cited.  This  and 
Hervey  v.  Illinois  Midland  Ry.  Co.  (1884),  other  rulings  of  the  same  court  have  estab- 
28  Fed.  Eep.  169,  175.  This  point  was  lished  the  doctrine  in  that  State  that  even 
not  noticed  on  the  appeal.  See  Union  the  single  act  of  making  one  loan  of  money, 
Trust  Co.  V.  Illinois  Midland  Ry.  Co.  and  taking  a  mortgage  to  secure  it,  by  a 
(1886),  117  U.  S.  434.  foreign  company  engaged  in  the  business  of 

2  American  Loan  &  Trust  Co.  v.  East&  lending  money  on  mortgages,   is   "doing 

West  R.  Co.  of  Alabama  (1889),  37  Fed.  business."      See      Thompson     on     Corp., 

Rep.  242.      The  court  expressed  an  inde-  §§  7955,  7957. 


286 


RAILWAY   BONDS   AND   MORTGAGES. 


[chap.  XII. 


of  the  Illinois  act  of  June  15,  1887,  as  amended  by  the  act  of 
June  1,  1889,  declaring  a  trust  unlawful  where  it  is  taken  by  a 
corporation  organized  for  the  purpose  of  accepting  and  executing 
trusts,  unless  the  corporation  has  made  a  certain  deposit  for  the 
benefit  of  its  creditors.^ 

Even  if  such  a  statute  should  disable  the  trustee  from  executing 
the  trust,  it  cannot  have  the  effect  of  preventing  the  bondholders 
from  enforcing  it  in  a  federal  court.^ 

The  questions  above  considered  present  themselves  in  a  some- 
what different  aspect,  when  the  power  of  a  trust  company  to  take 
a  mortgage  of  the  property  of  a  foreign  railroad  is  disputed  in 
one  of  the  courts  of  the  State  in  which  the  company  was  organ- 
ized. The  true  principle  seems  to  be  that  the  grant  of  a  charter  to 
do  business  of  the  kind  for  which  such  corporations  are  organized 
will  not,  in  the  absence  of  some  express  limitation,  be  deemed  to 
refer  merely  to  those  cases  in  which  the  subject-matter  of  the 
pledge  is  situated  in  the  State  by  which  the  charter  was  granted.^ 


^  Farmers'  Loan  &  Trust  Co.  v.  Chicago 
P.  &  N.  R.  Co.  (1895),  68  Fed.  Eep.  412. 

2  Farmers'  Loan  &  Trust  Co.  v.  Chi- 
cago &  N.  P.  E.  Co.  (1895),  68  Fed.  Rep. 
412.  Judge  Jenkins  said  :  "It  may  be 
that  certain  trusts  contained  in  the  trust 
deed  or  mortgage  cannot  be  enforced  by 
the  trustee  while  in  contempt  of,  and  until 
compliance  with,  the  laws  of  the  State  of 
Illinois.  I  refer  to  those  provisions  of  the 
instrument  which  authorize  the  trustee  to 
take  possession  of,  acquire  title  to,  and 
convey  the  property.  It  is  not,  however, 
necessaiy,  nor  by  this  bill  is  it  sought,  to 
execute  those  trusts.  If  they  are  void, 
their  invalidity  does  not  necessarily  invali- 
date the  instrument  as  a  mortgage.  The 
court  will  treat  it  as  a  mortgage  merely, 
the  trustee,  as  mortgagee,  holding  the 
naked  legal  title  to  the  security,  the  bond- 
holders being  the  beneficial  owners.  Tlie 
court  will  enforce  the  security  by  judicial 
sale,  not  pemaitting  the  execution  of  any 
trust  that  may  be  inoperative  until  com- 
pliance with  the  law  of  the  State  of  Illi- 
nois. The  statute  has  provideil  a  penalty 
for  the  act  of  the  tru.stee,  if  its  assump- 
tion of  duty  is  within  the  prohibition  of 
the  act.  That  penalty  is  the  measure  of 
punishment  which  the  State  saw  fit  to 
impose  for  violation  of  its  laws.  It  has 
not  undertaken  to  render  void  the  tru.st 
decil  or  mortgage,  or  to  deny  to  innocent 


parties  the  enforcement  of  it  in  protection 
of  their  rights.  It  may  be  that  the  courts 
of  the  State  of  Illinois  would  refuse  to 
recognize  the  trustee  .standing  in  defiance 
of  its  laws.  I  do  not  think,  however,  that 
the  duty  is  imposed  ujjon  a  federal  court 
to  punish  innocent  parties  in  vindication 
of  the  authority  of  the  State." 

The  Fai'mers'  Loan  &  Trust  Co.,  in  a 
late  action  in  the  Superior  Court  of  Cook 
County,  Illinois,  has  been  removed  from 
the  trusteeship  of  a  deed  of  trust  made  by 
a  street-railroad  company,  on  the  ground 
that  it  had  not  com])lied  with  the  require- 
ments of  the  law  of  the  State  of  Illinois 
as  to  a  deposit  of  securities  by  foreign  cor- 
porations doing  business  within  the  State. 
The  decree  of  the  lower  court  was  af- 
firmed by  the  apjiellate  court  for  that 
district  in  February,  1897. 

In  American  Loan  &  Trust  Co.  v.  East 
&  We.st  Railroad  Co.  (1889),  37  Fed.  Rep. 
242,  it  was  strongly  intimated  that  a  stat- 
ute of  this  character  would  debar  a  trustee 
corporation  which  had  not  complied  with 
the  laws  from  interfering  actively  in  the 
enforcement  of  the  trust. 

■''  Farmers'  Loan  &  Trust  Co.  v.  Har- 
mony Ins.  Co.  (1868),  51  Barb.  33.  The 
doctrine  .stated  in  the  text  is  not  exjdicitly 
enunciated  in  this  case,  but  seems  to  be 
fairly  deduciible  from  the  ruling  and  the 
language  of  the  court. 


§§  260-262,]  TRUSTEES.  287 

§  260.  A  state  may  be  a  Trustee.^  —  This  relation  to  the  bond- 
holders is  sometimes  the  result  of  the  express  language  of  the 
acts  by  which  State  aid  is  granted  for  carrying  out  works  of 
internal  improvement  by  the  exchange  of  State  for  railroad  bonds. 
Under  these  circumstances  the  lien  usually  created  by  these  stat- 
utes to  indemnify  the  State  for  the  loan  of  its  credit  is  for  the 
benefit  of  the  holders  of  the  State  bonds,  and  the  State  is 
the  instrument  through  which  the  liability  of  the  company  to 
the  bondholder  is  to  be  discharged.^ 

In  such  a  case  no  special  mortgage  is  required  to  fasten  the  lien 
upon  the  property,  or  to  put  the  State  in  the  position  of  a  trustee.^ 
The  State  does  not,  however,  become  a  trustee  merely  by  indorsing 
the  bonds  and  declaring  a  lien  upon  the  company's  property  for  its 
own  protection.  Under  such  circumstances,  therefore,  the  pur- 
chase by  the  State  of  that  property,  in  order  to  secure  itself,  is 
not  invalid,  and  the  transaction  will  not  be  set  aside  at  the  suit  of 
a  bondholder.^ 

Nor  does  the  State  assume  the  position  of  a  trustee  by  hypothe- 
cating, as  a  security  for  a  certain  issue  of  bonds,  the  stock  of  the 
'company  which  it  holds  by  virtue  of  an  act  allowing  it  to  sub- 
scribe for  the  shares,  and  giving  it  the  right  to  appoint  a  majority 
of  the  directors.  In  such  a  case  there  is  no  implied  agreement 
to  charge  itself  with  the  duty  of  exercising  its  powers  of  control 
so  as  to  preserve  the  earnings  of  the  road,  and  appropriate  them 
to  the  payment  of  the  bonds.  The  State  is  no  more  a  trustee 
than  any  other  majority  stockholder  of  a  corporation,  and  is 
under  no  duty  to  the  mortgagee  except  to  conduct  itself  honestly 
in  exerting  its  powers  of  control  for  the  interests  of  the  mort- 
gagees and  other  creditors  and  stockholders  of  the  corporation.^ 

§  261.  Resignation  of  Trustee.  —  A  trustee,  after  he  lias  accepted 
the  office,  cannot  discharge  himself  by  a  subsequent  resignation 
merely,  or  by  his  own  act.  He  must  be  discharged  either  by  vir- 
tue of  some  special  provision  in  the  trust  deed,  or  by  an  order  of 
some  court  of  competent  jurisdiction,  or  by  the  consent  of  all 
persons  interested.^ 

§  262.  Appointment,  Removal,  and  Substitution  of  Trustees  by  a 
Court  of  Chancery,  generally.  —  The  inherent  authority   of  equity 

1  Perry  on  Trusts,  §  41.  R.  Co.  (1878),  3  Woods,  418 ;  s.  c.  6  Fed. 

2  Holland  v.   State  of  Florida  (1876),     Cas.  974,  Case  No.  3483. 

15  Fla.  455  (see  especially  p.  534).  ^  Gibson  v.  Richmond  &  Danville  R. 

8  State  of  Florida  v.  Florida  Central  R.  Co.  (1889),  37  Fed.  Rep.  743  ;  s.  c.  5  Ry. 
Co.  (1876),  15  Fla.  690.  &  Corp.  L.  J.  461. 

*  Cunningham  v.  Macon  &  Brunswick  •>  Richards  v.  Merrimack  &  Connecticut 

River  Railroad  (1862),  44  X.  H.  127. 


288  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  XII. 

to  effectuate  a  trust  extends  to  the  appointment  of  trustees  to 
administer  a  statutory  trust,  although  no  provision  for  such  an 
appointment  is  made  by  the  statute  itself.^ 

By  the  general  law  of  trusts  a  court  of  equity  has  power  to  re- 
move and  appoint  trustees,  in  order  that  the  trust  shall  survive 
and  be  executed  so  as  to  effect  the  purposes  for  which  it  is 
established. 2 

This  power  is  not  defeated  by  the  fact  that  there  are  special 
legislative  provisions  respecting  the  election  of  trustees.  These 
are  regarded  merely  as  "  auxiliary  regulations  designed  to  aid  the 
court  in  the  discharge  of  its  duty,  and  to  facilitate  the  action  of 
the  bondholders  who  may  desire  to  co-operate  to  secure  a  more 
efficient  execution  of  the  trust,  and  are  not  intended  to  prohibit 
an  individual  bondholder  from  directly  invoking  the  aid  of  a  court 
of  equity  in  behalf  of  himself  and  others  entitled  to  the  protec- 
tion of  the  same  security. ^ 

A  court,  however,  cannot  remove  trustees  from  a  part  of  their 
trust,  leaving  them  burdened  with,  and  responsible  for,  the  re- 
mainder.* 

§  263.  Grounds  for  Removal.  —  (a)  Non-residents.  —  A  railroad 
trustee  who  becomes  a  resident  of  a  foreign  country  is  deemed  to 
have  thereby  incapacitated  himself  for  the  duties  of  the  office,  and 
if  he  attempts  thereafter  to  bring  suit  as  trustee  in  a  Federal  court, 
the  State  court  will  enjoin  him.^ 

The  jurisdiction  of  a  court  of  chancery  to  substitute  another 
trustee  in  such  a  case  may  be  exercised  even  though  the  absent 
trustee  is  within  the  military  lines  of  an  enemy,  and  cannot  be 
served  with  process.  Such  a  circumstance  does  not  detract  from 
the  power  of  the  court  to  remove  him  and  appoint  another,  but 
rather  furnishes  a  good  reason  for  the  appointment  of  a  successor.^ 

1  In  re  Eastern  Railroad  (1876),  120  extension  of  the  road  ;  nor  by  the  fact  that 
Mass.  412.  a  majority  of  the  bonds  was  represented 

2  Hale  V.  Nashua  &  Lowell  Railroad  at  the  organization  of  the  new  corporation, 
(1880),  60  N.  H.  333.  there  being  nothing  in  the  mortgage  an- 

8  Inhabitants   of    Anson,    Petitioners,  thorizing  a  majority  of  the  bondholders  to 

etc.  (1892),  85  Me.  79  ;  s.  c.  26  Atl.  Rep.  act  for  the  minority  in  matters  respecting 

996.     It  was  also  held  that  the  inherent  the  mortgage. 

jurisdiction  of  a  court  of  equity  was  not,  *  Sturges  v.  Knapp  (1858),  31  Vt.  1. 

in  this  case,  defeated  by  the  formation  of         ^  Farmers'  Loan  &  Trust  Co.  v.  Hughes, 

a  new  coriwration  by  a  majority  of  the  11  Hun,  130.    Compare  Hughes «.  Chicago, 

bondholders  ;  nor  by  the  foreclosure  pro-  Milw.  &  St.  Paul  Ry.  Co.  (1881),  47  N.  Y. 

moted    by  the  bondholders,    the  trustees  Supr.  Ct.  531  ;  15  J.  &  S.  531. 
not  being  parties  thereto,  and  a  sale  of  the  «  Ketchum  v.   Mobile  &  Ohio  R.   Co. 

equity  of  redemption  on  execution  to  the  (1876),    2   "Woods,    532.      Woods,   C.  J., 

new  corporation  ;  nor  by  the  creation  of  a  said  :  "  The  war  might  have  lasted  twenty 

new  debt,  secured  by  mortgage,  for  the  years,    during  all   which   time   it  would 


§  263.]  TRUSTEES.  289 

Wl)ere  the  trust  deed  itself  provides  that,  in  case  the  trustee 
therein  named  is  absent  from  the  State  when  required  to  act, 
another  person  shall  be  appointed  to  succeed  him,  the  clause  will 
be  construed  as  referring  to  a  permanent  absence,  and  not  to  an 
absence  that  is  merely  casual  or  temporary.^ 

(b)  Acquisition  of  Hostile  Interests.  —  The  fact  that  the  trustees 
have  acquired  interests  hostile  to  those  of  the  bondholders  is  a 
sufficient  ground  for  their  removal. ^ 

The  fact  that  what  is  alleged  in  a  petition  filed  in  a  Federal 
court  for  the  removal  of  trustees  was  done  by  them  in  another 
capacity  and  in  another  relation  to  the  property,  under  the  direc- 
tions of  a  State  court,  will  not  constitute  any  reason  why  they 
should  not  be  removed,  where  they  have  come  out  of  those  pro- 
ceedings with  such  interests  in  the  property  that  their  position  is 
hostile  to  that  of  the  petitioners.^ 

Whether  a  trustee  who  represents  several  different  classes  of 
bondholders  secured  by  successive  mortgages  is  thereby  disquali- 
fied from  acting  for  more  than  one  of  those  classes  in  foreclosure 
proceedings,  is  a  question  which  has  been  answered  differently  by 
the  two  federal  circuit  judges  to  whom  it  has  been  submitted. 
In  Clyde  v.  Richmond  &  Danville  R.  Co.,*  Judge  Goif  refused  to 
allow  committees  of  bondholders  to  become  parties  on  this  ground 
alone,^  taking  the  position  that  it  would  not  be  presumed  that 
the  trustee  would  be  unfaithful  to  the  trusts  confided  to  him, 
and  that  it  would  be  time  enough  to  consider  the  question 
whether  the  bondholders  should  be  made  parties  for  their  own 
protection  when  the  trustee  failed  promptly  and  faithfully  to  dis- 
charge his  duties. 

have  been  impossible  to  serve  the  absent  cence.  This  case  may  be  contrasted  with 
trustee.  It  seems  to  me  to  be  a  very  that  ofWashington,  Alexandria,  &  George- 
unreasonable  proposition  that  during  all  town  R.  Co.  v.  Alexandria  &  Washington 
this  time  a  court  of  chancery  must  see  the  R.  Co.  (1870),  19  Gratt.  ( Va. )  592,  cited 
trust  estate  perishing  (or  want  of  a  trustee,  in  §  264,  post,  wheie  the  trust  deed  re- 
and  refuse  to  act  on  the  ground  that  a  quired  notice  of  the  apjilication  for  a  new 
naked  trustee,  whom  it  was  impossible  to  trustee  to  be  given  to  certain  officers  of 
serve,  had  not  been  served  with  process."  the  corporation. 

In  this  case  there  was  the  additional  cir-  ^  Equitable  Trust  Co.  v.  Fisher  (1883), 

cumstance  that  the  trustee  had  made  no  106  111.  189. 

claim  to  the  office  for  ten  years  after  the  ^  Dwight   v.    Smith   (1882),    13    Fed. 

war.     The  court  held  that,  even  if  with-  Rop.  50.     See  Perry  on  Trusts,  §  275. 
out  notice,   the   appointment   of  another  "  Brooks  v.  Vermont  Central  R.   Co. 

trustee  was  good   for  temporary  purposes  (1878),  14  Blatch.  463. 
only,  and  the  ])o\ver  of  the  court  extended  *  55  Fed.  Eep.  445  (1893). 

that  far,  undoubtedly;  al.so  that  the  trustee  ^  ^^g  to  the  general  rule  in   regard  to 

who  had  been  removed  had  lost  his  right  the  intervention  of  bondholders,  see  Chap. 

to  resume  his  office  by  his  long  acquies-  XXIV.  (parties). 

19 


290  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.   XII. 

In  the  recent  case  of  Farmers'  Loan  &  Trust  Co.  v.  Northern 
Pacific  R.  Co.,1  Judge  Lacombe,  under  similar  circumstances, 
considered  that  the  proper  course  was  either  to  substitute  new 
trustees  under  all  the  mortgages  but  one,  or  to  allow  representa- 
tive bondholders  to  become  parties  to  the  suit,  the  latter  being 
the  course  actually  adopted.  The  action  of  Judge  Goff  was  re- 
ferred to  with  disapproval. 

(c)  Breach  of  Trust.  —  If  there  has  been  an  actual  breach  of 
trust  on  the  part  of  the  trustee,  the  proper  remedy  of  the  bond- 
holders is  to  take  appropriate  measures  to  have  them  removed, 
and  their  places  filled  by  others  who  will  perform  their  duty .2 

The  court,  however,  will  not  remove  a  trustee  for  every  mistake 
and  neglect  of  duty,  but  only  for  such  conduct  as  endangers  the 
trust  property,  or  shows  a  want  of  capacity,  honesty,  or  reason- 
able fidelity.^ 

Thus  a  trustee  under  two  railroad  mortgages  should  not  be 
removed  from  his  trusteeship,  on  the  application  of  a  majority 
in  interest  of  the  bondholders  under  the  first  mortgage,  for  the 
reason  that  he  declined  to  employ  counsel  selected  by  them  to 
foreclose  their  mortgage,  and  refused  to  elect  under  which  mort- 
gage he  would  serve  and  which  he  would  resign,  especially  if,  for 
anything  that  appears,  the  trustee's  judgment  in  the  matter  was 
sound  and  not  against  the  interest  of  any  bondholders.* 

On  the  other  hand,  it  has  been  held  a  proper  case  for  tlie 
removal  of  a  trustee  that  he  suffered  a  portion  of  the  bonds  to 
remnin  unpaid  after  maturity,  and  neglected  and  refused  to  take 
possession  of  the  mortgaged  property  and  to  execute  the  trust  by 
enforcing  the  mortgage  on  the  request  of  the  bondholders.  It  is 
a  clear  violation  of  the  trust  to  attempt  to  compel  the  cestiiis 
qua  frn.sfent  to  wait  the  ])leasure  of  the  trustee  in  foreclosing  tlie 
mortgage,  or  to  coerce  them  to  afford  facilities  to  the  debtor  to 
raise  means  to  pay  its  debts.^ 

A  coin])laint  in  an  action  for  the  removal  of  a  trustee  is  not  de- 
murrable where  it  alleges  that  the  defendant  has  refused  to  obey 
an  ordor  to  convey  the  trust  property,  made  by  a  competent  court," 
and  therefore  vulid  until  reversed  and  vacated.^ 

§  204.  Mortgage  Provisions  for  filling  Vacancies.  —  Generally  the 
mode  of  lllliug  vacancies  is  governed   l)y  the  instrument  itself. 

1  70  Fn.l.  ll.'p.  423  (ISOf)).  See  also  *  Bcadlc-ston  in  Knapp  (1872),  13  Abb. 
mibd.  ((;),  bolow.  Pr.  N.  S.  33.5. 

2  Stevens  v.  KMiidc^o  (1876),  4  ClilF.  ^  In  the  Matter  of  the  Petition  of  the 
348.  Mechanics'  Hank  (1848),  2  Barb.  446. 

8  Fictnhor  u  Kntland  &  liurlington  R.  "  Harrison  v.  Union  Trust  Co.  (180.5), 

Co.  (1858),  3'J  Vt.  G33.  144  N.  Y.  326;    s.  c.  39  N.  E.  R,ep.  353. 


§§  265,  266.]  TRUSTEES.  291 

Hence  although  the  mortgagor  may,  by  general  rules  of  law,  have 
the  right  to  be  notified  of  the  application  to  fill  a  vacancy,  an 
appointment  is  valid  without  such  notice  where  the  mortgage 
merely  requires  nomination  by  one  of  the  beneficiaries,  and  ap- 
proval by  a  judge  of  one  of  the  courts  of  the  State.^ 

On  the  other  hand,  if  such  notice  is  expressly  required,  and  not 
given,  this  will  invalidate  the  appointment.^ 

"Where  the  deed  provides  the  mode  in  which  the  successors  of 
the  original  trustees  are  to  be  selected,  and  proceedings  ai-e  insti- 
tuted to  procure  confirmation  of  an  appointment  which  is  asserted 
to  be  invalid  for  the  reason  that  the  terms  of  the  deed  have  not 
been  strictly  followed,  it  is  not  necessary  that  every  individual 
bondholder  should  be  notified  of  such  proceedings,  the  duty  of  the 
court  being  merely  to  see  that  service  is  made  upon  the  grantor 
and  the  different  beneficiaries  under  the  trust  so  as  to  insure  a  full 
and  fair  representation  of  that  interest.^ 

§  265.  Appointment  by  the  Company  itself.  —  The  Company  itself 
may  appoint  a  new  trustee,  if  it  has  reserved  the  power  to  do  so  ;  "* 
and  in  such  a  case  the  propriety  of  an  appointment  to  which  it  has 
consented  cannot  be  questioned  by  it,  although  there  may  have 
been  no  formal  resolution  on  the  subject.^ 

§  266.  Election  by  the  Surviving  Trustees.  —  Where  the  trustees 
themselves  are  vested  with  the  power  of  filling  vacancies,  they 
cannot  do  discretionary  acts  without  filling  a  vacancy.  Taking 
possession  of  the  road,  where  the  deed  allows  the  trustees  to  do  so 
without  any  requisition  of  the  bondholders,  is  an  act  of  that  char- 
acter, and  therefore,  if  one  of  the  trustees  dies  after  the  filing  of 
a  bill  to  obtain  possession,  his  place  must  be  supplied  by  the  sur- 
vivors before  the  suit  can  proceed.  The  corporation  can  take 
advantage  of  the  failure  to  fill  the  vacancy,  for  it  is  uncertain 
what  may  be  the  opinion  of  the  new  trustee  as  to  the  further 
prosecution  of  the  suit.^ 

1  Macon  &  Augusta  R.  Co.  v.  Georgia  doctrine  which  would  rigidly  insist  upon 
Railroad  &  Bkg.  Co.  (1879),  63  Ga.  103  ;  notice  under  such  circumstances  seems  to 
s.  c.  1  x\m.  &  Eug.  R.  R.  Cas.  378.  be  of  very  dubious  soundness.     See  §  263, 

2  Washington,  Alexandria,   &  George-  anfc. 

town  R.  Co.  V.  Alexandria  &  Washington  3  Cheever  v.  Rutland  &  Burlington  R. 

R.  Co.  (1870),  19  Gratt.    ( Va.)   592.     In  Co.  (1869),  4  Am.  Ry.  Rep.  291  (at  p.  .30.5). 

this  case  the  officers  of  the  company  to  *  Fidelity  Insurance,  Trust.  &  Safe  De- 

whom  notice  of  the  application  to  fill  a  posit    Co.   v.    Shenandoah  Valley   R.    Co. 

vacancy  was  to  be  given  were  all  within  (1889),  32  W.  Ya.  244;  s.  c.  9  S.  E  Rep. 

the  enemy's  lines  when  the  vacancy  oc-  180  :  38  Am.  &  Eng.  R.  R.  Cas.  577. 

curred,  and  for  a  considerable  time  there-  5  ]\[obile  &  Cedar  Point  R.  Co.  i\  Tal- 

after.     This  is  certainly  a  strict  ruling,  man  (1849),  15  Ala.  472. 

and,  considering  the  inherent  powers  of  a  6  shaw    ;;.     Norfolk    County    R.    Co. 

chancery  court  iu  reference  to  trusts,   a  (1855),  5  Gray  (Mass.),  162,  176. 


292  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  XII. 

§  267.  Statutory  Provisions  regulating  the  Manner  of  the  Election 
of  Trustees.  —  These  have  been  enacted  in  some  States.  Those  of 
Maine  have  been  held  to  be  applicable  only  when  no  other  method 
of  filling  vacancies  is  prescribed  in  the  mortgage  itself  or  by  spe- 
cial law.^ 

The  Maine  statutes  have  been  held  to  apply  only  where  the 
trust,  the  trustee,  and  the  cestui  que  trust  are  all  created  by  one 
and  the  same  deed  ;  and  accordingly  they  did  not  authorize  the 
parties  to  whom  the  grantee  named  in  a  mortgage  which  was  ex- 
ecuted to  him  upon  his  taking  a  contract  for  the  construction  of 
the  road  had  assigned  the  bonds  secured  by  the  mortgage  to  elect 
a  substitute  for  the  mortgagee,  such  a  grantee  not  occupying  the 
position  of  trustee  for  the  assignees  of  the  bonds.^ 

§  268.  Statutes  respecting  the  Election  of  Trustees  cannot  override 
the  Provisions  of  a  Trust  Deed  previously  executed.  —  If,  therefore, 
that  instrument  specifies  the  manner  in  which  the  trust  shall  be 
perpetuated,  a  statute  subsequently  enacted  which  provides  for 
the  appointment  of  trustees  annually,  in  case  the  railroad  is 
in  the  possession  of  and  being  operated  by  the  trustees,  inter- 
feres with  the  vested  rights  of  the  trustees,  and  is  therefore 
repugnant  to  the  constitutional  provision  which  forbids  a  State 
legislature  from  passing  any  law  impairing  the  obligation  of  a 
contract.^ 

Nor  can  the  legislature,  without  the  consent  of  tlie  cestui  que 
trust,  substitute  a  new  trustee  in  place  of  the  persons  named  in 
the  mortgage.  The  particular  trustees  are  selected  for  special 
reasons,  and  to  change  them  is  to  change  the  contract  in  an 
important  point.* 

§  269.  Termination  of  the  Trust.  —  The  general  rule  is  that  the 
trust  continues  until  all  bonds  are  paid,  unless  in  the  meantime 
the  trustee  is  discharged.^ 

As  long  as  any  bonds  are  outstanding  unmatured,  it  is  the  right 
and  duty  of  the  trustee  to  enforce  the  provisions  of  the  mortgage 
for  the  benefit  of  the  bondholders.^     Foreclosure  does  not  termi-' 

1  Pillshury  v.  Consolidated  European  &  ^  Flotelier  v.  Rutland  &  Burlington  R. 

N.  A.  Ry.  Co.  (1879),  6!)  Me.  394.      Here  Co.  (18r>8),  39  Vt.  633.     This  case  was  dc- 

the  apjiointment  of  a  trustee  by  the  court,  cided  by  Judge  Bennett  sitting  as  chan- 

upon  tiic  reiiuest  of  a  majority  in  interest  cellor,  but  the  decision  was  concurred  in 

of  the  liondholders,  was  sustained  on  the  by  tiiree  judges  of  the  Sui)renie  Court, 

grounil  that,  as  the  terms  of  the  trust  deed  *   Knajiit    v.    Railroad    Co.    (1874),    20 

liad  been    followed,  the  appointment  was  Wall.  117. 

fully  authorizeil  by  law.  ^   Knapp    v.    Railroad    Co.    (1874),    20 

■^   1 1,  rr  I'.oiidholders  of  York  &  Cumber-  Wall.  117. 

land  R.  Co.  (1801),  50  Me.  552.  «  Belden  v.  Burke  (1883),  72  Hun,  519. 


§  270.]  TRUSTEES.  293 

nate  tlie  duties  of  a  trustee  who  has  entered  into  possession.  He 
is  still  bound  to  manage  the  road,  for  the  benefit  of  the  cestuis  que 
trust  just  as  an  experienced  owner  would,  looking  to  the  nature  of 
the  property,  the  public  demand  upon  those  in  charge,  and  the 
duty  of  securing  the  greatest  permanent  return  to  the  cestuis  que 
trust.  This  obligation  continues  until  iiis  discharge  by  the  Court 
of  Chancery,  or  by  the  unanimous  and  legally  binding  consent  of 
the  beneficiaries,  or  until  the  latter  acquire  a  legal  organization 
and  a  capacity  to  act  through  a  majority.^ 

The  appointment  of  a  referee  to  make  a  foreclosure  sale  does 
not  abrogate  a  trustee's  right  and  duty  to  enforce  by  proper  reme- 
dies a  judgment  in  favor  of  the  bondholders.^ 

The  functions  of  the  trustees,  on  the  other  hand,  cease  whenever 
the  trust  property  is  disposed  of  and  applied  in  accordance  with  the 
terms  of  the  trust  deed.^ 

It  follows,  therefore,  that  a  trustee  who,  under  the  provisions  of 
an  enabling  statute,  purchases  the  property  at  the  foreclusure  sale, 
and  then  transfers  it  to  a  company  organized  from  the  general 
body  of  the  bondholders,  is  thereby  divested  of  his  title  as 
trustee,  and  has  no  right  to  maintain  a  bill  to  take  advantage 
of  alleged  frauds  or  irregularities  in  the  foreclosure  of  prior 
liens.^ 

Article  II.  —  Nature   and   Extent   of  the   Trustee's  Estate 

AND  Powers. 

§  270.  The  Precise  Character  of  the  Interest  acquired  by  the  Trustee 
in  the  trust  property  has  given  rise  to  much  discussion.  It  may 
be  readily  conceded  that,  where  the  trust  deed  is  worded  so  that 
defeasance  can  be  made  only  by  payment  to  the  bondholders,  the 
trustees  take  nothing  but  a  dry,  naked  trust.^ 

But  this  can  scarcely  be  the  effect  of  a  trust  mortgage  in  the 
ordinary  form.  The  authority  conferred  u])on  the  trustee  by  such 
an  instrument  may  possibly  be  regarded  as  investing  him  with  a 

1  Sturges  V.  Kiiapp  (1858),  31  Vt.  1.  ^  Brooks  v.  Vermont    Central   R.   Co. 

2  Stevens  V.  Union  Trust  Co.  (1891),  (1878),  14  Blatch.  463.  The  position 
57  Hun,  493;  s.  c.  33  N.  Y.  St.  Rep.  here  taken  as  to  the  nature  of  the  trustees' 
130  ;  11  N.  Y.  Supp.  268.  interest  was  one  of  the  steps  in  the  chain 

3  Welsh  V.  First  Division,  etc.  St.  of  reasoning  which  let!  Judge  Wheeler  to 
Paul  &  Paeilic  R.  Co.  (1879),  25  Minn,  the  conclusion  that  a  suit  for  foreclosure 
314.  brought  by  a  portion  of  the  bondholders 

*  Barnes  v.  Chicago,  Milw.  &  St.  Paul  was  not  barred  by  a  pending  suit  for  the 
Ry.  Co.  (1887),  122  U.  S.  1  ;  s.  c.  7  Sup.  same  purpose  brought  by  the  trustees  and 
Ct.  Rep.  1043.  another  portion  of  the  bondjiolders. 


294 


RAILWAY   BONDS    AND   MORTGAGES. 


[chap.  XII. 


merely  dry,  naked  trust  at  the  outset;^  but  potentially,  at  least,  it 
is  one  of  a  much  more  extensive  scope .^ 

This  being  admitted,  it  seems  an  unnecessary  refinement  to  con- 
sider the  estate  of  the  trustee  to  be  of  a  different  quality  at  differ- 
ent times.  A  simpler  and  more  straightforward,  doctrine  is  to 
hold  that  the  nature  of  the  trust  is  what  the  trust  instrument 
makes  it,  and  continues  the  same  from  first  to  last,  but  that  the 
powers  and  duties  of  the  trustee  remain  in  abeyance  until  the 
events  occur  which  are  to  call  them  into  activity.  To  take  a 
somewhat  analogous  case,  a  tenant  in  fee  is  none  the  less  such 
because  he  has  leased  the  estate,  and  has  thus  abandoned  most  of 
his  rights  over  it  until  the  term  is  ended,  or  the  lessee,  by  the 
breach  of  some  condition  imposed  by  the  instrument  of  demise, 
renders  himself  liable  to  be  dispossessed.  And  this  seems  to  be 
the  effect  of  the  cases  in  which  the  nature  of  the  trust  was  the 
question  fairly  presented  to  the  court,  and  it  became  neces- 
sary to  determine  precisely  what  the  powers  of  the  trustee  were. 
"  We  are  unable,"  remarked  the  court  in  a  Vermont  case,  "  to 
assent  to  the  proposition  that  the  trustees  are  only  agents  of  the 
cestiiis  que  trust  for  holding  the  legal  title.     They  are  agents  for 


1  Curtis  V.  Leavitt  (1857),  15  N.  Y.  9 
(followed  in  Johnson  County  v.  Thayer, 
94  U.  S.  631).  Judge  Paige  declared  the 
trustee  to  be  a  mere  assignee  without 
interest  in  the  property  held  by  him,  this 
theory  being  made  the  foundation,  at  least 
in  part,  of  a  ruling  that  notice  to  a  trustee 
was  not  notice  to  the  cestuis  que  trust  (see 
below).  In  this  case  the  extent  of  the 
trustees'  powers  was  not  in  question,  and 
it  is  not  easy  to  see  how  this  doctrine 
can  be  reconciled  with  the  rule  that  a 
trust  which  is  to  protect  an  estate  for  a 
given  time,  to  preserve  contingent  remain- 
ders, or  the  like,  is  one  of  those  active 
trusts  which  are  excluded  froin  the  opera- 
tion of  the  Statute  of  Uses  (see  Perry  on 
Trusts,  §  305  and  notes).  In  Ketchum  v. 
Jlobiie  &  Oiiio  K.  Co.  (1876),  2  Woods, 
532,  a  trustee  was  considered  to  hold  a 
"  naked  trust "  to  the  extent  that  his 
absence  and  residence  in  a  place  where  it 
was  impossible  to  serve  him  with  process 
would  nut  i)revent  a  court  of  equity  from 
entf^rtiiiniiig  a  suit  for  his  removal.  Ilei-e 
again  it  was  not  a  (piestion  of  tlic  ti'ustec's 
powers,  and  to  liavt^  made  a  dill'eient  ruling 
would  have  involved  the  anomalous  result 
that  non-residence  is  a  legitimate  ground 


for  removal,  but  that  the  court  is  disabled 
from  exercising  its  jurisdiction  until  ser- 
vice is  made  on  the  trustee.  So  far  as  it 
appears  from  the  authorities  the  power  of 
removal  for  this  cause  exists  in  the  case  of 
the  most  active,  as  of  merely  passive  trus- 
tees (see  Perry  on  Trusts,  §  275),  and  per- 
haps the  phrase  "  naked  trust"  is  used  here 
merely  in  the  sense  of  a  trust  not  coupled 
with  an  interest,  —  a  somewhat  loose  ap- 
plication of  the  term.  In  Webb  v.  Ver- 
mont Central  R.  Co.  (1882),  20  Blatch. 
218,  the  court  sjieaks  of  the  trustees  as 
holding  only  a  "  dry  legal  title  ; "  but  the 
only  question  before  it  was  as  to  the 
ability  of  the  bondholders  to  sue,  wheTi 
the  tru.stee  ac(]uires  interests  hostile  to 
theirs,  and  it  is  not  apparent  what  bearing 
the  chaiacter  of  the  trust  could  have  on 
such  a  point.  The  elementary  principle 
that  a  trustee  cannot  be  allowed  to  occupy 
a  position  in  which  his  interests  aie 
oj>posed  to  those  of  his  cestuis  que  trust  is 
presumably  applicable  to  every  description 
of  trust. 

-  ("ommonwealth  v.  Susquehanna  & 
Delaware  Piver  R.  Co.  (]888),  122  Pa.  St. 
306  ;  s.  0.  15  Atl.  Rep.  448;  36  Am.  & 
Eng.  R.  R.  Cas.  269. 


§  271.]  TRUSTEES.  295 

holding  just  such  title  as  is  created  by  the  transaction,  and  for  ad- 
ministering it  according  to  the  terms  of  the  trust;  and  whatever 
title  the  cestuis  que  trust  have,  whether  legal  or  equitable,  is  through 
and  in  virtue  of  the  title  conveyed  to  and  held  by  the  trustees."  ^ 

§  271.  The  Trustee  takes  an  Estate  sufBcient  to  enable  him  to  execute 
his  Trust.  —  If,  therefore,  the  provisions  of  the  mortgage  are  such 
that  they  cannot  be  carried  out  unless  the  trustee  holds  in  fee 
simple,  he  will  be  deemed  to  be  invested  with  an  estate  of  tiiat 
character,  although  the  granting  clauses  contain  no  words  of  in- 
heritance. Thus  where  he  is  empowered  by  the  provisions  which 
regulate  the  sale  of  the  trust  property  to  convey  the  entire  estate 
of  the  railroad  company  in  the  mortgaged  premises,  he  must  be 
clothed  with  that  entire  estate  in  order  to  be  capable  of  executing 
his  trust.  Of  this  fact  subsequent  mortgagees  and  creditors  have 
notice  from  the  record  itself,  and,  as  against  them,  the  mortgage 
will,  if  necessary,  be  reformed  so  as  to  make  its  terms  coi-rcspond 
with  the  intention  of  the  grantor.^ 

In  Kentucky  also  it  has  been  declared  that  a  trustee  is  not  a 
naked  one  where  he  has  a  power  of  sale  on  default.^ 

Trustees  of  a  mortgage  covering  the  lands  included  in  a  land- 
grant  to  a  railroad  company,  with  power  to  sell  them  on  such 

^  Miller  v.  Rutland  &  Washington  R.  and  infants  who  composed  the  body  of 
Co.  (1863),  36  Vt.  452,  483.  The  reasons  bondholders.  Where  so  many  of  the 
for  the  doctrine  here  laid  down  had  been  cestuis  que  trust  were  under  such  disabili- 
thus  stated  in  a  case  decided  not  long  ties  that  they  could  not  act  for  themselves, 
before  by  the  same  court,  the  opinion  and  where  consequent  delay  must  ensue  in 
being  entitled  to  exceptional  respect,  as  it  providing  the  means  of  obtaining  their 
was  written  by  Chief  Justice  Redfield:  "If  consent  in  a  legal  form,  with  possibly  fatal 
the  interest  on  the  coupons  and  the  princi-  results  to  the  property,  it  was  clearly  the 
pal,  as  it  falls  due,  are  promptly  paid  by  duty  of  the  trustees  to  continue  to  manage 
the  corporation,  so  that  no  forfeiture  occurs,  that  property  for  the  benefit  of  those  whom 
it  will  never  become  of  sufficient  impor-  they  represented,  until  they  could  be  regu- 
tauce  to  consider  the  question  what  is  the  larly  discharged.  The  conclusion  arrived 
precise  nature  of  the  trust  created  liy  the  at  was  that  the  trustees,  even  after  fore- 
contract  in  the  first  instance.  But  after  closure,  had  the  power  to  lease  the  prop- 
the  forfeiture  occurs,  either  by  non-pay-  erty  to  a  connecting  road,  if,  in  the  exercise 
ment  of  interest  or  principal,  or  both,  as  of  a  sound  discretion,  they  deemed  such  a 
in  the  present  case,  the  duties  of  the  trus-  contract  to  be  the  best  way  of  serving  the 
tee  become  not  only  active  and  responsible,  interests  of  \\\q. cestuis  que  trust,  especially 
but  critical  and  delicate.  It  is  not  only  not  where  that  lease  contained  a  clause  allow- 
a  dead,  dry  trust,  but  it  is  one  of  the  most  ing  the  majority  of  the  liondholders  to 
active  and  momentous  responsibility."  The  revoke  it  upon  giving  a  year's  notice, 
duties  thus  undertaken,  it  was  held,  did  ^  (jog  ^_  New  Jersey  ilidland  Rv.  Co. 
not  cease  with  the  foreclosure  of  the  mort-  (1879),  31  N.  J.  Eq.  10.5.  See  generally 
gage.  It  was  not  to  be  exjiected  that  there  on  this  point  Perry  on  Trusts,  §  313. 
should  be  an  immediate  surrender  of  the  ^  p,nrdstown  &  Louisville  R.  Co.  r. 
property  to  the  heterogeneous  and  chaotic  Metcalfe  (1862),  4  Mete.  (Ky.)  199. 
mass  of  men,  women  (single  and  married). 


296  RAILWAY   BONDS    AND   MORTGAGES.  [CHAP.  XII. 

terms  and  conditions  as  they  may  deem  best,  are  authorized  to 
warrant  the  title  of  the  lands  to  purchasers.^ 

§  272.  Quality  of  Trustee's  Estate,  how  affected  by  Statutory  Pro- 
visions.—  Since  the  terms  of  the  deed  decide  the  extent  and  char- 
acter of  the  trustee's  estate,  a  general  statutory  provision  as  to 
trusts,  that  the  legal  title  and  right  of  possession  shall  vest  in 
trustees,  will  not  have  the  effect  of  making  the  latter  the  proper 
parties  to  prosecute  a  suit  for  a  trespass  upon  the  trust  property .^ 

On  the  other  hand,  if  there  are  statutes  prescribing  the  duties 
of  trustees,  there  is  no  necessity  for  specifying  those  duties  in  the 
mortgage  for  the  purpose  of  fixing  the  quantum  of  interest  taken 
by  them,  and  the  fact  that  the  instrument  is  silent  in  this  respect 
is  in  such  a  case  no  ground  for  contending  that  the  trustees  take 
merely  the  dry  legal  title. 

§  273.  Devolution  of  the  Trust  Estate.  —  Upon  the  death  of  one  or 
two  or  more  trustees,  the  whole  estate  devolves  on  the  survivors, 
and  not  upon  the  heirs  or  personal  representatives  of  the  deceased 
trustee.^ 

Such  heirs  or  personal  representatives,  therefore,  are  not  proper 
or  necessary  parties  to  a  foreclosure  suit  begun  during  the  lifetime 
of  their  ancestor.^ 

The  question  who  are  the  proper  parties  in  case  the  trustees  of 
a  mortgage  are  all  dead,  was  discussed  in  Gibert  v.  Washington 
City,  Va.  Midi.  &  Great  Southern  R.  Co.^  There  proceedings  were 
taken  to  determine  the  relative  priorities  of  certain  claims  against 
a  railroad  company  formed  by  the  consolidation  of  several  others, 
and  the  objection  was  raised  that,  as  the  trustees  under  the  several 
deeds  had  deceased,  the  legal  title  was  outstanding,  and  there  was 
no  one  before  the  court  to  represent  the  legal  title  "  Avith  respect 
to  this  argument."  The  court  said:  "It  is  sufficient  to  remark 
that  if,  on  the  death  of  the  trustee  Lamar,  the  legal  title  was  in 
abeyance,  that  would  not  defeat  the  trust,  nor  prevent  the  juris- 
diction of  the  court  from  attaching,  in  the  absence  of  a  represent- 
ative of  the  legal  title,  no  such  rej)resentative  being  in  existence. 
Indeed,  it  would  be  a  potent  reason  for  the  court  to  proceed,  and 

1  DulMLpu'  &  Sioux  City  R.  Co.  v.  S.  C.  N.  S.  228;  4  Am.  &  Eng.  K.  IJ. 
rier.son  (\^\):,),  70  Fed.  Kep.  303.  Cas.    459  ;  Mobile  &  Cedar  Point  R.   Co. 

2  M<-rcaiitil('  Trust  Co.  v.  Portland  &  v.  Taltnan  (1849),  15  Ala.  472;  McAIlis- 
O-denshur-li  R.  Co.  (1882),  10  F.^d.  Rci..  tcr  v.  Plant  (187fi).  54  Miss.  106  ;  s.  c.  17 
604,  Am.  Ry.  Rpp.  389  ;  Newport  &  Ciniriniiati 

8  McAllister  V.  Plant  (1870),  51   Miss.  P.ridf^c  Co.  v.  Don.crlass  (1877),  12    Bush 

106  :   8.  c.  17   Am.    Ry.   Rep.  389.     See  (Ky.),  G7:^  ;  s.  c.  18  Am.  Ry.  Rep.  221. 
I'eny  on  Tm.sts,  §§  343,  314.  <■'  33  (!nitt.   473  ;  s.  c.    1   Am.  &   Eng. 

«  Gihbcs  V.  G.  &  C.  R.  Co.  (1879),   13  R.  R.  Cas.  473  (1880). 


§  274.J  TRUSTEES.  297 

take  upon  itself  tlie  execution  of  the  trust,  on  the  principle  that  a 
court  of  equity  will  never  suffer  a  trust  to  fail  for  want  of  a  trustee. 
If,  however,  the  legal  title  was  not  in  abeyance,  then  upon  the 
death  of  Lamar  it  either  devolved  by  operation  of  the  statute  on 
Lamar's  personal  representative,  or  else  it  resulted  to  the  old  com- 
panies ;  and  in  either  case  such  title  was  represented  by  parties 
before  the  court.  The  court,  having  possession  of  the  property, 
works,  rights,  and  franchises  of  the  company,  will  have  no  diffi- 
culty in  conveying  the  mere  legal  title  to  the  purchaser  whenever 
it  becomes  necessary  and  proper."  Of  the  three  alternative  doc- 
trines here  suggested,  that  which  supposes  the  trust  property  to 
devolve  upon  the  personal  representatives  of  the  surviving  trustee 
is  the  one  which  accords  with  the  general  law  of  trusts.^ 

If  a  public  functionary  is  made  trustee  ex  officio,  as  where  the 
mortgage  is  made  to  the  Treasurer  of  the  State  "  and  his  succes- 
sors in  office,"  the  trust  will  devolve  upon  his  successors  in  office, 
and  will  not  be  retained  by  him  after  the  termination  of  his  official 
duties.^ 

§  274.  Powers  of  Trustees  generally.  —  The  trustee  can  only  do 
with  the  trust  property  what  the  deed,  either  in  express  terms  or 
by  necessary  implication,  authorizes  him  to  do.^ 

He  is  not  a  general,  but  a  special,  agent  of  the  bondliolders,  and 
he  is  limited  to  the  legitimate  purposes  of  the  relation  he  sustains 
to  the  security  and  the  parties  entitled  to  the  benefit  thereof,  under 
the  trust  with  which  he  is  clothed.* 

The  implied  limitation  upon  his  powers  is  that  they  do  not  ex- 
tend beyond  matters  affecting  the  enforcement  of  the  security,  and 
the  administration  of  the  trust  property,  in  so  far  as  it  may  be 
under  his  control." 

He  cannot  bind  the  bondholder  personally  by  a  contract  entered 
into  for  supplies  to  be  furnished  for  the  use  of  a  road  which  he  is 
operating  in  fulfilment  of  his  trust  duties  and  not  otherwise.^ 

1  Perry  on  Trusts,  §§  343,  344.  Trustee  (1881),  53  Vt.  345  ;  s.  c.  4  Am.  & 

2  Board     of     Supervisors    v.    Mineral     Eng.  R.  R.  Cas.  212. 

Point  R.  Co.  (1869),  24  Wis.  93.  In  this  case  the  trustees  had  continued 

2  Fidelity    Insurance,    Trust,    &    Safe  to  operate  the  road   by  the   procurement 

Deposit  Co.  V.  Shenandoah  Valley  R.  Co.  and  in  the  interest  of  the  defendant  com- 

(1889),  32  W.  Va.  244  ;  s.  c.  9  S.  E.  Rep.  pany  organized   after   foreclosure   by  the 

180  ;  38  Am,  &  Rug.  K.  R.  Cas.  577.  bondholders.     The  contract  on  which  re- 

*  Miller  v.  Rutland  &  Washington  R.  covery  was  sought  was  at  first  verbally 
Co.  (1863),  36  Vt.  452;  Ap]teal  of  Harris-  entered  into  just  after  the  organization, 
burg  &  Eastern  R.  Co.  (Pa.  Sap.  Ct.,  and  subsequently  reduced  to  writing. 
1888),  36  Am.  &  Eng.  R.  R.  Cas.  249.  One  of  the  trustees  was  at  this  time  acting 

*  See  the  two  cases  last  cited.  in  the  double  capacity  of  president  of  the 
^  Chaffee  v.  Rutland  Railroad  Co.  and    company  and  as  one  of  the  trustees  of  the 


298  RAILWAY    BONDS   AND   MORTGAGES.  [CHAP.  XII. 

Nor  does  liis  authority  necessarily  include  the  power  to  place 
the  bonds  upon  the  market  for  sale,  and  the  exercise  of  such  a 
power  is  enough  to  put  a  purchaser  of  the  bonds  on  inquiry  as  to 
the  regularity  of  their  issue.^ 

§  275.  Bondholders'  Rights  under  the  Mortgage  cannot  be  altered  by 
the  Trustees  without  their  Consent.  —  A  non-assenting  bondholder, 
therefore,  is  not  bound  by  a  scheme  of  reorganization  by  which 
his  mortgage  is  to  be  postponed  to  three  others  which  are  to  re- 
place it.  Such  a  scheme  "  can  only  be  made  effective  in  one  of  two 
ways,  —  by  the  consent  of  all  the  bondholders,  or  by  a  foreclosure 
cutting  off  their  lien,  and  so  enabling  a  new  corpoi-ation  to  make 
its  own  mortgages  in  its  own  way.  A  bondholder  has  a  clear 
right  to  stand  upon  his  contract,  and  the  trustees  have  no  power 
or  authority  to  compel  him  to  make  a  new  and  different  one."  ^ 
So  also  it  is  outside  the  powers  and  duties  of  a  trustee  of  a  mort- 
gage drawn  in  the  usual  form  to  undertake  to  give  his  assent,  in 
behalf  of  the  bondholders,  to  a  scheme  involving  the  allowance  of 
a  preference  to  the  floating  unsecured  debts  of  the  company.^  Nor 
has  he  the  power  to  discharge,  change,  or  compromise  the  security, 
which  he  holds  as  trustee.* 

So  also,  as  his  implied  powers  do  not  extend  to  the  release  of 
the  mortgage,  he  must,  if  such  a  power  is  conferred  on  him  by 
the  trust  instrument,  execute  it  in  the  manner  prescribed  therein, 
or,  at  all  events,  not  until  the  condition  of  defeasance  has  been  ])er- 
formed ;  and  a  subsequent  purchaser  must,  at  his  peril,  ascertain 
whether  there  has  been  such  a  performance.^ 

bondholders.     Tlie  other  had  never  acted,  the  burden  of  the  contract.     But  it  was 
nor  pretended  to  act,  except  in  the  single  held  that  the  facts  in   evidence  were  in- 
capacity of  trustee.     The  defendant  com-  sufficient  to  establish  any  such  change  iu 
pany  had  never  authorized  the  making  of  the  relations  of  the  j)arties. 
the  contract,  and  there  was  no  finding  that  ^  Riggs  v.   Pennsylvania  &  New  Eng- 
the   trustees   held   any    such    relation    to  land  R.  Co.   (1883),   16    Fed.    Rep.    804. 
tlie  company  as  authorized  them  to  bind  See  also  Chaj).  II.  (buna  fide  jnirchaser). 
it  by  their  contract.     Under  these  circum-          ^  HoUister  i-.  Stewart  (1889),   111  N. 
stances  it  was  held,  first,  that  the  bond-  Y.    644;   s.   c.   19  N.   E.    Rep.    782;    38 
liolders,  as  such,   were  not  bound,   since  Am.   &  Eng.  R.  R.  Gas.    599  ;  Nelson  v. 
the  relationship  between  the  trustees  and  Hubbard  (1892),   96    Ala.   238  ;    s.  c.    11 
cenf.vii  que  trust  i.s  not  one  of  agency  ;  and.  So.  Rep.  428  ;  12  Ry.  &  Corp.  L.  J.  182. 
secondly,  that  the  company  was  equally          ^  Duncan  et  al.  v.   Mobile  &  Ohio  R. 
ex.-mpt   from  liability  because    there  had  Co.  (1876),  2  Woods,  542  ;  s.  c.   8  Fed. 
been   no  act,   or  omission   to  act,  on   its  Cas.  17,  Case  No.  4187. 
part,  from  which  the  iilaintilfhad  a  right          *  Miller  v.  Rutland  &  Washington  R. 
to  understand  that  the    trustees  had  the  Co.  (1863),  36  Vt.  452,  483. 
right  to  bin<l,  or  were  in  fact  binding,  it  to          ^  pjjelity    Insurance,    Trust,    &    Safe 
the  performnnce  of  the  contract.     It  was  Dci)Osit  Co.  v.  Shenandoah  Valley  R.  Co. 
also  contended  that  there  had  been  a  no-  (1889),  32  W.  Va.  244  ;  s.  C.  9  S.  K.  l!ep. 
vation  by  which  the  company  had  assumed  ISO  ;  38  Am.  &  Eng.  R.  R.  Cas.  577. 


§  276.]  TRUSTEES.  299 

So  also,  if  the  sole  authority  of  a  trustee  in  case  of  a  foreclosure 
sale  is  to  purchase  the  property,  upon  receiving  the  written  re- 
quest of  a  majority  of  the  bondholders,  and  thereupon  to  take 
certain  prescribed  steps  looking  to  the  reorganization  of  the  bond- 
holders into  a  new  corporation,  to  which  he  is  to  convey  the  pro})- 
erty  thus  purchased,  he  has  na  right  to  sell  the  property  even 
though  requested  to  do  so  by  a  majority  of  the  bondholders.  The 
dissent  of  a  single  bondholder  is  enough  to  invalidate  such  a  sale. 
It  makes  no  difference  that  the  reorganization  scheme  which  the 
mortgage  calls  for  has  apparently  become  impossible  of  execution, 
for  the  reason  that  the  majority  of  the  bondholders  have  pro- 
nounced in  favor  of  the  sale.  If  the  trustee  refuses  to  sell,  as 
being  beyond  his  authority,  it  is  a  reasonable  presumption  that 
those  who  are  seeking  the  sale  will  concur  in  the  reorganization 
rather  than  the  contrary.  And  even  if  for  this  reason,  or  for  any 
other,  the  due  execution  of  the  trust  seems  to  the  trustee  imi)Os- 
sible,  he  should  ask  for  the  direction  of  a  court.  To  allow  him 
such,  a  measure  of  discretion  as  a  sale  under  such  circumstances 
would  imply,  might,  in  many  cases,  make  him  independent  and 
despotic.^ 

Such  an  excess  of  his  powers  by  the  trustee,  however,  cannot 
be  taken  advantage  of  by  a  bondholder  who,  either  by  previous 
consent  or  subsequent  ratification,  has  sanctioned  the  act.^ 

§  276.  The  Power  to  declare  the  Principal  due.  —  This  power  is 
not  rendered  imperative  by  the  addition  of  a  clause  to  the  effect 
that,  "  upon  the  written  request  of  the  holders  of  a  majority  of 
the  bonds,  the  trustee  shall  proceed  to  collect  both  principal  and 
interest."  Such  an  agreement  with  regard  to  the  result  of  the 
non-payment  of  interest  is  in  the  nature  of  a  penalty,  and  must 
be  strictly  construed.  The  true  meaning  of  the  added  clause, 
therefore,  is  that  the  majority  of  the  bondholders  shall  have  the 
right  to  veto  the  proceedings  of  the  trustee,  and  the  written  re- 
quest mentioned  is  a  condition  precedent  to  any  action  by  the 
trustee  to  enforce  the  bonds.  Only  by  such  a  construction  is  it 
possible  to  effect  what  is  evidently  one  purpose  at  least  of  such  a 
clause  ;  viz.,  to  protect  the  bondholders  as  a  class  against  the 
views  of  individuals  and  combinations  of  individuals,  being  a 
minority,  pursuing  separate  interests.^     While  the  majority  can- 

^  James  v.  Cowiiif;  (1880),   82    N.  Y.  ^  That  the  various  limitations  imposed 

449 ;  38  Am.  &  Eng.  R.  R.  Cas.  336.  by  trust  deeds  u{)on   the  exercise  of  this 

2  Butterfield    v.    Cowing    (1889),    112  power  do  not  affect  the  power  of  tlie  trus- 

N.Y.  486  ;  s.  c.  20  N.  E.  Rep.  369,  a  case  tee  to  foreclose  upon  being  requested  to  do 

dealing  with  the  same  matter  as  the  one  so  by  one   or   more   of  the   beneficiaries, 

last  cited.  see  Chap.  XVIIl.  (foreclosure). 


300  •     RAILWAY    BONDS    AND    MORTGAGES.  [CHAP.  XII. 

not  and  ought  not  to  prevent  others,  even  a  single  individual, 
from  exacting  the  promptest  payment  of  what  is  due  and  may  be 
important  as  current  income,  by  legal  process,  they  may  never- 
theless rightfully  object  to  an  anticipation  of  payment  that  may  in 
their  opinion  prove  a  sacrifice.^ 

A  provision  in  a  mortgage  that  no  action  shall  be  commenced 
by  reason  of  any  default  on  the  part  of  the  mortgagor  by  the 
trustee,  except  upon  the  reasonable  request  of  the  bondholders,  is 
not  a  limitation  upon  the  right  and  power  of  the  trustee  to  insti- 
tute proceedings  whenever  in  its  judgment  such  a  course  is  needed 
in  the  interests  of  the  bondholders.  Primarily  it  is  left  to  the 
discretion  of  the  trustee  to  determine  whether  proceedings  for 
foreclosure  should  or  should  not  be  instituted.^ 

A  letter  from  a  bondholder  infoi'ming  the  trustee  of  a  mortgage 
that  the  writer  is  the  holder  of  a  majority  of  the  bonds  of  a  cor- 
poration, and  that  he  desired  "  to  ask  the  proper  court  to  fore- 
close and  sell  the  property,"  and  asking  the  trustee  "  what  action  " 
he  would  take,  and  adding  that  he  had  attorneys  prepared  to  act, 
who  would  arrange  for  the  trustee's  protection  "  in  any  manner 
that  may  be  necessary,"  will  not  be  interpreted  to  amount  to  a 
request  on  the  part  of  the  holder  of  the  majority  of  bonds  of  the 
trustee  to  take  action  ;  and  the  failure  on  the  part  of  the  trustee 
to  act  in  such  case  will  not  justify  an  action  on  the  part  of  the 
bondholder  to  foreclose  the  mortgage.^ 

The  trustee  of  a  mortgage,  upon  the  receipt  of  such  a  letter,  has 
a  right  to  ask  that  the  bonds  of  the  bondholder  be  deposited  with 
him  for  inspection,  as  well  as  to  require  of  the  bondholder  that  he 
indemnify  him  against  loss  before  bringing  a  suit  for  foreclosure 
of  the  mortgage.* 

Where  a  mortgage  provides  that,  at  the  request  of  the  holders 
of  two  million  dollars  of  the  mortgagor's  bonds,  the  trustee  must 
institute  foreclosure  proceedings,  and  a  request  is  made  by  a  bank 
claiming  the  ownership  of  one  million  seven  hundred  thousand 
dollars  of  the  bonds,  and  to  represent  a  sufficiency  in  amount  of 
other  bonds,  if  it  appear  that  in  reality  the  first-named  bonds 
were  the  property  of  the  competing  railroad  company,  and  that 
this  comi)!iny  had  simply  contracted  to  ])urchase  the  latter-named 
bonds,  this  request  would  l)e  insufficient  to  justify  a  foreclosure 

1  Cliicago,  I).  &  V.  R.  Co.  v.  Fosilick  »  Bucbe.  v.  Richmond  Ligbt,  Heat,  & 
(1882),  10(j  U.  S.  47;  s.  c.  7  Am.  &  Kiig.  Power  Co.  (1895),  13  Misc.  Rep.  737; 
R.  U.  Cas.  427,  Waite,  C.  J.,  dissenting.  s.  c.  Sf)  N.  Y.  Siippl.  1. 

2  New   York   Security  &  Trust  Co.  v.  *  Ibid. 
Lincoln  St.  Ry.  Co.  et  al.  (1890),  74  Fed. 

liep.  767. 


§§  277,  278.]  TRUSTEES.  301 

suit ;  and  one  having  been  brought  under  such  a  request  by  the 
ti'ustee,  the  trustee's  right  of  action,  in  spite  of  the  invalidity  of 
the  request,  will  not  be  upheld  because  the  trustee  might  in  its 
discretion  have  brought  the  suit  without  a  request.^ 

§  277.  The  Power  of  a  Trustee  to  w^aive  Defaults  in  Interest  or 
Principal. —  The  existence  of  this  power,  subject  only  to  the  con- 
trol of  a  majority  in  interest  of  the  bondholders  will  not  be 
readily  inferred ;  for  the  effect  of  admitting  it  would  be  to 
enable  stockholders  of  the  company,  by  buying  a  trifling 
excess  over  half  of  the  bonds,  to  practically  annul  the  whole 
debt,  .and  take  to  themselves  the  entire  net  earnings  of  the 
business.^ 

§  278.  Trustee's  Power  of  Entry.  —  This  power  is  regarded  as 
a  vested  right  of  the  bondholders,  which  cannot  be  impaired  by 
subsequent  legislation,  either  direct  or  indirect.^  It  exists  as 
long  as  there  is  default  in  the  payment  of  any  of  the  coupons. 
The  acceptance  of  the  preferred  stock  of  a  new  corporation  in 
lieu- of  bonds  affects  the  rights  only  of  those  bondholders  who 
assent  to  this  arrangement,  and  is  not  a  waiver  of  the  right  of 
the  trustees  to  take  possession  of  the  property  for  the  benefit  of 
those  who  do  not  assent.* 

The  trustees,  in  a  Minnesota  case,  having  acquired  possession 
of  the  road,  were  held  expressly  authorized  to  collect  and  receive 

^  Farmers'  Loan  &  Trust  Co.  v.  New  held,  to   instruct   said  trustees  to  waive 

York  &  Northern  Ry.  Co.   (N.  Y.   Ct.  of  such  default,  or  to  enforce  their  riglits  by 

App.,  1896),  44  N.  E.  Rep.  1043.  reason  thereof.     It  was  held  that,  in  spite 

2  Hollisteri;.  Stewart  (1889),  111  N.  Y.  of  the  generality  of  the  words  "in  any 
644  ;  s.  c.  19  N.  E.  Rep.  782  ;  38  Am.  provisions  herein  contained  to  be  per- 
&  Eng.  R.  R.  Cas.  599.  There  the  trus-  formed  or  kept  by  said  company,"  this 
tees  were  required  to  exercise  their  power  article  of  the  mortgage  must  be  construed 
of  entry  or  sale,  or  both,  if  the  default  to  relate  to  the  provisions  respecting  cov- 
was  in  the  payment  of  interest  or  principal  enants  for  assurance,  etc.,  and  not  to  those 
of  the  bonds,  upon  the  requisition  of  the  in  regard  to  which  other  and  more  strin- 
holders  of  one-fourth  of  the  aggregate  gent  directions  had  been  given  in  other 
araoimt  of  the  bonds;  while  if  the  default  parts  of  the  instrument, 
was  in  anything  required  to  be  done  for  In  Randolph  v.  Lamed  (lS7<i),  27  N.J. 
the  further  assuring  of  the  title  of  the  Eq.  557,  the  trustees  of  a  first  mortgage 
trustees  to  any  property  of  the  company,  were  held  entitled  to  the  property  of  a 
or  in  any  provisions  contained  in  the  railroad  company  in  prefprence  to  a  re- 
mortgage  to  be  performed  by  said  com-  ceiver  under  the  Insolvent  Corporation 
pany,  the  requisition  was  to  be  as  afore-  Acts  of  New  Jersey,  and  permitted  to 
said  ;  but  it  was  left  within  the  discretion  operate  the  road. 

of  the  trust(>es  to  enforce  or  waive  the  ^  See  also  Cliap.  XVIIl.  (suits  for 
rights  of  tlie  bondholders  by  reason  of  possession);  Cheever  v.  Rutland  &  Bur- 
such  default,  subject  to  the  power  hereby  lington  R.  Co.  (1869),  4  Am.  Ry.  Rep. 
declared  of  a  majority  in  interest  of  the  291. 

holders  of  the  said  bonds,  by  re(]uisition  in  *  Cheever  i\  Rutlnnd  &  Bnrlingtoi^   R 

writing,  or  by  a  vote  at  a  meeting  duly  Co.  (1869),  4  Am.  Ry.  Rep.  291. 


302  RAILWAY   BONDS   AND  MORTGAGES,  [CHAP.  XII. 

all  tolls,  freights,  incomes,  rents,  and  issues  of  the  same,  and  of 
every  part  thereof.^ 

The  rights  acquired  by  the  stipulation  in  the  trust  instrument 
granting  the  power  may  be  enforced  by  a  bill  for  specific  perform- 
ance,2  or  the  trustee  may  resort  to  an  action  of  ejectment.** 

§  279.  The  Power  of  Sale.*  —  This  power  being  a  legitimate 
part  of  a  trust  instrument,  the  trustee's  sale  will,  if  carried  out 
according  to  the  terms  of  the  instrument,  divest  the  title  of  the 
company,  without  a  foreclosure.^ 

Being  a  power  annexed  to  the  estate,  and  coupled  with  an 
interest,  it  is  necessarily  irrevocable.  It  becomes  part  of  the 
mortgage  security,  and  vests  in  any  person  who,  by  assignment  or 
otherwise,  becomes  entitled  to  the  money  secured  to  be  paid.^ 

A  mortgage  which  makes  it  the  duty  of  trustees  to  take  posses- 
sion after  default,  on  the  application  of  a  certain  percentage  of  the 
bondholders,  and  also  declares  that  they  are  authorized  to  sell  at 
their  option  "  upon  the  like  application,"  entitles  them  to  decline 
to  sell,  after  entry,  or  both  to  enter  and  sell,  as  they  may  think 
proper.'^ 

The  trustee  with  such  a  power  has  the  right  to  decide  in  the 
first  instance  upon  the  sufficiency  of  the  claim  of  the  bondholders 
who  seek  to  have  the  property  sold  to  pay  the  bonds  which  they 
profess  to  hold ;  but  the  railroad  company  has  also  the  right  to 
appeal  to  the  courts  to  have  the  validity  of  that  claim  passed 
upon.^ 

The  execution  of  the  power  of  sale  by  the  trustee  may  be  con- 
trolled by  a  court  of  equity  at  the  suit  of  a  cestui  que  trust.^ 

The  power  of  sale  is  rarely  exercised.  It  appears  in  many 
railroad  mortgages  where  it  is  entirely  inoperative  because  the 
statutes  of  the  State  where  the  property  is  situated  forbid  such  a 
power  from  being  exercised. 

Where  trustees  of  a  mortgage  securing  bonds  of  a  corporation 
are  proceeding  to  sell  the  property  under  a  power  of  sale  in  their 

1  Kice  V.  St.  Paul  &  Pacific  R.  Co.  Hughes  (1874),  52  Ga.  557  ;  s.  c.  7  Am. 
(1878),  24  Minn.  464.  Ry.  Rep.  137. 

2  Slipjilfy  V.  Atlantic  &  St.  Lawrence  ^  Bradley  v.  Chester  Valley  R.  Co. 
River  R.  Co.  (1868),  55  Me.  395.  (1860),  36  Pa.  St.  141. 

8  liicc  V.    St.    Paul   &  Pacific  R.    Co.  ^  Macon  &  Augusta  R.  Co.  v.  Georgia 

(1878),  24  Minn.  464.  Railroad  &  Bkg.  Co.  (1879),  63  Ga.    103  j 

*  See    also    Chap.    XVTII.    (suits    for  s.  c.  1  Am.  &  Eng.  R.  R.  Cas.  378. 

possession)  ;  Bradley  v.  Chester  Valley  R.  *  Western  Division  of  "Western  North 

Co.    (1860),    36    Pa.  St.   141;    Perry    on  Carolina  R.  Co.  v.  Drew  et  al.   (1877),  3 

Trusts,  §  602.  Woods,  674. 

''  Brunswick    &     Albany     R.     Co.    v.  "  Voungnian    v.    Elmira    &   Williams- 
port  R.  Co.  (1870),  65  Pa.  St.  278. 


§§  280-282.]  TRUSTEES.  303 

mortgage  for  the  benefit  of  a  holder  of  its  bonds  who  shows  a 
good  title  to  Ills  bonds,  a  court  of  equity  will  not  enjoin  the  sale 
till  the  corporation  can  have  adjudicated  an  unliquidated  and  dis- 
puted claim  against  the  holder  of  the  bonds.^ 

S  280.  Trustee  not  confined  to  the  Exercise  of  a  Single  Power  only. 
—  A  trustee  who  is  given  both  the  power  of  entry  and  sale  need 
not  confine  himself  to  either  measure,  but  may  first  enter  and 
then  sell,  using  the  road  for  the  purposes  of  the  trust  until  the  sale 
is  effectcd.2 

§  281.  Special  Powers  of  Trustee  for  Enforcement  of  the  Security 
cumulative  upon  the  Right  of  Foreclosure.^ 

Article  III.  —  Effect  op  Notice  to  Trustee. 

§  282.  Bondholders  affected  with  Notice  of  Everything  of  which 
their  Trustee  is  notified  in  the  Course  of  Litigation  concerning  the 
Bonds.  —  It  will  be  shown  in  another  chapter  that  for  all  purposes 
of  active  litigation  to  which  a  trustee  is  a  party  he  represents  the 
bondholders,  and  binds  them  fully  by  what  he  does  in  the  course 
of  the  proceedings,  unless  he  is  shown  to  have  been  guilty  of  a 
breach  of  his  fiduciary  duties.  Notice  of  any  step  taken  by  the 
court  at  the  instance  of  other  parties  will  operate  as  notice  to  the 
bondholders.  Thus  notice  to  a  trustee  of  an  application  by  a  re- 
ceiver for  permission  to  issue  certificates  is  notice  to  the  bond- 
holders ;  and  if  the  trustee  makes  no  objection  to  the  issue,  the 
bondholders  are  bound  by  the  action  of  the  court  in  granting  the 
application.* 

Especially  is  a  bondholder  concluded  by  the  action  of  the  trus- 
tee where  the  latter  is  a  State  official  designated  by  statute,  and 
not  a  person  selected  by  the  contract  of  the  parties.  Foreclosure 
proceedings  and  a  subsequent  reorganization  carried  through  by 
such  an  official  will,  therefore,  bind  each  bondholder  though  he 
has  no  notice  thereof.^ 

1  National  Rubber  Co.  etal.v.  Rhode  Midland  R.  Co.  (1886),  117  U.  S.  434, 
Island  Hospital  Trust  Co.  et  al.  (R.  I.,  463;  s.  c.  6  Sup.  Ct.  Kep.  809;  Kent  v. 
1895),  33  Atl.  Rep.  254.  Lake  Superior  Ship  Canal  Ry.  &  Iron  Co. 

2  Macon  &  .\ugusta  R.  Co.  v.  Georgia  (1892),  144  U.  S.  75;  s.  c'  12  Sup.  Ct. 
Railroad  &  Bkg.  Co.  (1879),  63  Ga.  103  ;  Rep.  650  ;  Central  Trust  Co.  v.  Season- 
s.  c.  1  Am.  &  Eng.  R.  R.  Cas.  378  ;  good  (1889),  130  U.  S.  482;  s.  c.  9  Supr. 
McAllister    v.    Plant    (1876),     54    Miss.  Ct.  Rep.  575. 

106  ;  s.  c.  17  Am.  Ry.  Rep.  389.  5  Gates  v.  Boston    &   New   York    Air 

8  See   Cha]),    XVIIL,    on    cumulative  Line  R.  Co.   (1885),   53  Conn.   333;  s.  c. 

character  of  remedies.  5  Atl.   Rep.  695  ;  24  Am.  &  Eng.  R.  R. 

*  Wallace  o.   Loomis  (1877),  97  TJ.  S.  Cas.  143. 

146,    163  5    Union   Trust    Co.   v.    Illinois 


304  RAILWAY   BONDS    AND    MORTGAGES.  [CHAP.  XII. 

§  283.  Effect  of  Notice  to  Trustee  as  to  Matters  not  arising  in 
Active  Litigation.  —  (a)  Wlien  Notice  to  Trustee  has  been  held  not 
to  be  Notice  to  Bondholders.  —  If  the  trustees  who  take  a  convey- 
ance for  the  purpose  of  upholding  the  estate,  without  having  any 
previous  connection  with  the  title,  are  to  be  considered  as  invested 
with  a  merely  dry,  naked  trust,  it  will  probably  be  conceded  that 
notice  to  them  is  not  always,  nor  perhaps  usually,  regarded  as  no- 
tice to  the  cestuis  que  trust.  The  leading  case  in  which  this  theory 
has  been  made  the  partial  basis  of  a  decision  that  notice  to  a  trustee 
in  a  corporate  mortgage  is  not  effectual  as  notice  to  the  bondhold- 
ers is  Curtis  v.  Leavitt,^  in  which  Judge  Paige,  after  pointing  out 
that  the  grounds  here  assigned  for  upholding  the  claims  of  the  bond- 
holders, as  bona  fide  purchasers  of  the  securities,  without  notice  of 
irregularities  in  their  issue,  was  not  necessary  for  the  decision  of 
the  case,  and  that  it  rested  upon  the  individual  opinion  of  two 
judges,  the  other  four  having  arrived  at  the  conclusion  that  these 
irregularities  did  not  vitiate  the  issue,  on  the  broader  grounds  that 
it  was  within  the  scope  of  the  corporate  powers,  and  that  the 
alleged  defects  had  been  cured  by  subsequent  acts  of  recognition 
and  ratification,  expressed  his  reasons  in  the  following  language: 
"  The  trustees  are  not  to  be  regarded  as  the  purchasers  of  the 
bonds  and  mortgages  assigned  to  them.  No  consideration  pro- 
ceeded from  them ;  they  were  mere  assignees  of  these  securities, 
coupled  with  no  interest  in  trust  to  hold  them  as  a  security  for 
the  payment  of  all  the  mortgage  bonds  that  should  thereafter  be 
sold  or  negotiated  by  the  company,  and,  after  the  payment  of  such 
bonds,  to  hold  the  same  subject  to  the  disposition  of  the  company. 
Whoever  purchased  the  mortgage  bonds  became  purchasers  of  the 
bonds  and  mortgages  so  assigned  as  security  for  their  payment, 
or  of  an  equitable  right  to  hold  them  as  such  security."  Nor,  it 
was  thought,  could  the  contention  be  supported  on  the  ground 
that  the  trustee  stood  in  the  relation  of  an  agent  as  respects  bond- 
holders. "  Fie  was  selected,"  said  the  learned  judge,  "  by  the 
company,  not  by  the  ccf^tuis  que  trust.  His  powers  and  duties 
were  confen-ed  and  prescribed  by  the  company,  not  by  the  bond- 
holders. There  were  at  the  time  of  the  execution  of  the  trust 
deeds  no  l)ondholder8,  —  no  cestuis  que  trust.  It  is  a  necessary 
aftril)ii1('  of  an  agency  that  it  should  be  created  by  the  princii)al. 
.  .  .  The  doctrine  that  notice  to  an  agent  operates  as  constructive 
notice  to  liis  principal  is  n|)plicable  only  to  cases  where  an  agency 
in  fact  lias  been  created,  and  in  such  cases  only  where  the  notice 
is  to  the  agent  while  engaged  in  the  same  transaction  or  ncgotia- 

1  15  N.  Y.  9  (1857). 


§  283.]  TRUSTEES.  305 

tion  to  which  the  agency  applies."  In  this  case,  as  the  relation  of 
principal  and  agent  did  not  exist  between  the  bondholders  and 
Graham,  notice  to  him  or  knowledge  by  him  tliat  there  was  no  pre- 
Aaous  resolution  was  not  constructive  notice  to  the  bondholders.^ 

The  arguments  here  used  were  accepted  as  convincing  in  a 
similar  case  by  the  Supreme  Court  of  the  United  States,  where 
the  court  held  that,  where  a  railroad  company  mortgaged,  for  the 
purpose  of  securing  its  own  bonds,  various  property,  including 
certain  aid  bonds  issued  by  a  county,  the  knowledge  of  one  of  the 
trustees  that  the  aid  bonds  were  irregularly  issued  did  not,  in  a 
suit  brought  to  enforce  them,  operate  to  deprive  the  holders  of  the 
company's  bonds  of  their  rights  as  bona  fide  purchasers  without 
notice.^ 

So  also  in  Hay  v.  Alexandria  &  Washington  R.  Co.,"  the  court 
held  that,  although  the  trustee  had  personal  notice  of  an  execution 
on  the  company's  property,  this  notice  could  not  bind  the  bond- 
holders represented  by  him,  who  took  the  bonds  without  notice, 
and  that,  for  all  purposes  of  notice,  the  trust  deed  was  in  the 
case  in  question  to  be  treated  as  made  to  the  bondholders.  No 
reasons  for  this  ruling  are  given. 

(b)  WJien  Notice  to  Trustee  has  been  held  to  be  Notice  to  Bond- 
holder. —  Other  courts  have  adopted  the  doctrine  that  bond- 
holders, in  all  matters  affecting  their  security,  are  charged  with 
the  knowledge  of  the  trustees.  The  most  elaborate  statement  of 
this  view  is  contained  in  the  opinion  delivered  by  Judge  Barrett 
in  Miller  v.  Rutland  &  Washington  R.  Co.,^  where  some  weighty 
reasons  are  given  for  rejecting  the  theory  propounded  in  Curtis  v. 
Leavitt,  supra,  which  is  affirmed  to  be  not  only  founded  on  an 
erroneous  conception  of  the  functions  of  a  trustee  of  this  descrip- 
tion, but  also  productive  of  much  injustice  in  its  practical  opera- 
tion. "  Whatever  title  the  cestuis  que  trust  have,  whether  legal  or 
equitable,  is  through  and  by  virtue  of  the  title  conveyed  to  and 
held  by  the  trustees.  Even  if  it  should  be  granted  that  the  trus- 
tees were  agents  merely  for  holding  the  legal  title,  gtill,  as  the 
rights  of  the  cestuis  que  trust  depend  upon,  and  are  to  be  asserted 
through,  the  legal  title,  whatever  affects  sucli  title  in  its  creation  in 
the  trustees  must  affect  the  rights  and  interests  that  are  dependent 
on  it.     If  the  legal  title  is  charged  with  an  incumbrance  in  its 

1  See   criticism    of    Jiulrre    Barrett   in  2  Johnson   Count}'  v.   Thayer  (1876), 

Miller  v.  Rutland  &  Washington  R.  Co.     94  U.  S.  631. 
(1863),    36  Vt.    452.     See   also    National  3  20  Fed.  Rep.  1.5  (1884). 

Waterworks  Co.  of  N.  Y.  v.  Kansas  City  *  36  Yt.  452  (1863). 

(1896),  78  Fed.  Rep.  428. 

20 


306  RAILWAY    BONDS    AND   MORTGAGES.  [ciIAP.  XII. 

creation  in  the  hands  of  the  trustees,  it  is  difficult  to  see  how  the 
cestnis  que  trust  can  have  an  equity  suspended  upon  the  legal  title 
that  shall  override  such  incumbrances.  However  that  might  be 
as  a  proposition  applicable  to  a  dry  trust,  still,  as  to  a  trust  which, 
in  addition  to  the  holding  of  a  title,  is  administrative  of  the  prop- 
erty for  the  purpose  of  rendering  the  security  effective,  the  trus- 
tees must  be  regarded  as  the  agents  of  the  cestuls  que  trust  with 
reference  to  all  their  rights  and  interests,  both  in  the  title  held 
and  in  the  administration  and  fruits  of  the  trust,  according  to  its 
terms  and  legal  operation.  The  fact  that  the  bonds  are  treated 
as  negotiable,  and  pass  from  hand  to  hand  like  bank-bills,  does 
not  affect  the  question  of  the  agency  of  the  trustees  in  reference 
to  the  security  provided  by  the  mortgage.  Such  bonds  purport  to 
be  secured  by  a  mortgage  in  trust  to  trustees  who  arc  designated 
and  known.  They  are  negotiated  and  purchased  upon  the  security 
thus  existing.  By  the  purchase  of  the  bonds,  the  purchaser  volun- 
tarily adopts  the  security  as  it  exists  in  the  trustees,  and  becomes 
a  cestui  que  trust  under  them,  thereby  adopting  said  trustees  as 
his  agents  for  holding  the  existing  title  and  administering  the 
property  held  thereby  to  the  intents  specified  in  the  creation  of 
the  trust.  The  question  is  not  how  cestuis  que  trust  would  be 
affected  by  notice  to  trustees  of  transactions  subsequent  to  the 
creation  of  the  trust,  or  to  their  becoming  cestuis  que  trust,  but  as 
to  how  they  are  affected  by  notice  to  the  trustees,  which,  as  to 
them  personally,  affects  the  legal  estate  at  the  time  and  in  the 
act  of  their  becoming  trustees." 

The  learned  judge  then  discussed  the  practicability  of  a  contrary 
doctrine,  pointing  out  that  the  fact  of  the  bonds  passing  from 
hand  to  hand,  almost  daily,  without  record  or  notice,  shows  that 
the  matter  of  fixing  an  equity  by  actual  notice  to  the  holders 
would  be  virtually  impossible.  The  result  would  necessarily  be 
tliat,  however  well  grounded  an  equity  a  party  might  have  against 
the  corporation,  and  against  the  trustees  personally,  attaching 
upon  the  legal  title  held  by  such  trustees,  it  would  prove  barren 
and  futile  to  any  beneficial  intent,  by  reason  of  the  impossibility 
of  knowing  and  notifying  the  ever-shifting  parties  who  have  an 
interest,  and  claim  an  equity,  subsequently  created  and  subse- 
quently accruing.  On  the  other  hand,  it  would  be  comparatively 
easy  for  persons  desirous  of  investing  in  railroad  bonds  to  apply 
to  tlie  trustees  holding  the  security,  aiul  elicit  the  true  state  of 
the  title;  and  it  was  declared  to  be,  in  the  opinion  of  the  court,  no 
hardship  that  tliey  should  be  required  to  do  so.  The  conclusion 
arrived  at  was  that  the  bondholders  secured  by  a  second  mort- 


§  283. J  TRUSTEES.  307 

gage  should  be  postponed  to  those  secured  by  an  earlier  instru- 
ment which  took  effect  as  an  equitable  mortgage,  and  of  which 
the  trustees  of  the  second  mortgage  had  actual  notice. 

For  similar  reasons,  more  briclly  expressed,  the  mortgage  bond- 
holders secured  by  an  after-acquired  property  clause  had  previously 
been  held  in  New  Hampshire  to  take  their  securities  subject  to  the 
lien  of  an  agreement  known  to  one  of  the  trustees,  whereby  a 
portion  of  that  property  was  to  be  liable  to  be  removed  by  certain 
parties,  if  the  money  which  they  had  advanced  for  the  purpose  of 
enabling  the  company  to  take  it  from  the  custom-house,  where  it 
was  held  for  duties,  was  not  repaid  at  a  certain  time.  The  court 
said  that  under  the  mortgage  in  question  the  trustees  "  must  be 
considered  in  the  light  of  agents  for  the  negotiating  of  the  loan  ; 
they  act  for  those  who  lend  their  money  on  the  security  of  the 
mortgage ;  they  are  charged  with  the  duty  of  protecting  the  inter- 
ests of  the  bondholders,  who  are  unconnected  individuals,  having 
no  ready  means  of  acting  together  except  through  the  trustees, 
whom. the  law  appoints  to  act  for  them.  Notice  to  the  trustees 
would  be  all  that  could  be  given  in  this  case."  ^ 

In  West  Virginia  this  has  been  carried  to  its  strict  logical  con- 
clusion, and  applied  to  a  case  in  which  a  bondholder  was  merely 
shown  to  be  aware  of  facts  which  put  him  upon  inquiry  as  to  the 
existence  of  a  prior  equitable  lien.^ 

From  the  above  summary  it  is  apparent  that  the  important 
question  is  left  by  the  authorities  in  an  extremely  unsatisfactory 
position.  There  are  doubtless  serious  difficulties  involved  in  the 
adoption  of  either  of  the  opposing  doctrines.  If,  on  the  one  hand, 
the  rule  is  established  that  intending  purchasers  of  bonds  must, 
at  their  peril,  inquire  of  the  trustee  and  ascertain  whether  he  is 
aware  of  the  existence  of  any  prior  equity,  the  value  and  negoti- 
ability of  these  instruments  will  be  much  impaired.     On  the  other 

1  Pierce  v.   Emery  (1856),    32  N.  H.  bonds   as   collateral.      For   several   years 

484.     Compare  Skiddy  v.  Atlantic,  0.  &  there  was  no  complaint,   and  one  of  the 

M.  R.  Co.  (1879),  3  Hughes,  320  ;  Redf.  trustees   named   in    the    mortgage   was  a 

Am.     Ry.    Cas.    568    (1879)  ;    Claflin    v.  director  during  these  years  with  a  knowl- 

South    Carolina   R.    Co.    (1880),    8    Fed.  edge  of  all  that  was  done.     Edd,  that  it 

Rep.   118,    133.       In   the   last- mentioned  was  too  late  for  other  bondholders,  after 

case  a  railroad  company  gave  its  notes  to  many  of  these  bonds  had  been  sold  under 

a  linaneial  institution  controlling  a  claim  the  pledge,  to  object  to  their  use  or  dispute 

against  an  embarrassed  company,  an  im-  their  lien. 

portant  feeder  to  itself,    in  the  stock  of  '-  Fidelity    Insurance,    Trust,    &    Safe 

which  it  owned  a  controlling  interest,  the  Deposit  Co.  v.  Shenandoah  Valley  R.  Co. 

object  being  to  prevent  its  falling  under  (1889),    32   W.   Va.    244  ;   s.  c.    9  S.   E. 

the  control  of  an  antngonistic  interest,  and  Rep.   180;    38  Am.  &  Eng.    R.   R.   Cas. 

secured  these  notes  by  its  second-mortgage  577. 


308  RAILWAY   BONDS    AND   MORTGAGES.  [CHAP.  XTI. 

hand,  it  seems  scarcely  consistent  with  justice  that  the  secured 
creditors,  by  thus  interposing  a  trustee  between  themselves  and  the 
company,  should  be  able  to  obtain  a  higher  rank  for  their  claims 
than  parties  who  have  acted  with  due  diligence  in  giving  the  only 
kind  of  notice  of  which  the  circumstances  admit.  That  the  bond- 
holders in  such  a  case  should  be  permitted  to  postpone  existing 
equities  in  favor  of  theirs  is  a  far  more  stringent  doctrine  than 
that  which  entitles  bona  fide  transferees  of  a  note  secured  by  a 
mortgage  to  enforce  the  mortgage  without  regard  to  equities 
between  the  original  parties.^  The  technical  objection  that  the 
trustee  cannot  be  the  agent  of  those  who  purchase  the  bonds,  for 
the  reason  that  he  is  appointed,  not  by  them,  but  by  the  corpora- 
tion, seems  to  be  sufficiently  answered  by  the  theory  propounded 
in  Miller  v.  Rutland  &  Washington  R.  Co.,  sujn-a,  that  the  act  of 
purchase  may  be  deemed  to  amount  to  an  acceptance  of  the 
trustee  as  agent,  subsequent  ratification  being  here  regarded, 
according  to  the  ordinary  rule,  as  equivalent  to  a  prior  appoint- 
ment. The  question,  therefore,  is  pre-eminently  one  to  be  settled 
by  a  resort  to  general  considerations  of  commercial  expediency. 

Article  I Y.  —  Duties  of  the  Trustee  generally. 

§  284.  The  General  Duties  of  the  Trustee  are  the  same  as  those  of 
other  Trustees.  —  He  must  act  in  good  faith  for  the  best  interests 
of  the  bondholders ;  he  must  take  care  that  the  property  is  not 
wasted  nor  depreciated ;  he  must  see  that  the  income  is  not 
improperly  diverted  from  the  payment  of  interest  on  the  mort- 
gage as  it  accrues ;  and,  in  case  of  a  manifest  purpose  on  the 
part  of  the  mortgagor  to  waste  or  destroy  the  property,  or  not  to 
apply  the  income  to  payment  of  interest,  to  the  injury  of  bond- 
holders, it  is  the  trustee's  duty  to  take  possession  of  the  property 
and  manage  it  for  the  security  of  the  eestuis  que  truHt? 

A  trustee  for  bondholders,  authorized  by  them  to  purchase  the 
property  at  a  foreclosure  sale  with  a  view  to  reorganization  with 
obligations  on  the  side  of  the  l)ondholdcrs,  to  exchange  their  bonds 
for  those  of  the  reorganized  corporation,  to  ])ay  assessments,  etc., 
has  a  right  to  abandon  the  sale  and  to  refuse  to  complete  it  u])on 
the  failure  of  a  sufficient  number  of  bondholders  to  meet  their 
obligations  under  the  agreement.  This  would  leave  the  property 
under  the  lien,  and  a  resale  could  be  had  un(l(M-  the  decree.     But, 

1  Sco  Dan.  on  Xf;;.  liistr.,  §  834.  et  al.  (1881),   1.30  Mass.  303  ;  s.  c.  4  Am. 

2  Sttir^ra  V.   Knaj)])  (IS'.S),   Sfi  Vt.  1  ;     &  Eiig.  U.  K.  Cas.  480. 
First  National  Fire  Ins.   Co.  v.  Salisbury 


§  285.J  TRUSTEES.  309 

after  bidding  off  the  property  as  the  trustee  of  the  bondholders, 
and  proceeding  to  complete  the  purchase  made  as  their  trustee, 
he  will  be  held  bound  by  all  the  terms  of  the  trust  until  released 
therefrom  by  the  bondholders.  And  if  he,  in  such  a  case,  sells  the 
property  to  third  parties,  the  bondholders  will  be  entitled  to  relief 
against  the  trustee,  and  may  follow  the  property  in  trust  in  the 
hands  of  the  purchaser. ^ 

§  285.  The  Duties  of  a  Trustee  become  active  when  a  Default 
occurs,  and  are  not  then  merely  ministerial.  —  From  the  usual  terms 
of  mortgages  it  follows  that,  unless  the  safety  of  the  security  is 
threatened  by  the  mortgagor  or  by  attacks  from  without,  or  there 
has  been  a  default  in  the  payment  of  the  bonds  or  the  interest, 
the  trustee  has  no  active  duties  to  perform,  but  is  simply  the 
depositary  of  the  title  to  the  property  mortgaged.  "  Tlie  actual 
possession  of  the  franchises  and  the  property  remains  in  the 
railroad  company  to  enable  it  to  discharge  its  duties  to  the  public, 
and  earn  an  income  from  which  to  pay  its  liabilities.  But  when 
a  default  occurs,  the  duties  of  the  trustee  become  active  and 
important ;  he  represents  all  the  bcmdholders,  and  is  under  obli- 
gation to  protect  them,  so  far  as  the  property  in  his  hands  in 
trust  for  them  will  enable  him  to  do  so."  ^ 

The  duties  of  a  trustee,  after  forfeiture,  become,  not  only  active 
and  responsible,  but  critical  and  delicate.  He  must  then  elect 
between  delay  and  action ;  between,  on  the  one  hand,  taking  pos- 
session of  the  road  and  its  fixtures  where  he  is  entitled  to  do  so, 
and,  on  the  other,  delay  and  consequent  further  embarrassment, 
complication,  and  loss,  or  he  must  undertake  the  ulterior  and 
final  remedy  of  foreclosure.  It  is  the  sole  or  the  first  purpose  of 
his  office  that  he  should  act,  and  should  exercise  his  wisdom  and 
discretion  upon  the  possible  occurrence  of  the  emergency  of  a 
default.  He  is  selected  with  reference  to  his  capacity  and  respon- 
sibility for  this  very  contingency,  both  by  the  corporation  and 
the  cestuis  que  trust ;  and  neither  of  these  parties  has  stipulated 
to  deal  directly  with  the  other,  but  only  with  the  trustee,  as  the 
responsible  party.^ 

1  Indiana,  111.  &  Iowa  R.  Co.  v.  hondholder  and  an  ordinary  niort£;agep, 
Swannell,  Exr.,  et  al.,  157  111.  616;  s.  c.  decided  that  a  sale  of  the  property  and 
41  N.  E.  Rep.  989  (1895),  affirming  Same  franchises  of  the  corporation  under  execii- 
V.  Same,  54  111.  App.  260.  tion  of  a  judgment  obtained  by  a   bond- 

2  Commonwealth  v.  Susquehanna  &  holder,  not  as  one  of  a  class,  but  as  an 
Delaware  River  R.  Co.  (1888),  122  Pa.  individual,  did  not  cut  off  the  lien  of  the 
St.  306  ;  s.  c.  36  Am.  &  Eng.  R.  R.  Cas.  mortgage,  as  would  have  been  the  case  had 
269.  The  court,  after  examining,  in  a  the  property  been  sold  to  satisfy  an  ordi- 
passage  of  which  this  extract  forms  a  part,  nary  mortgage. 

the   difference    between    the   rights   of    a  3  Sturges  v.  Knapp  (1858),  31  Vt.  1. 


310  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  XII. 

In  carrying  through  a  foreclosure  suit,  it  is  not  enough  for  a 
trustee  to  be  ready  to  contest  a  demand  against  the  estate  to  which 
the  bondholders  may  call  his  attention.  He  is  under  the  positive 
duty  of  seeing  that  the  property  is  not  burdened  with  unjust 
claims  or  unnecessary  expenditures.^ 

A  court  of  equity  will  take  jurisdiction  of  the  trusts  created  by 
the  mortgage,  and  compel  the  trustees  to  execute  them  in  the 
manner  indicated  by  the  terms  of  the  instrument  itself.^ 

Thus,  if  the  trustee  neglects  or  refuses  to  move  after  a  de- 
fault, any  bondholder  may  proceed,  by  bill  filed  on  behalf  of 
himself  and  the  other  members  of  the  class  of  creditors  to  which 
he  belongs,  to  compel  a  sale  of  the  mortgaged  premises,  a  re- 
moval of  the  trustee,  or  such  other  relief  as  may  be  appropriate.^ 

The  duty  imposed  upon  a  trustee  by  the  ordinary  provision, 
that,  if  the  payment  of  principal  and  interest  continues  in  default 
for  a  specified  period,  he  shall,  upon  receiving  the  request  of  a 
certain  proportion  of  the  holders  of  the  bonds,  take  possession 
and  sell  it  in  the  manner  prescribed,  is  purely  ministerial,  and,  if 
the  necessary  requisition  is  made,  he  has  no  option  but  to  comply 
with  it.^ 

And  as  the  remedy  of  foreclosure  may  be  put  in  motion  inde- 
pendently of  any  such  requisition,^  the  trustee  may  be  compelled, 
upon  a  proper  showing,  to  comply  with  the  demand  of  any  number 
of  the  bondholders,  to  enforce  the  security  in  that  manner.  Thus, 
where  it  is  provided  that,  until  default  and  for  six  months  there- 
after, the  mortgagor  shall  remain  in  possession,  and  that,  on 
request  of  one-half  of  the  owners  of  the  bonds,  the  trustees  might, 
upon  tlie  continuance  of  a  default  for  six  months,  sell  the  road, 
bondholders  owning  only  one-sixth  of  the  amount  of  the  issue 
secured  by  the  mortgage  may  maintain  a  bill  in  equity  to  compel 
the  trustees  to  take  possession  of  the  property,  for  the  purpose  of 
foreclosing  the  lien,  where  it  is  alleged  that  there  has  been  a  de- 
fault in  the  payment  of  the  interest  on  the  bonds ;  that  the  cor- 
poration has  signified  a  purpose  not  to  pay  interest  on  the  bonds 
unless  the  holders  thereof  will  take  a  less  rate  than  that  which 

1  De  Retz's  Petition  (1878),  9  Abb.  (1855),  5  Gray  (Mass.),  162;  Bradley  v. 
N.  C.  246.  Chester  Valley  E.  Co.  (1860),   36  Pa.  St. 

2  Hradley  v.  Chester  Valley  II.  Co.  141;  Wilrner  i;.  Atlanta  &  Richniond  Air 
(1860),  36  Pa.  St.  141.  Lino    Ry.     Co.    (1875),    2   Woods,    409; 

8  Conirnoiiwealth    v.     Susiinehanna    &  Maryland  ».  Brown  (1885),   64  Md.   199; 

Delaware  River  R.  Co.  (1888),  122  Pa.  St.  s.  c.   1  Atl.  Rep.  54  ;  6  Atl.   Rep.  172  ; 

306  ;  8.  c.  15  Atl.  Rep.  448  ;  36  Am.  &  24  Am.  &  Eng.  R.  R.  Cas.  192. 
Kiif,'.  R.  Pi.  Cas.  269.  ^  See  chapters  on  remedies. 

*  Sliaw    V.    Norfolk    County    R.    Co. 


§  286.]  TRUSTEES.  311 

the  bonds  call  for  ;  that  the  net  income  of  the  corporation  is  in- 
sufficient to  pay  the  interest  on  the  bonds  ;  that  the  corporation  is 
ap})lying  the  income  to  unsecured  debts ;  and  that  there  is  danger 
tliat,  if  this  course  is  continued,  the  property  will  be  inadequate 
security  for  the  payment  of  the  mortgage.  To  such  a  bill  it  is 
no  defence  that  litigation  may  be  necessary  to  ascertain  what 
property  is  covered  bj;  the  mortgage,  or  that  a  great  burden  and 
personal  liability  for  injuries  done  and  debts  subsequently  in- 
curred will  thereby  be  imposed  on  them.  This  burden  and  this 
liability  are  incident  to  the  trust  which  the  trustees  assume  in 
taking  the  mortgage,  and  it  is  not  for  them  to  say  that  the  cestuis 
que  trust  must  suffer  because  it  is  inconvenient  or  burdensome 
for  them  to  do  their  duties  as  trustees.^ 

Where  the  primary  right  to  proceed  is  in  the  trustees  and  not 
in  the  bondholders,  as  is  the  case  under  the  Florida  Improvement 
Act,  it  is  the  absolute  duty  of  the  trustees  to  proceed  against  the 
property  which  stands  as  the  security  of  the  bondholders,  when 
the  interest  is  in  default,  and  no  funds  are  available  from  the 
other  sources  provided  in  the  act.^ 

The  relation  between  mortgage  trustees  and  bondholders  is  not 
such  as  makes  it  the  trustee's  duty  in  every  case  to  promptly  fore- 
close the  mortgage  without  any  request  from  the  bondholders. 
It  follows  that  the  failure  of  a  trustee  to  foreclose  for  a  long  time 
after  default  will  not  give  a  bondholder  the  right  to  bring  an 
action  for  foreclosure  on  the  ground  of  abandonment  or  neglect 
on  the  part  of  the  trustee.^ 

§  286.  The  Duties  of  the  Trustees  are  owed  to  the  Bondholders 
severally  as  well  as  collectively. — They  are,  therefore,  not  at 
liberty  to  follow  the  advice  or  comply  with  the  wishes  of  a  ma- 
jority of  the  bondholders.  The  minority  may  still  hold  them 
liable  for  a  faithful  administration  of  the  trust.  Nor  are  they 
allowed  to  discriminate  between  members  of  the  same  creditor 
class.  The  bonded  debt  is  a  unit,  so  far  as  their  duties  and 
powers  are  concerned,  and  they  must  regard  the  bondholders  as  a 
class,  not  as  individuals.* 

A  voting  power  which  the  trustee  of  a  mortgage  of  stock  is 
entitled  under  the  instrument  to  exercise,  after  a  three  months' 

1  First    National     Fire    Ins.    Co.    v.  Co.  (1893),  13  Misc.  Rep.  737  ;  s.  c.  35 

Salisbury  (1881),  130  Mass.   303  ;  s.  c.  4  N.  Y.  Suppl.  1. 
Am.  &  Eng.  R.  R.  Cas.  481.  <  Sturges  v.  Knapp  (1858),  36  Vt.   1  ; 

'■^  Florida  v.  Anderson  (1875),  91  U.  S.  Commonwealth  i;.  Susquehanna  &  Dela- 

667,  ware   River  R.   Co.    (1888),    122  Pa.   St. 

8  Beebe  v.  Richmond   L.  H.  &  Power  306  ;  s.  c.  15  Atl.  Rep.   448  ;  36  Am.  & 

Eng.  R.  R.  Cas.  269. 


312  RAILWAY   BONDS    AND   MORTGAGES.  [CHAP.  XII. 

default  in  the  interest,  should  be  used  for  the  advantage  of  all 
the  cestuis  que  trust,  and  not  in  obedience  to  the  desires  of  the 
majority  .1 

A  trustee  of  more  than  one  mortgage  must  take  such  action  as 
will  preserve  the  interests  of  the  bondholders  secured  by  all  the 
mortgages,  and  not  simply  those  secured  by  the  first  one.^ 

§  287.  A  Trustee's  Duties  are  personal,  and  cannot  be  delegated. 
—  He  is,  therefore,  liable  for  damages  caused  by  allowing  other 
persons  to  institute  proceedings  and  to  sell  the  trust  property.^ 

For  the  same  reason  he  incapacitates  himself  for  the  perform- 
ance of  the  trust  by  voluntarily  removing  to  and  becoming  a 
permanent  resident  of  a  foreign  country.  By  such  a  change  of 
domicil  he  will  be  deemed  to  have  vacated  his  office,  and  if  he 
attempts  to  prosecute  an  action,  as  trustee,  in  the  United  States 
court,  a  State  court  may  enjoin  him  from  proceeding  in  the  case.* 

§  288.  A  Trustee  should  consult  the  Court,  and  is  justified  in 
doing  so,  when  the  words  of  the  trust  deed  which  prescribe  his 
duties  are  ambiguous,^  or  where  the  due  execution  of  his  trust 
seems  impossible.*^ 

§  289.  When  a  Trustee  may  be  required  to  report  to  the  Court. — 
The  rule  that  the  trustee  must,  when  so  required,  report  to  the 
court,  is  applicable  to  a  case  in  which  a  court  of  equity,  in  the  ex- 
ercise of  its  general  jurisdiction,  has  appointed  the  trustees  called 
for  by  the  provisions  of  a  statute  authorizing  a  mortgage,  although 
no  express  reference  to  such  reporting  is  made  either  in  the 
statute  or  the  order  of  appointment.'^ 

A  like  duty  is  incumbent  on  a  trustee  who  has  been  placed  in 
possession  of  the  property  in  course  of  proceedings  for  fore- 
closure.^ 

1  Toler  V.  East  Tennessee,  V.  &  G.  By.  (1877),  11  Hnn,  130.  Compare  §  263,  ante, 
Co.  (1894),  67  Fed.  Rep.  168.  as  to  the  removal  of   a  trustee  for   this 

2  Central   Trust    Co.    v.    Texas   &   St.     cause. 

Louis  Ey.  Co.  (1885),  23  Fed.  Eep.  846.  ^  Denver  &   R.  G.    R.    Co.  v.   United 

8  Men-ill  v.  Farin(>rs'  Loan  &  Trust  Co.  States   Trust    Co.    (1890),   41    Fed.   Rep. 

(1881),   24  Hnn,   297.     In  this  case  the  720. 

trustee  was  held  responsible  for  the  lo.ss  ^  James  v.  Cowing  (1880),  82  N.  Y. 

sustuineil  hy  allowing  certain  contractors  449  ;  s.  c.  2  Am.   &  Eng.  R.  R.  Cas.  336. 

who  held  a  large  rpiantity  of  the  bonds  See  article  entitled  "  Legal  Responsibility 

to  control  the  foreclosure  proceedings  and  of  Trustees  under  Cori)orate    ]^)Oiids   and 

to  arrange  among  tliemselves  for  a  sale,  Mortgages  or  Deeds  of  Trust,"  by  Robert 

williout    giving    any    notice    to    outside  Ludlow  Fowler,  24  Am.  L.  Rev.  703. 

bondliolilers    of    the    time    of    sale,    the  '  Jn    the   Matter   of   Eastern  Railroad 

contractors  being  thus  eTiabled  to  obtain  Co.  (1876),  120  Mass.  412. 

the    property    at    an    unreasonably    low  "  Bill    v.  New    Albany,    etc.     R.    Co. 

price.  (1870).  2  lliss.  390;  s.  c.3  Fed.  Cas.  379. 

*  Farmers'  Loan  &  Trust  Co.  v,  Hughes  Case  No.  1407. 


§§  290-292.]  TRUSTEES.  313 

§  290.  Trustee's  Duty  to  account.  —  No  action  for  an  account- 
ing can  be  maintained  against  a  trustee  after  the  foreclosure  sale, 
where  he  has  always  stood  in  the  attitude  merely  of  the  mortgage 
trustee,  foreclosing  and  selling  when  his  trust  duty  required, 
never  buying  at  any  such  sale  or  taking  possession  under  it,  or 
o{)erating  the  railroad ;  and  where,  although  he  has  received 
certain  checks  from  the  purchasers,  and,  owing  to  his  failure  to 
collect  them,  might  have  been  made  responsible  for  the  money, 
the  election  of  the  bondholders  to  disaffirm  the  sale  has  released 
him  from  the  liability  incurred  by  this  neglect  of  duty.^ 

S  291.  Duty  to  prevent  Misfeasance  of  Co-trustees.  —  The  mort- 
gage sometimes  provides  that  a  trustee  shall  be  liable  only  for 
his  own  wilful  default  or  misconduct,^  and  this  is  the  general  rule, 
in  the  absence  of  any  express  provision  in  the  mortgage.'^ 

But  a  trustee  will  be  personally  liable  for  the  acts  of  a  co- 
trustee, if  he  becomes  aware  of  any  circumstances  tending  to 
show  that  the  co-trustee  is  committing  a  breach  of  trust,  and 
omits  to  take  active  steps  to  protect  the  trust  property .** 

§  292,  Duty  of  Trustee  as  to  Investment  of  Trust  Funds.  Sink- 
ing Funds.  —  The  rule  is  that  the  instructions  as  to  investment 
contained  in  an  instrument  of  trust  are  comparatively  obliga- 
tory on  the  trustee,  but  that  by  the  direction  of  a  competent 
court  he  may  depart  from  them.  The  court,  however,  will  exer- 
cise its  authority  in  such  cases  only  when  there  is  a  necessity  to 
do  so,  and  after  giving  full  opportunity  to  the  parties  who  are  to 
be  affected  by  such  action  to  be  heard.  The  bondholders  are  en- 
titled to  the  advantage  of  the  agreements  as  made  on  the  issuing 
of  the  bonds,  and  unless  it  appears  indisputably  that  an  occasion 
had  arisen  which  calls  for  the  action  of  the  court,  any  interference 
with  the  provisions  of  the  trust  deed  is  unwarrantable.  If  a  sink- 
ing fund  is  directed  to  be  invested  in  certain  specified  bonds  of  the 
mortgagor  company,  the  court  will  not,  without  the  consent  of 
the  bondholders  themselves,  authorize  the  trustee  to  invest  that 
fund  in  other  bonds  of  the  company  merely  because  the  latter 
would,  as  may  be  alleged,  prove  more  remunerative  in  the  exist- 
ing condition  of  the  money  market.  That  the  trustee  recom- 
mends the  change  is  not  a  sufficient  reason  for  allowing  it  to  be 

1  Harrison  v.  Union  Trust  Co.  (1895),  N".  Y.  644;  s.  c.  19  N.  E.  Rep.  782  ;  38 
144  N.  Y.  326  ;  s.  c.   39  N.  E.  Rep.  353.     Am.  &  Eng.  R.  R.  Gas.  599. 

As  to  duty  of  trustees   in   possession  to  »  Perry  on  Trusts,  §§  415  c/*  .wg'. 

account,  see  §§  296,  301,  post.  4  Weetjen  v.   Vibbanl  (1875),  5  Hun, 

2  A   mortgage    of    this   character   was  265  ;  Perry  on  Trusts,  §  419. 
under  review  in  Hollister  u.  Stewart,  111 


314  RAILWAY   BONDS   AND    MORTGAGES.  [CHAP.  XII. 

made,  since,  for  the  purposes  of  such  an  application,  he  does  not 
represent  the  bondholders. ^ 

§  293.     The   Application    of    the    Money    •which    comes    into    the 
Hands  of  the  Trustees  in  the  Execution  of  their  Trust.  —  This  appli- 
cation should  be  made  in  such  a  manner  as  to  diminish  the  in- 
debtedness of  the  company  as  far  as  possible.     In  Little  Rock  & 
Fort  Smith  Ry.  Co.  v.  Huntington  ^  the  trustees  were  required  by 
the  trust  deed  to  apply  the  moneys  arising  from  the  sales  of  the 
company's  lands  (1)  to  the  payment  of  the  coupons  as  fast  as 
they  should  become  payable,  to  the  extent  that  the  net  earnings 
of  the  business  should  be  insufficient  for  that  purpose ;  (2)  to  the 
purchase  and  cancellation  of  such  outstanding  bonds  as  could  be 
obtained  at  their  market  value,  not  exceeding,  however,  a  premium 
of  10  per  cent ;  (3)  to  the  payment  of  such  of  the  bonds  as  should 
not  have  been  purchased  in  accordance  with  these  provisions,  when 
the  same  should  become  due  and  payable.      Any  money  not  used 
for  any  of  these  purposes  was  to  be  invested  in  United  States  se- 
curities, or  lent  from  time  to  time  in  such  mnnncr  as  was  permitted 
to  savings  banks  by  the  law  of  Massachusetts.     During  the  first 
two  years  after  the  execution  of  the  mortgage  the  net  earnings, 
even  when  united  with  the  proceeds  of  the  land  sales,  were  in- 
sufficient to  meet  the  coupons ;  and  an  agreement  was  thereupon 
made  with  the  holders  whereby  they  surrendered  their  coupons  to 
the  trustees,  and  the  company  issued  to  the  latter  negotiable  scrip, 
by  which  it  promised  to  pay  the  trustees  or  bearer  the  amount  of 
the  coupons  surrendered,  in  ten  years  from  their  maturity,  with 
interest  at  the  rate  of  7  per  cent,  the  company  reserving  the  right 
to  pay  the  scrip  and  interest  at  any  time  previous  to  its  maturity. 
The  scrip  also  provided  that  the  trustees  should  hold  the  coupons 
surrendered  as  collateral  security  for  the  payment  of  the  scrip  thus 
issued  therefor,  and  that  the  coupons  should  not  be  surrendered 
or  cancelled  until  the  scrip  should  be  paid.     Subsequently  the  net 
earnings  became,  and  promised  to  continue  to  be,  amply  sufficient 
to  meet  the  interest  on  the  coupons,  and  the  price  of  the  bonds 
increased  so  greatly  as  to  exceed  the  limit  at  wliich  the  trustees 
were  entitled  to  purchase  them.     Under  these  circumstances  it 
was  held  that  as  the  surplus  funds  accruing  from  the  land  sales,  if 
invested  according  to  the  provisions  of  the  mortgage,  would  bring 
in  a  much  lower  rate  of  interest  than  the  coupons  were  drawing, 

1   Fidelity  riiHurancc,  Trust,  &  Safe  De-  ofFoct  see   Clark    v.   vSt.    Louis,    Alton,    & 

posit  Co.  V.  Ihuiod  New  Jersey  llailroad  &  Terro    Haute    R.    Co.    (1879),    58    How. 

Canal  Co.    (1884),  W  N.  J.   E(i.  40.5;  12  Pr.  21. 
Am.  &  Eng.  R.  R.  Cos.  404.     To  the  same         «  120  U.  S.  160  (1887). 


§§  294,  295.]  TRUSTEES.  315 

there  was  a  manifest  justice  in  the  demand  of  the  company  that 
the  money  thus  obtained  should  be  devoted  to  taking  up  the  out- 
standing coupons. 

Article  V.  —  Trustees  in  Possession. 

§  294.  General  Statement.  —  A  trustee  who  enters  into  posses- 
sion of  the  road,  cither  ex  proprio  motu  or  at  the  instance  of  the 
bondholders,  assumes  a  position  which  imposes  upon  him  new 
duties  and  corresponding  liabilities.  Having  taken  under  his 
charge  the  subject-matter  of  the  trust,  he  is  bound  to  administer 
it  in  such  a  manner  as  will  promote  the  best  interests,  not  merely 
of  the  bondholders  whom  he  more  immediately  represents,  but  also 
of  the  company  itself,  which  is  justly  entitled  to  demand  that  this 
method  of  liquidating  the  debt  shall  not  be  abused.  His  control 
of  the  railroad  necessarily  subjects  him  to  the  various  responsi- 
bilities incident  to  the  ownership  of  that  class  of  property,  whether 
as  regards  the  public  as  a  whole,  or  that  portion  of  it  with  which 
he  comes  into  business  relations.  In  short,  although  his  duty  is 
still  primarily  to  the  bondholders,  he  becomes  for  some  purposes 
the  agent  of  the  corporation  as  well,  and  the  party  to  whom  those 
who  are  in  any  way  affected  by  the  management  of  the  road  may 
properly  look  for  satisfaction. 

§  295.  The  Right  of  the  Trustees  to  exercise  the  Corporate 
Franchises  after  entering  for  Default.  ■ —  In  an  early  Illinois  case 
it  was  contended  that  the  trustees  were  incapable  of  operating 
the  road  of  which  they  had  taken  possession,  for  the  reason 
that  to  do  so  involved  the  exercise  of  the  corporate  franchises, 
which,  as  the  law  then  stood  in  the  State,  could  not  be  mort- 
gaged or  transferred.  The  parties  had  endeavored  to  get  over 
this  difficulty  by  providing  that  the  trustees  were  to  operate  it 
as  the  agents  of  the  company ;  but  it  was  held  that  even  with- 
out this  provision  the  trustees  were  endowed  with  sufficient 
powers  to  enable  them  to  maintain  and  operate  the  road :  that  for 
this  purpose  they  might  use  their  own  proper  names  or  adopt  any 
other  convenient  business  name,  as  any  other  individual  or  com- 
pany might  do  ;  and  that  they  were  under  no  necessity  of  adopt- 
ing the  name  of  the  company  to  whose  rights  in  the  property  they 
had  succeeded.  Any  other  construction  of  the  mortgage  would, 
it  was  pointed  out,  lead  to  the  conclusion  that  the  rights  of  the 
mortgagee  could  be  enforced  only  by  taking  up  the  road  and  dis- 
posing of  the  material ;  and  it  was  thought  to  be  impossible  that 
the  legislature,  in  authorizing  the  mortgage  of  the  railroad  i)rop- 


316  RAILWAY   BONDS    AND    MORTGAGES.  [CHAP.  XII. 

ertj,  could  have  intended  that  any  consequences  so  disastrous  to 
the  public  should  be  allowed  to  result  from  the  default  of  the 
company.  "  If,"  said  the  court,  "  it  was  the  intention  that  the 
road  should  not  be  taken  up  and  destroyed,  for  the  payment  of 
the  mortgage  debt,  but  that  it  should  be  sold  subject  to  the  duty 
towards  the  public  of  continuing  and  operating  it  as  a  road,  it 
follows  necessarily  that  it  was  the  intention  of  the  legislature  that 
those  into  whose  hands  it  might  fall,  and  upon  whom  this  duty  to 
the  public  of  running  and  operating  the  road  might  devolve,  should 
possess  all  the  necessary  rights  and  powers  to  enable  them  to  per- 
form this  duty.  The  authority  to  mortgage  implies  the  authority 
to  sell  the  thing  mortgaged,  and  to  convey  to  the  purchaser  all 
needful  powers  to  use  the  thing  purchased  in  a  proper  and  bene- 
ficial manner."  ^ 

§  296.  Trustee's  Duty  to  account  to  Bondholders  for  the  Avails 
of  the  Property.  —  Trustees  in  possession  of  the  road  and  operating 
it  must  account  to  the  bondholders  for  the  income  while  it  is  under 
their  management.  A  failure  to  do  so  is  a  neglect  and  a  violation 
of  their  duty  to  such  bondholders,  and  renders  them  liable  to  a 
suit  for  an  accounting.  Such  claims  of  the  bondholders  against 
the  trustees,  although  claims  on  account  of  the  bonds,  are  claims 
against  the  trustees  personally  for  the  moneys  received  to  the 
use  of  the  bondholders.^ 

Each  bondholder  has  a  right  to  receive  his  share  of  any  money 
which  comes  into  the  hands  of  the  trustee,  and  is  applicable  to 
the  payment  of  the  bonds.  Whether  the  bondholders  who  have 
acquired  their  bonds  since  the  money  became  available  for  this 
purpose  are  entitled  to  a  share  of  it  depends  upon  the  nature  of 
the  transaction  by  which  the  bonds  were  acquired.  In  dealing 
with  a  demurrer  to  a  complaint  in  an  action  brought  by  a  bond- 
hulder  to  enforce  his  claim  to  such  money,  it  will  be  presumed 
that  the  securities  passed  to  the  plaintiff  with  all  their  incidents, 
among  which  would  be  the  right  to  have  a  proportionate  amount 
of  the  money  applied  to  the  payment  of  his  bonds,  and  that  the 
time  when  the  transfer  occurred  is,  therefore,  not  material.  The 
demurrer  will  accordingly  be  dismissed  in  the  absence  of  some 
averment  on  this  point.^ 

A  bondholder's  i-cmedy  to  compel  a  trustee  to  account  for  the 
pro(;(!eds  of  the  sale  of  ])ropcrty  which,  in  accordance  with  the 


pi 


ovisions  of  the  mortu-aerc,  lie  has  bid  in  at  the  foreclosure  sale 


'o"&^? 


»   r.'ilni.T  V.  Foihps  (1860),  23  111.  301.  3  Dvviglitv.  Smith  (1882),  13  Fed.  Rep. 

2  U wight  V.  Smith  (1881),  9  Ft-d.  Rep.     50. 


790. 


§  297.] 


TRUSTEES. 


317 


for  the  benefit  of  the  bondholders  and  afterwards  conveyed,  is  not 
confined  to  an  intervention  in  the  foreclosure  suit,  for  the  facts 
on  which  such  relief  is  claimed  do  not  arise  until  after  the  entry 
of  the  judgment  in  the  foreclosure  suit.^ 

§  297.  Relation  of  the  Trustee  in  Possession  to  the  Mortgagor 
Corporation.  —  A  trustee  in  possession  of  the  mortgaged  property 
is  for  some  purposes  regarded  as  the  agent  of  the  corporation  as 
well  as  of  the  bondholders.^ 

He  must  account  for  the  earnings  to  the  company ,3  or  any  one 
claiming  by  the  same  right  as  the  company,  —  such  as  the  purchaser 
of  the  equity  of  redemption,  for  instance.^ 

He  is  bound  to  manage  the  property  with  reasonable  care,  pru- 
dence, and  faithfulness,  and  to  apply  the  net  income  according  to 
the  legal  rights  of  all  parties.^ 

But  where  the  trustee  is  known  not  to  be  a  man  having  expe- 
rience in  the  direct  management  of  a  railroad,  he  is  not  held 
responsible  for  the  highest  skill,  or  for  failing  to  attain,  in  the 
operation  of  the  road,  the  same  degree  of  success  which  might 


1  Zebley  v.  P'armers'  Loan  &  Trust  Co. 
(1893),  139  N.  Y.  461  ;  s.  c.  34  N.  E. 
Rl'P.  1007. 

2  Aslmelot  R.  Co.  v.  Elliot  (1874),  57 
N.  H.  397  ;  s.  c.  13  Am.  Ry.  Rep.  491  ; 
Racine  &  Miss.  R.  Co.  v.  Farmers'  Loan  & 
Trust  Go.  (1868),  49  111.  331. 

^  Racine  v.  Mississippi  R.  Co.  v.  Farm- 
ers' Loan  &  Trust  Co.  (1868),  49  111.  331. 

*  Wood  V.  Goodwin  (1861),  49  Me.  260. 

6  Kennebec  &  Portland  R.  Co.  v.  Port- 
land &  Kennebec  R.  Co.  (1871),  59  Me.  9. 
In  this  case  a  foreclosure  .sale  made  by 
virtue  of  proceedings  instituted  by  a  trus- 
tee in  possession  under  a  first  mortgage, 
was  attacked  by  the  bondholders  secured 
by  a  second  mortgage,  in  which  the  same 
party  was  also  named  as  trustee.  Upon  a 
review  of  the  facts  the  sale  was  sustained ; 
but  the  court,  in  the  course  of  its  opinion, 
declared  a  different  ruling  would  have 
been  proper  if  fraudulent  or  negligent 
conduct  on  the  part  of  the  trustees  had 
been  shown.  "  A  mortgagee  in  posses- 
sion," it  was  remarked  (p.  47),  "is  un- 
doubtedly in  an  important  sense  a  trustee 
for  the  mortgagor,  and  bound  to  regard  his 
interest.  These  trustees  knew  that  in 
three  years  the  equity  would  be  fore- 
closed, and  that  it  was  their  duty  to  pre- 
vent this  consequence  if  they  could 
legally,  and  had  the  means  or  money  in 


their  hands  which  thej'  could,  properly 
and  consistently  with  their  obligations  to 
others,  and  with  their  duty  under  the  law 
or  stipulations  under  which  they  acted, 
applj'  to  the  payment  of  these  second- 
mortgage  coupons,  due  and  unpaid.  And 
we  think,  further,  that  if,  having  such 
means,  they  diverted  them  to  otlier  ille- 
gitimate objects,  or  entered  into  combi- 
nations with  others  to  allow  the  time  of 
redemption  to  run  out,  when  it  could  have 
been  prevented  by  the  use  of  earnings  or 
assets  in  their  hands,  which  might,  under 
their  responsibilities  and  duties,  have 
been  so  applied  that  the  foreclosure  should 
not  be  set  up  or  held  effectual.  Again,  if  by 
intentional  mismanagement  or  neglect,  or 
by  such  gross  and  clearly  proved  misfea- 
sance in  their  office,  and  inattention  to  the 
wants  and  interests  of  the  road  as  would 
amount  to  constructive  fraud,  the  income 
was  thereby  reduced  so  as  to  affect  the  net 
profits,  which  a  different  mode  of  adminis- 
tration would  have  produced,  which  profits 
would  have  been,  or  might  have  been, 
properly  applied  to  the  payment  of  those 
coupons  before  the  three  years  would  liave 
expired,  and  would  have  been  sufficient, 
we  think  that  the  same  result  as  to  strict 
foreclosure  would  follow.  It  would  be 
against  right,  reason,  and  fair  dealing  to 
hold  otherwise." 


318  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  XII. 

possibly  be  reached  by  an  experienced,  long-tried,  and  exceptional 
manager.^ 

§  298.  Trustee  taking  Possession  not  an  Assignee  of  a  Lease  made 
subsequently  to  the  Mortgage.^  —  The  trustees  of  a  mortgage  exe- 
cuted prior  to  the  leasing  by  the  company  of  another  road  are 
not,  when  they  enter  into  possession,  bound  by  the  terms  of  the 
lease,  nor  under  any  obligations  to  undertake  its  burdens.  They 
will  not,  therefore,  be  required  to  account  for  the  earnings  of  the 
leased  road  to  a  trustee  selected  by  the  lessor  and  lessee  jointly, 
who,  under  the  stipulations  of  the  leases,  was  to  receive  those 
earnings  for  the  purpose  of  being  applied  to  the  payment  of  the 
interest  on  the  bonds,  the  surplus,  if  any,  to  be  handed  over  to 
the  lessor.  Any  money  derived  from  this  source  is  liable,  as 
being  the  property  of  the  lessor  company,  to  be  garnished  in 
the  hands  of  the  trustees  thus  in  possession.^ 

§  299.  Surrender  of  Possession  by  Trustee.  —  A  trustee  who 
has  entered  into  possession  by  virtue  of  a  special  agreement 
which  by  its  terms  is  plainly  made  for  the  benefit  of  the  rail- 
road company,  to  prevent  the  necessity  of  a  foreclosure  by  either 
of  the  methods  pointed  out  in  the  mortgage,  must  surrender  the 
road  as  soon  as  the  company  is  ready  to  pay  all  the  interest  that 
is  due,  and  is  in  a  condition  to  meet  future  instalments,  although 
the  end  of  the  period  of  possession  specified  in  the  agreement 
may  not  have  arrived.  Under  such  circumstances  the  company 
may  waive  the  condition  made  for  its  benefit  if  it  so  desires.* 

§  300.  Liabilities  of  Trustees  to  Third  Persons. — A  trustee  of  a 
corporate  mortgage,  by  a  certificate  on  each  of  the  bonds  of  the 
corporation  that  "  This  bond  is  one  of  a  series  of  bonds  within 
mentioned,  and  is  secured  by  mortgage  as  therein  described  duly 
recorded,"  etc.,  does  not  thereby  render  himself  liable  to  a  purchaser 
of  the  bonds  from  the  corporation  in  case  the  mortgage  proves  not 
to  have  been  a  first  lien  upon  the  property  covered  by  it.^ 

1  Kcnneliec  &  Portland  K.  Co.  v.  Port-  had  occurred  which  were  to  give  the 
land  &  Kcnnfbec  R.  Co.  (1871),  59  Me.  9.  right  of  possessionimder  that  instrument ; 

2  Compare  the  similar  rule  as  to  a  re-  viz.,  a  default  in  the  payment  of  the 
ceiver,  Chap.  XXVII.,  pnst.  interest,  and  a  declaration  by  the  major- 

3  Milwaukee  &  "W.  R.  Co.  v.  Brooks  ity  of  bondholders  that  the  principal  was 
Locomoti%'e  Works  (1887).  121  IT.  S.  430;  "forthwith  due  and  payable,"  or  a  re- 
B.  c.  7  Sup.  Ct.  Rep.  1094  ;  30  Am.  &  quest,  after  such  default,  by  the  holders 
Eng.  R.  R.  Cas.  499.  of  bonds  to  a  certain  amount  to  foreclose 

*  Union  Trust  Co.  u.  Missouri,  K.  &  T.  the  mortgage. 

Ry.  Co.  (1880),  26  Fed.  Rej).  48.^).     It  was  ^  layers  v.  Union  Trust  Co.  (1896),  175 

iilso  argued  that  the  terms  of  the  mortgage  Pa.  St.  318  ;  s.  c.   34  Atl.  Rep.  629  ;  S8 

rei|\iir('d  the  possession  to  continue  ;  but  W.    N.    C.    207.      See    Miles   v.    Roberts 

the  court  said  that  neither  of  the  events  (1896),  76  Fed.  Rep.   919,  where  such  a 


§  300.]  TRUSTEES.  319 

The  general  rule  is  that  the  trustees  who  take  possession  of  a 
railroad  for  breach  of  the  condition  in  the  mortgage  stand  in  the 
place  of  the  corporation,  vested  with  all  the  rights  and  subject  to 
all  the  liabilities  incidental  to  the  exercise  of  the  franchise  and 
the  operation  of  the  railroad.^ 

They  are,  therefore,  liable  for  an  injury  to  property  caused  by 
the  creation  and  maintenance  of  a  nuisance  on  the  railroad  lands, 
and  for  injuries  generally  caused  by  the  negligence  of  those  whom 
they  employ  to  operate  the  road;^  and  their  responsibility,  as 
regards  passengers  and  freight,  is  that  of  a  common  carrier.^ 

The  liability  in  these  cases  is  personal,  for  they  are  not  in  pos- 
session as  receivers  or  officers  of  the  court,  and  their  accountability 
is  to  the  bondholders.* 

But  where  a  statute  expressly  limits  the  liability  of  the  trustees 
as  such  to  the  moneys  received  from  the  operation  of  the  road, 
and  their  personal  liability  to  malfeasance  or  fraud,  they  cannot 
be  held  absolutely  liable  for  an  injury  to  property  by  lire,  under  a 
statute  which  provides  that,  "  when  a  building  or  other  property 
is  injured  by  fire  communicated  by  a  locomotive  engine,  the  corpo- 
ration using  it  is  responsible  for  such  injury."  It  was  suggested, 
however,  that  in  the  proper  proceedings,  under  an  allegation  of 
receipts  beyond  what  was  necessary  to  liquidate  prior  claims,  the 
trustees  might  be  required  to  appropriate  enough  to  pay  the  claim, 
either  as  an  incident  to  and  a  part  of  the  '•  running  expenses,"  or 
as  "  damages  arising  from  misfeasance  in  the  management  of  the 
road,"  which  the  statute  defining  their  liabilities  required  them 
to  pay.^ 

Their  liability  for  the  negligence  of  their  employees  still  con- 
tinues where,  after  entering  into  possession,  they  lease  the  prop- 
erty to  others,  but,  under  a  verbal  agreement,  go  on  operating  it 
for  the  lessees,  and  receive  the  earnings,  pay  the  expenses,  select, 
contract  with,  and  discharge  the  persons  employed  on  the  road, 
and  exercise  all  the  powers  usually  exercised  by  railroad  corpora- 
tions over  their  own  roads.^ 

certificate    of    the    trustee   was    held    to  *  Rogers  v.  "Wlieeler  (1871),  43  N.  Y. 

amount  to  a  warrauty.  598.     Compare  Sprague  v.  Smith  (1857), 

1  Daniels  v.   Hart  (1875),    118    Mass.     29  Vt.  421. 

543  ;  Union  Trust  Co.  i;.  Cnppy  (1882),  26  ^  Stratton  v.  European  &  Xorth  Aineri- 

Kans.  754  ;  s.  c.   11  Am.  &  Eng.   K.   R.  can  Ry.  Co.  (1883),  74  Me.  422. 

Cas.  562.                                          '  e  Ballon  v.   Farnum   (1864),  91  Mass. 

2  Ballou  V.  Farnum  (1864),  91  Mass.  47.  47.     The  reasoning  of  the  court  was  that, 
^  Barter  v.   Wheeler  (1869),  49  N.  H.  in  spite  of  the  amhiguity  of  the  language 

9;  Rogors  v.  Wlieeler  (1870),  2  Lans.  of  the  agreement,  that  "  they  should  con- 
486  ;  on  appeal  (1871),  43  N.  Y.  598  ;  tinue  to  f)peratp  the  road  for  the  lessees," 
Sprague  v.  Smith  (1857),  29  Vt.  421.  the  practical   construction   put  upon  the 


320  RAILWAY   BONDS   AND   MORTGAGES,  [CHAP.  XII. 

Nor  is  their  liability  as  common  carriers  affected  by  the  sur- 
render of  the  whole  property  to  a  company  newly  organized  under 
a  decree  which  provides  for  full  indemnity  to  them  by  lien  upon 
the  property,  as  against  all  liability  of  every  description  incurred 
or  to  arise  out  of  any  act  or  contract  done  or  made  by  them  as 
such  trustees.^ 

§  301.  Trustees  in  Possession  are  within  the  Purview  of  Statutes 
imposing  duties  and  liabilities  to  which  the  company  itself  is 
made  liable,  either  for  the  reason  that  it  is  a  railroad  company,  or 
for  the  reason  that  it  is  one  of  a  certain  class  of  pro})erty  owners. 
Thus  they  are  liable  under  the  various  statutes  requiring  the  com- 
pany to  pay  damages  in  certain  cases  where  injuries  are  inflicted 
in  the  operation  of  the  road  upon  person  or  property .^ 

So  also  trustees  who  have  taken  possession  of  a  road  and  com- 
pleted it  are  within  the  terms  of  a  statute  requiring  railroad 
companies  to  erect  and  maintain  fences  and  cattle-guards,  and 
may  be  compelled  by  a  decree  of  specific  performance  to  carry  out 
the  duty  thus  imposed  upon  them.^ 

So  also,  if  improvements  on  a  river  made  by  statutory  authority 
benefit  the  railroad  property  among  others,  the  trustees  are  liable 
to  be  assessed  for  a  proportionate  share  of  the  expenses.* 

S  302.  Liability  of  the  Company  while  the  Trustees  are  in  Posses- 
sion. —  The  liability  of  the  trustees  under  such  circumstances 
would  seem  necessarily  to  involve  a  complete  exemption  from 
liability  on  the  part  of  the  corporation  itself,  which  has  no  longer 
the  right  or  the  power  to  control  the  property,  and  cannot  be 
brought  within  the  reach  of  the  principle  that  the  burdens  of  the 
position  must  be  borne  by  one  who  enjoys  its  advantages.  This 
doctrine  has  been  adopted  in  a  case  in  which  the  corporation 
was  held  not  liable  under  a  statute  requiring  the  payment  of 
damages  to  the  "  widow  and  family  of  a  person  whose  life  is 
lost  by  the  negligence  of  servants  or  agents  in  the  operation 
of  the  road."  5 ' 

words  showod  that  they  were  to  be  treated  352;  Cooley  v.  Brainerd  (1866),  38  Vt. 

as  a  form   of  expression    indicating   that  394. 

the  (h'fcndants  had  become  substitutes  for  »  Jones  v.  Scligman  (1880),   81  N.  Y. 

the  lessees.  190  ;    s.  c.    3    Am.    &    Eng.   R.    11.   C'as. 

1  Rogers  v.  Wheeler  (1871),  43  N.  Y.  236. 

598.  *  County  rommrs.  of  Hanijishire,  Pe- 

2  Lamphear  w.  Buckingham  (1866),  33  titioners  (1887),  143  Mass.  424;  s.  c.  9 
Conn.  237  ;  Stratton  v.  Kurojx'an  &  North     N.  K.  Rop.  7^6. 

American    Ry.  Co.    (1884),  76  Mo.  269;  6  gtate   v.   Consolidated    European    & 

8.  c.    17   Am.  &  P'-ng.  R.    R.    Cas.   277;  North  American  Ry.  Co.   (1878),  67  Mc. 

Farrell  v.  Union  Trust  Co.  (1883),  77  Mo.  479. 
475  ;    a,  c.  V6  Am.   &  Eug.  R.   R.  Cas. 


§  -^03.] 


TRUSTEES. 


321 


But  another  view  has  also  been  taken,  and  it  has  been  held 
that,  where  the  trustees  are  exercising  the  same  functions  as  the 
corporation  which  has  selected  them,  and  are  operating  the  road 
to  earn  money  to  pay  the  debts  of  that  corporation,  the  trustees 
will  be  regarded  as  the  agents  of  the  corporation  so  far  as  relates 
to  the  transaction  of  business  with  third  persons,  and  such  per- 
sons may  sue  the  corporation  directly  and  recover  for  damages,  in 
respect  to  transactions  had  with  the  trustees.^ 

§  303.  Fiduciary  Position  of  Trustee,  Acts  inconsistent  with. — 
The  trustee  in  possession,  as  he  is  thus  considered  to  occu{)y  a 
fiduciary  position  with  regard  to  the  debtor  and  the  creditor,  is 
forbidden  by  the  ordinary  principles  of  equity  applicable  to  such 
a  position  to  deal  with  the  property  under  his  control  in  such  a 
manner  as  to  place  his  individual  interests  in  a  state  of  antag- 
onism with  those  of  either  the  bondholders  or  the  makers  of  the 
bonds.  Thus,  although  there  is  no  rule  of  law  which  incapacitates 
him  from  purchasing  and  holding  the  bonds,^  he  will  not  be  per- 
mitted to  speculate  in  them  for  his  private  advantage,  and  for  any 
profits  which  accrue  from  a  rise  in  the  value  of  the  securities  he 
will  be  compelled  to  account  to  the  company.^ 


1  Grand  Tower  Manufacturing  & 
Transportation  Co.  v.  Ullnian  (1878),  89 
111.  244.  Here  the  company  was  held 
liable,  as  a  common  carrier,  for  the  de- 
struction of  goods  by  fire.  No  reason 
except  the  position  of  agency  for  the  com- 
pany occupied  by  the  trustees  is  given  by 
the  court  for  this  ruling,  which  is  difficult 
to  reconcile  with  the  cases  cited  already  in 
this  and  the  two  preceding  sections,  or 
with  a  previous  decision  of  the  same  court 
in  which  the  trustee's  property  was  re- 
quired to  answer  in  damages  for  a  personal 
injury,  although  they  had  carried  on  the 
business  of  the  road  in  the  name  of  the 
company.  Wilkinson  et  al.  Trustees,  etc. 
V.  Fleming  (1863),  30  Ilh  353. 

2  Clark  V.  Flint  &  Pere  Marquette  Ry. 
Co.  (1875),  5  Hun,  556  ;  Ashuelot  Ry. 
Co.  V.  Elliot  (1874),  57  N.  H.  397  ;  s.  c. 
13  Am.  Ry.  Rep.  491,  per  Foster,  C.  J. 

3  Ashuelot  Ry.  Co.  v.  Elliot  (1874), 
57  N.  H.  397  ;  s.  c.  13  Am.  Ry.  Rep. 
491.  There  the  reasons  for  applying  the 
general  rule  in  this  case  were  explained  as 
follows  by  Ladd,  J.,  who  delivered  the 
principal  opinion :  "  It  is  true,  as  the 
defendant  says,  that  the  legal  liability  of 


21 


the  corporation  on  the  bonds  has  all  the 
time  been  to  pay  their  full  amount  with 
interest  to  the  holders.  It  is  at  the  same 
time  true  that,  when  the  bonds  are  selling 
in  the  market  or  otherwise  at  fifty  cents 
on  a  dollar,  the  debt  might  be  extin- 
guished by  the  corporation  for  one-half 
the  amount  they  are  legally  liable  to  pay. 
The  actual  value  of  the  bonds  was  all  the 
time  [i.  e.  while  they  were  outstanding] 
measured  by  the  amount  for  which  they 
could  be  sold,  and  this  would  depend 
upon  the  understood  ability  of  the  com- 
pany eventually  to  pay  them  in  full. 
Now,  when  Mr.  Elliot  [the  trustee],  after 
he  had  taken  possession  of  the  road  under 
the  mortgage,  became  the  owner  of  $46,000 
of  the  bonds  secured  thereby,  his  indi- 
vidual interest  lay  strongly  in  the  direction 
of  enhancing  their  salable  value,  and  so 
of  increasing  the  amount  for  which  the 
corporation  might  procure  the  extinguish- 
ment of  the  debt  and  remove  the  mortgage. 
The  master  finds  that  his  buying  up  of 
the  bonds  was  in  part  the  cause  of  advanc- 
ing their  price  from  about  fifty  per  cent, 
to  about  par.  His  duty  did  not  call  for 
any  such  private  speculation  for  such  a 


322 


RAILWAY   BONDS    AND    MORTGAGES. 


[chap,  XII. 


Nor  can  he  make  a  valid  contract  for  the  lease  of  the  road  to 
another  corporation  in  which  he  is  a  stockholder  and  director.^ 

It  constitutes  no  breach  of  trust  for  a  trust  company,  under  a 
mortgage  of  one  corporation  covering  its  property  and  stock  (the 
controlling  share)  of  another  corporation,  for  the  trustee  to  accept 
from  this  second  corporation  a  mortgage  upon  its  property,  to  secure 
bonds  issued  and  turned  over  to  the  trust  company  to  be  used  as 
a  collateral  to  secure  a  debt  owed  by  this  second  corporation  to  the 
first,  the  transaction  being  for  the  benefit  of  the  bondholders.^ 

§  304.  Trustee  not  compelled  to  countersign  and  deliver  Bonds.  — 
The  trustee  of  the  mortgage  in  whose  possession  bonds  are, 
cannot  be  compelled  at  the  suit  of  a  creditor  of  the  corporation  to 
issue  the  bonds  of  the  corporation.^ 


purpose ;  and  even  though  it  should  be 
said  that  a  legal  wrong  was  not  thereby 
done  to  the  mortgagors,  inasmuch  as  their 
undertaking  was  to  pay  the  full  face  of 
the  bonds,  the  proceeding,  nevertheless, 
strikes  my  mind  as  quite  inconsistent,  in 
an  equitable  point  of  view,  with  the  re- 
lation of  confidence  and  trust  in  which 
he  stood  to  them.  The  reasons  for  scruti- 
nizing with  considerable  care  the  acts  of 
one  situated  as  this  trustee  was,  and 
applying  the  equitable  rules  relative  to 
the  conduct  of  trustees  with  a  reasonable 
degree  of  strictness,  seem  to  me,  indeed, 
strong  and  imperative.  He  has  the  whole 
control  and  management  of  the  road. 
His  position  necessarily  gives  him  means 
of  knowing  its  present  resources  and 
future  prospects  possessed  by  no  one  else. 
By  accepting  that  position  he  assumed 
obligations  to  all  the  real  parties  in 
interest  altogether  inconsistent,  as  it 
seems  to  me,  with  the  interposition  of 
any  private  or  personal  interest  of  his 
own.  With  respect  to  the  duties  thus 
voluntarily  assumed,  the  individual  was 
absorbed,  as  it  were,  in  the  trustee.  The 
interest  of  the  corporation,  which  he  was 
bound  to  protect  so  far  as  he  could  with- 
out infringing  the  legal  rights  of  the 
bondliolders  (also  in  his  keeping),  lay  in 
the  direction  of  extinguishing  the  debt. 
In  liis  relative  capacity  he  represented  the 
debtor  and  creditor  both.  A  purchase  of 
bonds  by  him  on  behalf  of  tlie  corporation 
would  be  an  extinguisliment  of  the  debt 
pro  laiUn.  In  doing  that  he  would  not  be 
buying  of  his  cestuis  que  trust,   because 


as  an  individual  he  would  represent  the 
debtor.  If,  as  an  individual,  he  may 
buy  the  bonds,  that  would  be,  in  the  first 
place,  a  purchase  by  a  trustee  of  his 
cestuis  que  trust,  and,  in  the  second  place, 
would  to  that  extent  change  his  jiosition 
from  that  of  a  trustee  with  no  interest 
but  to  preserve  the  just  and  legal  rights 
of  both  debtor  and  creditor,  to  that  of  the 
creditor  having  in  his  control  and  man- 
agement the  property  of  the  debtor." 

1  Ashuelot  R.  Co.  v.  Elliot  (1874),  57 
N.  H.  397  ;  13  Am.  Ky.  Rep.  491. 

2  Gasquet  v.  Fidelity  Trust  &  Safety 
Vault  Co.  (1896),  75  Fed.  Rep.  343. 

^  Eastern  Electric  Cable  Co.  v.  Great 
Western  Mfg.  Co.  (1895),  164  Mass.  274  ; 
41  N.  E.  Rep.  295. 

In  England  debentures  are  often  cer- 
tified to  by  the  trustees,  and  the  United 
States  Mortgage  and  Trust  Company  of 
New  York  has  recently  originated  a  sys- 
tem of  authentication  of  municipal  bonds 
so  as  to  guard  against  fraud,  over-issue, 
etc. 

Statutes  of  some  of  the  States  relating 
to  trustees  of  railroad  mortgages  :  Maine, 
Rev.  Stats.  1883,  ch.  51,  §§  85-90,  Elec- 
tion, power,  and  duties  of  mortgage 
trustees  ;  §  91,  Foreclosure  by  trustees. 
Massachusetts,  Pub.  Stats.  1882,  ch.  112, 
§  66,  Power  of  trustees  entitled  to  posses- 
sion. Pennsylvania,  Br.  Purd.  Dig.  1887, 
p.  1440,  §  127,  Liabilities  of  trustees 
in  possession.  S.  C,  Gen.  Stats.  1882, 
§  1415,  Liabilities  of  trustees  in  posses- 
sion. Vt.,  Gen.  Stats.  1894,  §§  3941  et 
seq.,  Duties,  etc.  of  trustees. 


§  305.] 


STATUTORY   LIENS   IN   FAVOR   OF   BONDHOLDERS. 


323 


CHAPTER  XIIL 


STATUTORY   LIENS   IN    FAVOR   OF   BONDHOLDERS. 


§  305. 
306. 

307. 

308. 

309. 
310. 

311. 


Introductory. 

When  a  Lien  is  deemed  to  have 
been  created  by  the  Statute. 

Construction  of  Statutory  Mort- 
gages. 

Waiver  of  the  Benefit  of  a  Statu- 
tory Lien  by  the  State. 

Release  of  Statutory  Lien. 

Remedies  of  Bondholders  for  the 
Enforcement  of  Statutory  Liens. 

Condition  for  the  Benefit  of  the 
State  in  the  Enabling  Act  can 
only  be  taken  Advantage  of  by 
the  State. 


§  312.    Subrogation   of   Bondholders   to 
the  Rights  of  the  State. 

313.  Right  of  Holders  of  State  Bonds 

negotiated  by  Company  to  en- 
force Lieu  declared  in  Favor  of 
the  State. 

314.  Unconstitutionality    of    Part    of 

Act  authorizing  Issue  of  State 
Bonds  not  a  Bar  to  Enforce- 
ment of  Lien  by  Bondholders. 

315.  Effect    of    Subsequent     Legisla- 

tion on  the  Rights  of  Bond- 
holders secured  by  a  Statutory 
Lien. 


§  805.  Introductory,  —  In  the  present  chapter  it  is  proposed  to 
review  tlie  cases  dealing  with  the  rights  of  bondholders  under 
statutes  creating  liens  or  mortgages  (the  terms  are  used  indiffer- 
ently by  the  courts)  ^  in  favor  of  a  State  to  secure  it  for  the  loan 
of  its  credit  to  railroad  companies.  Such  loans  of  the  State 
credit  are  usually  effected  in  one  of  two  ways.  Either  the  State 
guaranties  the  railroad  bonds  by  indorsing  them,  or  issues  its 
own  bonds  to  the  company  for  negotiation.  In  the  latter  case 
it  is  usual  to  provide  for  a  deposit  in  the  State  treasury  of  the 
railroads  bonds  to  an  amount  equal  to  those  issued  by  the  State 
to  the  company. 

The  effect  of  the  acceptance  of  the  provisions  of  such  statutes, 
therefore,  is  that  the  State  occupies  the  position  either  of  guaran- 
tor or  principal  debtor  as  regards  the  purchasers  of  the  bonds 
negotiated  by  tlie  company.  Whether  the  lien  reserved  by  the 
State  can  be  enforced  directly  by  the  bondholders  depends  upon 
the  construction  of  the  statute  itself,  and  each  case  must  be 
decided  in  view  of  the  terms  of  the  particular  statute.  If  the 
State  has  guarantied  the  railroad  bonds  by  any  words  showing 

^  In  some  eases  such  liens  are  said  to  gages."  McGraw  v.  Memphis  &  Ohio  R. 
be  substantially  "  in  the  nature  of  mort-     Co.  (1868),  5  Coldw.  (Tenn.)  434. 


324  RAILWAY   BONDS   AND    MORTGAGES,  [CHAP.  XIII, 

that  the  lien  is  created  for  the  benefit  not  only  of  the  State  itself, 
but  also  of  the  bondholders,  as  will  be  seen  below,  the  latter 
have  a  locus  standi  to  apply  to  a  court  of  equity  for  relief  and  to 
be  subrogated  to  the  rights  of  the  State.  If  the  loan  of  the 
State  credit  has  been  effected  by  the  issuance  of  State  bonds, 
the  principle  of  subrogation  cannot  operate,  and  the  action  of 
the  State  is  necessary  to  enable  the  bondholders  to  obtain  the 
benefits  of  the  lien,  unless  the  effect  of  the  statute  is  not 
simply  the  creation  of  a  lien  in  favor  of  the  State,  but  also  a 
specific  appropriation  of  some  definite  part  of  the  property  to  the 
payment  of  the  debt  secured  thereby. 

§  306.  When  a  Lien  is  deemed  to  have  been  created  by  the  Statute. 
—  To  create  a  statutory  lien  on  the  corpus  or  earnings  of  a  rail- 
road as  a  security  for  municipal  or  State  aid,  the  expressions  used 
in  the  statute  must  show  clearly  that  it  was  the  intention  of  the 
legislature  to  call  the  lien  into  existence.  No  such  inference  can 
be  drawn  from  tlie  fact  that  the  companies  accepted  the  State 
bonds  issued  in  accordance  with  its  provisions,  tliereby  rendering 
themselves  liable  to  the  payment  of  a  requisition,  called  in  the 
statute  a  "  tax,"  which  was  to  be  paid  at  stated  times  to  the  State 
treasurer,  whose  duty  it  was,  in  case  of  default  in  such  payments, 
to  sequester  the  revenues  and  hold  them  until  the  default  had  been 
fully  paid  up.  Nor  can  a  lien  be  created  by  implication  from  a 
section  of  such  a  statute  providing  that,  upon  the  payment  of  this 
"  taxation,"  the  said  road  shall  be  entitled  to  a  discharge  from 
all  "  claims  or  liens  "  on  the  part  of  the  State.^ 


*  Tompkins    v.    Little    Rock   &   Fort  bonds,  and  that  they  were  entitled  to  be 

Smith  R}'.  Co.   (1882),   15  Fed.  Rep.  6;  subrogated  to  the  same  in  equity  and  have 

18  Fed.  Rep.   344  (1883)  ;  21  Fed.  Rep.  it  enforced  against  the  property.     When 

370  (1883)  ;  125  U.  S.   109  (1888).      In  the  matter  came  up  in  the  United  States 

tliis  case  a  company  receiving  the  bonds  Circuit  Court  a  demurrer  to  the  bill  was 

i.ssued  under  the  statute  in  question  had  overruled,   both  the  Circuit  and  the  Dis- 

executed   a   mortgage    to  secure  its   own  trict  Judges  hokling,  upon  the  authority 

bonds.    This  mortgage  had  been  foreclosed,  of  Railroad   Cos.  v.   Schutte  (1880),  103 

and  the  property  sold  subject  to  any  lien  U.  S.  118,  that  this  act  created  a  statutory 

of  the  State  wLich  might  be  declared  to  mortgage  on  the  roads,  their  income  and 

exist  on  account  of  tlie  State-aid  bonds,  revenues,   to   secure  the   payment  of  the 

and  the  purchaser  at  the  sale  had  organ-  State  bonds  by  the  companies  accepting 

izcd   a    new    company.       Thereafter    the  tlie  loan  ;  that  all  persons  were  bound  to 

State   Supreme   Court    had    declared   the  take  notice  of  the  lien  reserved  by  the  act, 

issue  of  their  State-aid  bonds  unconstitu-  and    when    it    occurred ;    that    the    lieu 

tional  and  the  bonds  void.     Tlie  holder  of  reserved    to   secure   the   payment   of  the 

some  of  these  bonds  and  coupons  brought  bonus  was  financially  a  security  for  those 

suit  against  tliis  new  company,   alleging  liolding  tlio  bonds  ;  tliat,  as  between  the 

that  there  was  a  statutory  lien  under  tlie  State  and  the  company  receiving  the  bonds 

acts  in  favor  of  tlie  State  to  secure  these  the   company   was  the   principal    debtor, 


§  306.] 


STATUTORY   LIENS   IN   FAVOR   OP   BONDHOLDERS. 


325 


Nor  can  an  intention  to  create  such  a  lien  be  deduced  from  the 
fact,  that,  unless  the  particular  clause  of  the  act  relied  on  is  oper- 


and bound  to  pay  the  bonds  or  pay  to  the 
State  money  for  that  purpose  ;  that,  if  the 
bonds  were  void  as  obligations  against  the 
State,  the  company  which  received  and 
negotiated  tliem  as  genuine  was  bound  to 
pay  them  to  bona  fide  holders  ;  and  that 
the  latter  might,  therefore,  enforce  the 
lien  reserved  by  the  act  to  secure  this 
result.  Upon  final  hearing  the  bill  was 
dismissed  in  conformity  with  the  opinion 
of  Miller,  Circuit  Justice,  in  which  he 
held  that  there  was  nothing  in  the  bonds 
themselves,  without  indorsement  by  the 
companies,  to  bind  those  that  received 
and  sold  them  to  pay  either  the  principal 
or  interest  ;  that  the  holder  of  the  bonds, 
though  the  latter  might  be  void  as  to  the 
State,  would  be  entitled  to  such  remedy 
as  the  statute  gave  against  any  railroad 
companies  which  had  accepted  and  sold 
the  bonds,  and  thereby  ratified  the  reme- 
dies provided  by  the  statute  ;  but  that 
there  was  nothing  in  the  act  which  would 
constitute  a  statutory  lien  for  the  benefit 
of  those  bondholders,  or  against  the  rail- 
road property  itself.  Caldwell,  District 
Judge,  adhered  to  his  former  opinion. 

Upon  appeal  to  the  Supreme  Court  the 
decision  of  Justice  Miller  was  upheld.  In 
the  course  of  his  opinion  Waite,  C.  J.,  said: 
"  The  bonds  were  bonds  of  the  State,  pure 
and  simjile  ;  they  carried  on  their  face  no 
express  obligation  of  the  railroad  company 
to  the  holder.  The  promise  made  by  the 
company  on  the  acceptance  of  the  bonds 
was  to  pay  the  State,  not  the  bondholder. 
The  failure  of  the  company  to  meet  its 
obligations  to  the  State  did  not  operate  in 
any  manner  to  relieve  the  State  from  its 
liability  on  the  bonds.  The  debt  of  the 
State  still  remains,  and  was  the  only  debt 
the  bonds  expressed  on  their  face.  The 
debt  of  the  company  was  to  the  State  for 
the  bond,  not  to  the  bondholder  on  the 
bond,  payment  of  which  to  the  State  dis- 
charged the  obligat/ion  of  the  company. 
If  these  bonds  were  invalid,  and  relief  was 
sought  on  that  account  against  the  com- 
pany selling  them,  the  liability  would  not 
be  on  the  bonds,  but  for  the  money  had 
and  received  on  their  sale  ;  that  certainly 
would  be  the  debt  of  the  original  company 


alone,  and  in  no  way  binding  on  a  pur- 
chaser of  its  property." 

The  distinction  between  the  case  before 
the  court  and  those  of  Railroad  Cos.  v. 
Schutte  (1880),  103  U.  S.  118,  and 
Ketchum  v.  St.  Louis  (1880),  101  U.  S. 
306,  was  then  pointed  out.  "The  facts  of 
the  latter  showed  a  complete  equitable 
assignment  of  the  fund  in  question,  while 
in  the  present  one  there  was  no  specific 
appropriation  of  the  earnings  of  the  road. 
The  company  was  required  to  pay  what 
was  called  the  '  tax,'  to  enable  the  State 
to  meet  the  semi-annual  instalments  of 
interest  on  the  State  bonds,  and  provide  a 
fund  for  the  redemption  of  the  principal 
whenever  it  falls  due.  No  specific  amount 
of  the  earnings  of  the  road  was  specially 
set  apart  by  law  for  that  purpose.  There 
was  no  provision  for  a  custodian  of  the 
earnings,  whose  duty  it  shall  be  to  pay  the 
State,  out  of  the  earnings  as  they  accrue, 
any  definite  amount  on  the  days  named. 
The  tax  is  to  be  paid  by  the  company  on 
certain  specific  days,  but  there  is  no  statu- 
tory appropriation  of  earnings  for  that 
purpose.  If  the  company  fails  to  meet 
the  'tax'  as  it  falls  due,  the  income  and 
revenues  of  the  '  said  company  '  may  be 
sequestered.  Under  the  operation  of  this 
sequestration  the  receiver  to  be  appointed 
may  take  possession  of  all  the  income  and 
revenue  of  said  defaulting  company,  with 
authority  to  demand  and  receive  all  moneys 
coming  to  the  same  from  the  operation  of 
such  road ;  but  this  falls  very  far  short  of  a 
specific  appropriation  of  the  earnings  of  the 
road  as  they  accrue,  so  that  they  can  be 
demanded  under  the  statute  as  earnings 
of  the  road,  without  sequestration."  The 
learned  Chief  Justice,  while  admitting  the 
propriety  of  considering  the  intention  to 
charge  the  property  with  a  lien,  and  the 
duty  of  the  court  of  equity  to  use  its 
power  to  enforce  such  charge,  and  to  put  a 
liberal  construction  on  such  statutes,  with 
a  view  to  establish  such  charges  against 
the  companies  and  in  favor  of  the  State, 
thus  concluded:  "The  wide  departure 
which  Arkansas  made  in  this  statute  from 
the  accustomed  form  of  proceeding,  both 
at  home  and  elsewhere,  is  strongly  indica- 


326 


RAILWAY   BONDS   AND   MORTGAGES. 


[chap.  XIII. 


ative  for  this  purpose,  it  will  be  merely  declaratory  of  the  law  as 
it  was  already ;  especially  when  the  result  of  such  a  construction 
would  be  to  make  another  clause  in  the  same  section  devoid  of 
meaning.^  Nor  do  bonds  issued  in  pursuance  of  an  act  providing 
that  they  "  shall  be  binding  upon  the  property  of  the  company, 
and  on  such  other  property  belonging  to  the  stockholders  as  they 
may  pledge  to  the  company  by  mortgage,  to  meet  their  own  en- 
gagements or  the  engagements  of  the  company,"  become  ipso 
facto  a  lien  on  the  property  superior  to  other  bonds,  secured  by  a 
later  trust  deed,  and  held  by  persons  who  have  no  notice  of  the 
lien.2 

It  is  not,  however,  necessary  that  the  legislative  intention  to 
call  the  lien  into  existence  should  be  expressed  in  direct  words. 
Thus  where  the  issue  of  a  county's  bonds  to  a  railroad  company 
and  the  appropriation  of  the  income  of  the  road  to  the  payment 
of  the  interest  and  principal  of  the  bonds  are  authorized  by  a 


tive  of  an  intention  to  waive  security  any 
further  than  it  was  embraced  in  the  re- 
served power  of  sequestration.  ...  In 
our  opinion  the  new  companies  took  the 
roads  free  of  incumbrance  in  favor  of 
the  State,  and  neither  the  State  nor  its 
bondholders  are  entitled  to  a  sequestration 
of  the  income  and  revenue  arising  there- 
from in  their  hands."  This  statute  was 
again  under  discussion  in  the  recent  case 
of  McKittrick  v.  Arkansas  Central  Ry. 
Co.  (1894),  152  U.  S.  473  ;  s.  c.  14  Sup. 
Ct.  Eep.  661,  and  the  court  adhered  to  its 
former  opinion. 

1  Cincinnati  City  v.  Morgan  (1865),  3 
Wall.  275.  Here  tlie  act  authorizing  the 
City  Council  of  Cincinnati  to  issue  its 
bonds  to  a  railroad  contained  the  following 
section  :  "  It  shall  be  the  duty  of  the  said 
City  Council  ...  to  secure  by  mortgages, 
transfers,  or  hypothecations  of  stock  of  said 
company,  or  by  such  other  Mens  or  securi- 
tic!>  as  may  be  mutually  agreed  upon,  the 
payment  of  the  ])rincipal  as  it  may  become 
due,  and  the  reimbursement  of  the  interest 
on  the  same  which  .shall  have  been  paid 
by  the  city  ;  and,  for  the  further  purjiose 
of  securing  the  city  against  .all  losses, 
whether  by  the  payment  of  the  said  princi- 
j)al  or  interest,  the  above-described  liens, 
etc.,  shall  have  precedence  of  all  claims  or 
obligations  sulisequoiitly  contracted  by  the 
company,  and  over  otli(;r  liens,  securities, 
or  mortgages  which  were  not  duly  entered 


into  before  the  respective  loans  and  issues 
aforesaid."  The  court  said:  "Tlie  first 
clause  of  this  section  would  be  quite  as 
idle  and  absurd  a  piece  of  legislation, 
which  conferred  on  the  parties  the  au- 
thority of  agreeing  on  their  own  terms  as 
to  the  nature  and  character  of  the  securitj', 
for  the  loans,  as  the  latter,  if  by  the  latter 
clause,  whatever  might  be  the  security 
agreed  upon,  it  must  operate  as  a  mortgage 
on  the  road,  and  have  precedence  over  all 
others.  Why  give  this  choice  of  security 
if  this  would  be  the  result  ?  There  was  no 
necessity  to  stipulate  for  a  mortgage  on  the 
road  if  the  statute  gave  the  lien  without 
it;  nor  propriety  or  sense  in  the  choice  be- 
tween a  mortgage  and  a  pledge  of  stock, 
if  a  lien  on  the  road  followed  either 
security." 

2  Brunswick  &  Albany  R.  Co.  v.  Hughes 
(1874),  52  Ga.  557;  s.  c.  7  Am.  Ry. 
Rep.  137,  di.stinguishing  Collins  v.  Central 
Bank,  1  Kelly  (Ga.),  435,  where,  by  the 
statute,  the  corporate  property  was  to  be 
"  pledged  and  bound  "  for  the  redemption 
of  certain  bills  to  be  issued  by  the  bank. 
The  court  emphasized  both  the  stronger 
terms  by  which  the  lien  was  created  in  the 
earlier  case,  and  the  different  nature  and 
character  of  the  two  debts.  The  bonds 
were  an  ordinary  debt  ;  the  bills  were 
issued  for  circulation  among  the  people 
of  the  State,  and  formed  a  part  of  the 
currency. 


§  307.] 


STATUTORY    LIENS    IN    FAVOR    OP    BONDHOLDERS, 


327 


statute,  the  acceptance  of  the  terms  specified  in  the  statute,  and 
tlie  issue  of  the  county  bonds  in  accordance  with  its  provisions, 
were  held  to  operate  as  a  contract  by  which  the  company  agreed 
that  the  official  who  was  to  receive  the  earnhigs  should  pay  the 
sums  necessary  to  defray  the  interest  on  the  bonds  ;  and  the  effect 
of  this  contract  is  the  creation  of  a  lien  of  an  equitable  nature 
upon  the  earnings  as  they  accrued,  and  this  lien  is  enforceable  as 
long  as  the  bonds  are  unpaid.^ 

§  307.  Construction  of  Statutory  Mortgages.  — As  regards  the 
property  covered,  a  statutory  lien  or  mortgage  is  constructed 
according  to  the  same  principles  as  an  ordinary  trust  deed  or 
moi'tgage.  If  the  words  used  in  the  statute  are  such  that  they 
would,  in  a  trust  deed  or  mortgage,  be  deemed  to  cover  the  whole 


1  Ketchum  v.  Pacific  Railroad  (1877), 
4  Dill.  78,  affirmed  iu  Ketchum  v.  St. 
Louis  (1880),  101  U.  S.  306. 

The  legislature  of  Missouri  had,  be- 
tween the  years  1851  and  1855,  passed 
various  acts  loaning  the  credit  of  the  State 
to  aid  and  secure  the  completion  of  the 
Pacific  Railroad.  This  aid  was  given  in 
the  shape  of  bonds,  the  State  being  secured 
by  a  statute  lien  with  a  power  of  sale. 
The  work  of  construction  was  suspended 
by  the  Civil  War,  but  in  1864  another  act 
was  passed  authorizing  the  company  to 
borrow  $1,500,000  to  complete  the  road. 
This  loan  was  to  be  secured  by  a  first  lien 
on  a  portion  of  the  line,  the  State  waiving 
its  prior  lien  to  this  extent.  By  this  act  a 
fund  commissioner  was  appointed,  who  was 
to  have  control  of  all  the  revenues  of  the 
company,  which  were  to  be  applied,  after 
all  expenses  of  operation,  etc.,  had  been 
paid,  in  the  following  order:  (1)  To  his 
salary  ;  (2)  To  liquidate  the  interest  on 
the  first-mortgage  bonds  for  which  tlie 
act  provided  ;  (3)  To  the  dividends  on  the 
prefen-ed  stock  which  the  same  act  au- 
thorized to  be  created.  The  surplus,  if 
any,  was  to  be  applied  to  the  purchase  of 
outstanding  State  bonds.  The  money  was 
obtained,  but  while  the  work  was  in  prog- 
ress the  line  was  "raided"  by  the  insur- 
gent forces,  and  further  aid  was  need«d, 
both  to  repair  the  damage  thus  inflicted 
and  to  finish  the  line.  In  this  emergency 
the  legislature  authorized  the  County  of 
St.  Louis  to  loan  its  credit  or  bonds  for 
this  purpose.     It  was  provided  in  this  act 


that  the  county  should  have  a  lien  upon 
the  earnings  of  the  company  in  the  hands 
of  the  fund  commissioner,  or  any  other 
person,  to  secure  the  undertaking  of  the 
company  to  pay  the  interest  and  principal 
of  these  county  bonds  as  they  matuied. 
The  provisions  of  the  statute  were  accepted 
by  the  company,  and  the  bonds  of  the 
county  were  issued  to  it. 

When  a  subsequently  executed  mort- 
gage was  foreclosed,  a  question  of  priority 
of  lien  as  to  the  earnings  arose.  The 
court  said,  referring  to  the  terms  of  the 
act :  "  Such  appropriation  and  waiver 
were,  by  agreement  of  all  the  parties  then 
interested  in  the  property  and  the  disposi- 
tion of  its  income,  to  continue  until  the 
bonds  themselves  were  paid,  or  the  county 
discharged  from  liability  thereon.  It  was 
not  a  simple,  naked  covenant  to  pa}'  out 
of  a  particular  fund;  but  the  act,  being 
accepted  by  the  parties  interested,  operated 
as  an  equitable  assignment  of  a  fixed  por- 
tion of  that  fund,  —  an  assignment  which 
became  eff"ectual  without  any  furtlier  inter- 
vention upon  the.  part  of  the  debtor,  and 
which  the  party  holding  the  funds  of  the 
company,  whether  the  fund  commissioner 
or  some  other  person,  could  respect  without 
liability  to  the  debtor  for  so  doing.  .  ,  . 
It  was  an  engagement  to  pay  oat  of  a 
specially  designated  fund,  accompanied  by 
express  authority  to  its  custodian  to  apply 
a  specific  part  thereof  to  a  definite  object 
in  the  accomplishment  of  which  all  the 
parties  to  the  arrangement  were  directly 
interested. " 


328  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  XIII 

property  of  the  company,  including  after-acquired  property,  the 
statutory  lien  will  be  equally  extensive.  This  result  is  not  changed 
by  the  fact  that  a  portion  of  the  road  may  have  already  been  built, 
before  that  particular  section,  upon  the  completion  of  which  the 
indorsement  is  authorized  to  be  made.^ 

§  308.  Waiver  of  the  Benefit  of  a  Statutory  Lien  by  the  State. 
—  As  between  itself  and  subsequent  incumbrancers  the  State  is 
deemed  to  have  waived  its  statutory  lien  by  authorizing  the  com- 
pany to  issue  bonds,  and  secure  them  by  mortgages  on  the  road,  if 
the  enabling  acts  contain  no  intimation  that  such  liens  were  to  be 
subject  to  the  prior  lien  of  the  State.^ 

§  309.  Release  of  Statutory  Lien.  —  Where  the  assignment  of  a 
statutory  State  lien  to  a  company  is  authorized  upon  the  payment 
to  the  State  treasurer  of  a  sum  of  money  equal  in  amount  to  all 
indebtedness  due  or  owing  by  the  company  to  the  State,  and  all 
liability  incurred  by  the  State  by  reason  of  having  issued  bonds 
and  loaned  the  same  to  the  company,  together  with  all  interest 
that  has,  or  may  have,  at  the  time  when  such  payment  shall  have 
been  made,  accrued  and  remained  unpaid  by  the  company,  the  lien 
of  the  State  remains  enforceable  until  payment  has  been  made  not 
only  of  the  face  value  of  the  bonds,  but  also  of  all  outstanding 
coupons  which  are,  or  have  been,  attached  to  the  bonds,  whether 
due  or  not,  together  with  all  indebtedness  due  or  owing  by  the 
company  to  the  State  by  reason  of  the  latter's  having  issued  its 
bonds,  or  paid  interest  thereon,^ 

The  same  act  was  also  discussed  in  the  Supreme  Court  of  Mis- 
souri, and  the  petition  of  the  trustees  for  a  mandamus  to  the 
treasurer  directing  him  to  assign  the  lien  was  denied,  on  the 
ground  that,  even  if  the  act  had  the  meaning  contended  for,  viz., 
that  they  were  not  obliged,  as  a  prerequisite  to  the  assignment, 

1  Colt  V.  Barnes  (1879),  64  Ala.  108.  in  improving  it,  the  inference  would 
Compare  Chap.  IX.  amount  to  certainty." 

2  Newport  &  Cincinnati  Bridge  Co.  v.  »  Ralston  v.  Crittenden  (1882),  10  Fed. 
Douglass  (1877),  12  Bush  (Ky.),  673;  Eep.  254.  Coupons,  it  was  observed,  are 
Brown  v.  State  of  Maryland  (1884),  62  obligations  capable  of  a  distinct  suit,  and 
Md.  439.  In  the  latter  case  it  was  oh-  so  far  separate  obligations  from  the  bonds, 
served:  "In  the  ordinary  affairs  of  life,  As  long  as  such  pieces  of  paper  were  out- 
if  an  individual  who  lias  a  lien  on  prop-  standing,  they  were  each  an  item  of  debt 
erty  authorizes  a  mortgage  of  it  for  the  owing  at  the  time  this  transaction 
purpose  of  raising  money,  it  would  be  in-  occurred.  Whatever  the  State  had  bc- 
ferred  that  \w  intended  his  lien  to  be  come  liable  for,  under  the  issue  of  those 
subordinated  to  tlie  mortgage.  But  sup-  bonds,  was  to  be  paid  by  a  sum  of  money 
pcse  his  lien  exceeded  the  value  of  the  e(pial  to  it  if  paid  in  money,  before  the 
property,  and  that  the  money  to  bo  ob-  riglit  to  the  assignment  of  the  statutory 
tained  by  the  mortgage  was  to  be  expended  lien  accrued.     This  had  not  been  done. 


§  310.] 


STATUTORY  LIENS   IN    FAVOR   OF   BONDHOLDERS. 


329 


to  provide  for  the  future  interest,  any  such  construction  would 
make  it  repugnant  to  a  subsequent  constitutional  provision  for- 
bidding the  legislature  to  release  or  alienate  a  State  lien  on  any 
railroad,  and  as  no  vested  rights  were  created  by  the  mere  pas- 
sage of  the  act,  and  its  proposals  had  not  been  accepted  until 
after  the  adoption  of  the  constitution,  it  ceased  to  operate  as 
soon  as  that  event  occurred.^ 

On  the  other  hand  a  constitutional  provision  that  the  legislature 
shall  have  no  power  for  any  purpose  whatever  to  release  the  lien 
held  by  the  State  upon  any  railroad,  does  not  prevent  that  legis- 
lature from  discharging  its  lien  on  receiving  the  full  value  of  the 
security,  the  legislature  itself  being  the  judge  of  what  the  full 
value  is.2 

§  310.  Remedies  of  Bondholders  for  the  Enforcement  of  Statutory 
Liens.3  —  When  the  State  indorses  railroad  bonds,  and  reserves  by 
statute  a  lien  upon  the  property  of  the  company  for  its  own  in- 
demnification, the  presumption  is  that  the  lien  so  reserved  is 
for  the  protection  and  benefit  not  only  of  the  State  itself,  but  also 
of  the  persons  who  take  the  bonds  relying  upon  the  guaranty  of 
the  State.4 


1  The  State  ex  rcl.  Rolston  et  al.  Trus- 
tees i-.  Cliappell  (1881),  74  Mo.  336. 

2  Murdock  V.  Woodson  (1873),  2  Dill. 
188 ;  affirmed  in  Woodson  v.  Murdock 
(1874),  22  Wall.  351. 

^  As  to  the  remedies  for  the  enforce- 
ment of  the  lien  of  ordinary  mortgages  or 
trust  deeds,  see  post. 

*  Hand  v.  Savannah  &  Charleston  R. 
Co.  (1879),  12  S,  C.  N.  S.  314.  In  this 
case  it  was  contended  that  the  language 
of  the  statute  vesting  a  lien  in  the  State 
upon  its  indorsing  the  bonds  of  a  railroad 
company,  and  making  no  mention  of  bond- 
holders, implied  that  it  was  the  intention 
of  the  legislature  to  hold  the  lien  for  its 
own  benefit.  In  discussing  this  theory 
the  court  made  the  following  remarks: 
"  In  the  payment  of  the  bonds  and  inter- 
est, not  only  the  State  but  the  bondholders 
were  interested ;  and  if  security  is  given 
for  the  performance  of  a  particular  act, 
why  should  it  not  inure  to  all  interested 
in  the  performance  of  the  act,  whose  in- 
terests were  the  subject  of  consideration 
and  protection  in  the  transaction  that  gave 
origin  to  the  security  ?  If  a  private  indi- 
vidual had  stood  in  the  place  of  the  State, 
and   the  terras  of  the  act  had  been  the 


terms  of  a  private  contract,  there  can  be 
no  doubt  that  as  such  contract,  in  effect, 
created  the  rights  of  the  bondholders,  such 
as  might  on  the  contingency  contemplated 
arise,  such  terms  would  be  held  to  amount 
to  a  declaration  of  trust  in  favor  of  the 
after-springing  rights  of  the  bondholders, 
and  the  surety  could  not  be  regarded  as 
holding,  subject  merely  to  a  general  equity 
of  subrogation.  There  was  nothing  to 
prevent  the  title  acquired  by  the  State  in 
the  lien  or  mortgage  from  passing  under 
the  operation  of  the  same  directly  to  and 
vesting  in  the  bondholder,  according  to 
the  extent  of  his  interest,  and  therefore 
there  was  no  inconsistency  in  creating  a 
lien,  attached  to  a  bond,  that  may  pass 
from  hand  to  hand,  and  vesting  that  lien 
in  the  State."  The  court  then  commented 
on  the  language  of  the  act  as  follows: 
"  The  intention  is  clearly  expressed  that 
the  security  taken  shall  be  for  the  payment 
of  the  bonds.  It  is  in  no  case  saul  that 
it  is  taken  for  the  special  indemnity  of  the 
State  as  indorser.  That  is  undoubtedly 
implied,  but  the  direct  provision  is  for 
the  payment  of  the  bonds.  A  provision 
for  the  payment  of  the  bonds  is  primarily 
a  security  for  those  holding  the  bonds. 


330 


RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  XIII. 


Such  statutes  usually  provide  special  remedies  for  the  enforce- 
ment of  the  lien  by  the  agents  of  the  State,  and  it  is  only  the  State 
itself  that  can  use  these  remedies.^ 

But  if  the  State  fails  to  put  those  remedies  in  motion,  the  bond- 
holders may  apply  to  a  court  of  equity  for  relief,  and  thus  avail 
themselves  of  the  existence  of  the  lien  created  for  their  benefit,^ 
unless  there  is  some  express  provision  in  the  statute  that  the 
remedies  given  by  it  are  to  be  exclusive.^ 

Where  a  railroad  company  issues  bonds  which,  in  accordance 
with  the  provisions  of  a  statute,  are  guarantied  by  the  trustees  of 
an  internal  improvement  fund,  and  a  subsequent  statute  makes 
those  bonds  a  first  lien  on  the  corporate  property,  the  bondholder 
has,  in  addition  to  the  personal  liability  of  the  company,  two 
securities  ;  viz.,  the  guaranty  of  the  improvement  fund,  and  the 
statutory  lien.* 

But  the  bondholders  cannot  avail  themselves  of  the  lien  as  if  it 
were  a  mortgage  given  to  secure  the  bonds  alone.  They  must 
Induce  the  trustees  of  the  guaranty  fund  to  act  in  the  mode 
pointed  out.  If  they  refuse  to  act  when  they  ought  to  do  so,  the 
bondholders  may  either  compel  them  to  act  by  mandamus,  or  file 
a  bill  in  equity  to  obtain  the  relief  to  which  they  may  be  entitled." 


It  is  always  so  in  equity  and  at  law  when 
its  forms  permit  it."  This  reasoning  was 
approved  by  the  same  court  in  Gibhes  v. 
Greenville  &  Columbia  R.  Co.  (1880),  13 
S.  C.  N.  S.  228  ;  s.  c.  4  Am.  &  Eng.  R.  R. 
Cas.  459. 

1  Forrest's  Exrs.  v.  Luddington  (1883), 
68  Ala.  1  ;  .s.  c.  12  Am.  &  Eng.  R.  R.  Cas. 
330.  In  this  case  the  court  thought  it 
was  also  incontestable  that  the  State  itself 
was  not  restricted  to  the  statutory  rem- 
edy, but  might  resort,  if  such  a  course  was 
deemed  preferable,  to  a  court  of  equity, 
and  have  the  lien  enforced  by  the  ordinary 
methods  of  chancery.  This  ohiter  dictum 
is  supported  by  State  of  Florida  v.  Florida 
Central  R.  Co.  (1876),  15  Fla.  690,  where 
it  was  held  that,  if  there  is  a  trust  and  a 
mortgage,  and  connected  with  tliem,  in 
order  to  secure  their  due  enforcement, 
there  is  a  statutory  power  of  sale,  a  court 
of  e(]uity,  at  the  suit  of  the  trustee,  might 
decree  a  sale  conformably  to  the  statutory 
power. 

2  Forrest's  Exrs.  p.  Luddington  (1883), 
68  Ala.  1  ;  K.  c.  12  Am.  k,  Eng.  li.  11.  Cas. 
330. 


3  State  y.  Florida  Central  R.  Co.  (1876), 
15  Fla.  690. 

*  Florida  v.  Anderson  (1875),  91  U.  S. 
667. 

6  Florida  v.  Anderson  (1875),  91  U.  S. 
667.  Compare  Schutte  v.  Florida  Central 
R.  Co.  (1879),  3  Woods,  692.  At  the 
time  the  former  of  these  suits  was  insti- 
tuted the  road  had  passed  into  the  hands 
of  the  purchasers  at  the  sale  under  a  fore- 
closure against  the  company  to  which  the 
bonds  were  originally  issued.  A  portion 
of  the  purchase-money  had  been  paid,  and 
with  this  a  corresponding  amount  of  the 
bonds  had  been  retired.  The  holders  of 
the  residue  contended  that  their  bonds 
were  still  a  first  lien  on  the  road,  notwith- 
standing the  trustees'  sale,  and  that,  at 
all  events,  they  were  entitled  to  prosecute 
the  lien  for  the  unpaid  purchase-money 
due  on  that  sale  in  order  to  obtain  satis- 
faction of  their  bonds,  and  to  do  so  by 
right  paramount  to  that  of  the  State  or 
trustees  to  enfon;e  the  vendor's  lien  for  the 
unpaid  purchase-money.  The  court,  how- 
ever, said  that,  as  the  lien  was  a  statutory 
one,   it  could  only    be    enforced  iu   the 


§§  311,  312.]       STATUTORY  LIENS   IN   FAVOR   OF   BONDHOLDERS.      381 

S  811.  Condition  for  the  Benefit  of  the  State  in  the  Enabling  Act  can 
only  be  taken  Advantage  of  by  the  State. —  All  act  by  which  the  State 
empowers  the  company  to  borrow  money  upon  its  coiiseiitin<>;  to 
recognize  certain  State-aid  bonds  as  a  part  of  its  floating  debt,  >' 
does  not  create  the  relation  of  debtor  and  creditor  between  the 
company  and  the  bondholders  who  were  not  parties  to  the  trans- 
action, or  give  them  any  right  of  action  against  the  company.^ 

§  312.  Subrogation  of  Bondholders  to  the  Rights  of  the  State. 
—  As  already  stated,  the  right  of  bondholders  to  enforce  statutory 
liens  declared  to  indemnify  the  State  for  its  indorsement  of  rail- 
road bonds  depends  upon  the  principle  of  subrogation.  This  term 
as  used  in  this  connection  has  a  wider  signification  than  that 
which  it  ordinarily  bears  in  respect  to  mortgages  ;  viz.,  the  right 
which  arises  when  the  mortgage  debt  has  been  extinguished  by 
any  other  than  the  party  entitled  to  redeem.  In  most  of  the 
cases  on  the  subject  the  bondholders  have  been  seeking  to  enforce 
the  lien  while  the  debt  was  still  in  existence,  and  their  claims  to 
be  subrogated  to  the  lien  declared  in  favor  of  the  State  depend 
rather  upon  the  broad  principle  that  a  creditor  is  entitled  to  the 
benefit  of  all  pledges  and  securities,  given  to  or  in  the  hands  of 
a  surety  for  his  indemnity,  and  this  whether  the  surety  is  damnified 
or  not,  such  pledges  and  securities  being  regarded  as  a  trust  cre- 
ated for  the  better  security  of  the  debt.^ 

"  The  right  of  the  creditor  arises  from  the  natural  justice  of 
allowing  him  to  have  applied  to  the  discharge  of  his  demand  the 
property  deposited  with  the  surety  for  that  purpose,  if  required  by 
the  default  of  the  principal."  ^ 

The  operation  of  the  principle  of  subrogation  is  not  affected  by 
the  rule  that  the  State  cannot  be  made  a  party  to  a  suit  in  a 
federal  court,  and  refuses  to  be  a  party  in  any  other  court.     The 

manner  pointed  out  by  the  statute.     The  case  will  be  found  in  the  note  appended  to 

primary    right    to    proceed    against    the  the  report  of  it  in  3  Am.  &  Eng.   R.   R. 

property  being  in  the  trustees,  and  they  Cas.,  p.  25    ff.       Compare   also   State   v. 

having  exercised  that  right  with  the  result  Florida   Central   R.   Co.    (1876),    15  Fla. 

of  being  able  to  extinguish  a  portion  of  690. 

the   bonds   with   money   realized    by   the  ^  Stuart  v.  James  River  &  Kanawha  Co. 

foreclosure  sale,   the  original  lien  of  the  (1874),  24  Gratt.  294. 
bonds  was  consummated  and   merged  in  ^  pglt  v.  Barnes  (1879),  64  Ala.  108  ; 

the   title  acquired  by  the    purchasers   at  s.  c.  7  Am.  &  Eng.  R.  R.  Cas.  129.    Com- 

that  sale.     The  holders  of  the  outstanding  pare  the  language  of  the  same  court  in 

bonds,  therefore,  had  no  right  to  interfere  Forrest's  Exrs.  v.  Luddington  (1883),  68 

with   the   proceedings   instituted   by   the  Ala.  1 ;  s.  c.  12  Am.  &  Eng.    R.  R.  Cas. 

State  or  the  trustees  for  the  enforcement  330. 

of  their  vendor's  lien,  and  might  properly  ^  Chamberlain  v.  St.  Paul  &  Sioux  City 

be   enjoined   from    any   such    action.     A  R.  Co.   (1876),  92  U.  S.  299,  per  Justice 

useful  note  on  the  points  raised  in  this  Field. 


332  RAILWAY   BONDS   AND   MORTGAGES,  [CHAP.  XIII. 

law  of  subrogation  being  the  creation  of  equity,  and  resorted  to 
to  prevent  a  failure  of  justice,  a  court  of  equity  would  be  guilty 
of  a  singular  inconsistency  if  it  should  deny  the  right  of  subroga- 
tion for  such  a  reason. ^  But  there  can  be  no  subrogation  except 
as  to  the  bonds  actually  indorsed  by  the  State.^ 

And  if  some  of  an  issue  are  indorsed,  and  others  are  not,  the 
holders  of  the  former  are  entitled  to  be  paid  before  the  holders 
of  the  latter  out  of  the  proceeds  of  a  sale  made  by  virtue  of  a 
decree  in  proceedings  to  foreclose  a  mortgage  executed  by  the 
company  to  secure  the  bonds,  and  expressed  upon  its  face  to  be 
subordinate  to  the  statutory  lien.^ 

Subrogation  being  a  strictly  equitable  doctrine,  creditors  who 
seek  the  enforcement  of  the  claims  by  being  subrogated  to  the 
rights  of  the  State  must  submit  to  the  operation  of  the  equitable 
principle  that  "  equality  is  equity."  The  holders  of  the  bonds, 
therefore,  are  entitled  to  share  equally  with  the  holders  of  past- 
due  coupons  in  the  proceeds  of  a  sale  made  under  a  decree  fore- 
closing the  statutory  lien.^ 

§  313.  Right  of  Holders  of  State  Bonds  negotiated  by  Company  to 
enforce  Lien  declared  in  Favor  of  the  State.  —  When  the  loan  of  the 
State's  credit  is  made  by  issue  of  State  bonds  to  the  railroad  com- 
pany, the  State  is,  as  regards  the  bondholder,  the  principal  debtor, 
and  the  company  the  surety.  In  such  a  case  the  company  by 
negotiating  the  bonds  is  liable  under  the  rule  that  makes  every 
indorser  of  commercial  paper  the  guarantor  of  the  genuineness 
and  validity  of  the  instrument  he  indorses.^ 

But  the  relations  of  the  parties  do  not  admit  of  the  application 
of  the  doctrine  of  subrogation  in  favor  of  the  bondholders.  Their 
right  to  enforce  the  lien  of  the  State  to  secure  payment  of  its 
bonds  depends  upon  the  words  of  the  statute  creating  that  lien. 
If  that  lien  is  made  a  security  for  the  bondholders,  they  have  their 
own  recourse  thereon.^  So  also,  if  there  is  by  the  statute  a  specific 
appropriation  of  a  definite  portion  of  the  company's  property,  into 
whosesoever  hands  it  may  come,  and  it  will  be  the  duty  of  a  court 
of  equity  to  do  everything  in  its  power  to  enforce  that  charge.'^ 

^  Young  V.  Montgomery  &  Eufaula  R.  ^  Railroad  Cos.  v.  Scbutte  (1880),  103 

Co.  (1875),  2  Woods,  606.  U.  S.  118  ;  s.  c.  3  Am.  &  Eng.  R.  R.  Cas.  1. 

2  Clews  &  (;o.  V.  First  Mortgage  Bond-  ^  Ibid. 

holders  of  the  Brunswick  &  Albany  R.  Co.  ^  Ketehum  r.    St.    Louis  (1879),    101 

(187.'»),  ^>i  (in.  31. 5.  U.  S.  306,  explained  and  distinguisbcd  in 

3  Colt  V.  Barnes  (1879),  64  Ala.  108  ;  Tompkins  v.  Little  Rock  &  Fort  Smith 
B.  c.  7  Am.  &  Kng.  R.  R.  Cas.  129.  Ry.  Co.  (1888),  125  U.  S.  117,  fromwhich 

♦  State  V.  Spartanburg  &  Union  R.  Co.  several  extracts  were  given  in  the  note 
(1874),  8  S.  C.  129.  above. 


§  314.]  STATUTORY   LIENS   IN   FAVOR   OF   BONDHOLDERS.  333 

On  the  other  hand,  where  a  company,  in  accordance  with  the 
provision  of  a  statute  authorizing  a  loan  of  State  bonds,  mort- 
gages to  the  State  certain  lands,  as  an  indemnity  against  loss 
thereon,  and  after  purchasing  those  bonds  at  a  foreclosure  sale 
sells  them  to  other  companies,  the  bondholders  have  no  equity  for 
the  application  of  the  land  to  the  payment  of  the  bonds  which  can 
be  enforced  against  the  State,  and  the  grantees  take  the  property 
discharged  of  any  claim  of  the  bondholders.^ 

S  314.  Unconstitutionality  of  Part  of  Act  authorizing  Issue  of  State 
Bonds  not  a  Bar  to  Enforcement  of  Lien  by  Bondholders,  —  If  the 
intention  of  the  legislature  is  clearly  expressed  that  the  debt  con- 
tracted on  the  combined  credit  of  the  company  and  the  State  shall 
be  a  lien  on  the  railroad  property,  even  the  unconstitutionality  of 
that  portion  of  the  act  which  authorizes  the  execution  of  State 
bonds,  and  their  exchange  for  railroad  bonds,  will  not  necessarily 
be  fatal  to  the  validity  of  the  portion  which  creates  the  lien. 
That  portion  will  still  be  upheld,  if,  after  striking  out  all  that  is 
invalid,  it  is  possible  to  give  effect  to  what  appears,  upon  a  con- 
sideration of  the  whole  enactment,  to  have  been  the  legislative 
will.  The  result  in  this  case  is  to  avoid  the  bonds  as  State 
obligations,  and  to  leave  them  good  against  the  company  which 
actually  put  them  out.^ 

1  Chamherlain  ?^.  St.  Paul  &  Sioux  City  agreement  of  tlie  parties.    It  did  not  create 

R.  Co.  (1875),  92  U.  S.  299.     It  was  con-  any  lien  which  attached  to  and  followed 

tended  by  the  counsel  for  the  bondholders  the  property.    It  was  a  right  to  be  enforced, 

that,  notwithstanding  the  form  of  the  con-  if  at  all,  only  by  a  court  of  chancery  against 

tract,  the  company  was  in  fact  the  princi-  the  surety.    But  the  State  being  the  surety 

pal  debtor,  and  the  State  its  surety,  thus  here,  it  could  not  be  enforced  at  all,  and, 

bringing  the  case  under  the  rule  illustrated  not  being  a  specific  lien  on  the  property, 

in  the  preceding  section.      The  court  dis-  cannot    be   enforced    against    the    State's 

posed  of  this  theory  as  follows  :   "  In  this  grantees.     (Strong,  J.,  dissented.) 

case  the  deed  and  mortgage  were  not  in-  ^  Railroad       Companies     v.      Schutte 

tended  to   create  a  trust  in  favor  of  the  (1880),   103    U.   S.    118  ;    s.  c.   3  Am.   & 

holders  of  her  own  bonds.     The  State  was  Eng.  R.  R.  Cas.  1,  especially  p.   142.     The 

primarily  liable  to  the  bondholders,  and  it  court  thought  it  clear  that  "  the  object  of 

was  only  as  between  her  and  the  company  the  legislature  was,  not  to  create  a  debt 

that  the  relation  of  principal  and  surety  which  the  State  was  expected  to  pay,  but 

existed.     It  may  be  doubted  whether  the  to  aid  the  company  in  borrowing  money 

bondholders  could  call  on  the  company  in  on  the  credit  of  the  State,"  and  laid  stress 

any  event.     The  indorsement  made  by  the  upon  the  fact  that,    "in  any  event,  the 

president  simply  transferred  the  bonds;  it  company  was  to  be  bound  for  the  payment 

was  not  the  act  of  the  company.     Be  that  of  the  entire  debt  when   it  matured,  and 

as  it  may,  whatever  right  the  plaintiff  had  its  property  was  to  be  given  as  security." 

to   compel    the    application   of  the  bonds  Under   these   circumstances  "  the  uncon- 

received  by  the  State  to  the  payment  of  the  stitutional   part   of  the  statute  might  be 

bonds  held  by  him,  it  was  one  resting  in  stricken   out,    and  the  obligation    of  the 

equity  only.      It  was   not   a   legal   right  company,  including  its  statutory  mortgage 

arising   out   of  any  positive   law  or  any  in  favor  of  the  holders  of  the  State  bonds. 


334  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  XIII. 

§  315.  Effect  of  Subsequent  Legislation  on  the  Rights  of  Bondholders 
secured  by  a  Statutory  Lien.  —  A  statutory  lien  created  for  the  ben- 
efit both  of  the  State  which  indorses  railroad  bonds  and  of  those 
who  take  such  bonds  relying  on  the  guaranty  by  the  State  itself 
(see  Chap.  IV.,  above),  cannot  be  postponed  or  in  any  way  impaired 
by  a  subsequent  statute. ^ 

Where  a  later  act  is  passed  purporting  to  extend  the  original 
lien  so  as  to  cover  an  additional  issue  of  bonds,  and  at  the  same 
time  offering  certain  advantages  to  persons  holding  bonds  under 
the  provisions  of  the  first  act,  if  they  will  surrender  their  bonds 
for  an  equal  amount  of  the  new  issue,  those  who  come  under  this 
provision  must  take  the  new  bonds  on  the  conditions  on  which 
they  are  offered.  Qui  sentit  commodum,  sentire  debet  et  onus. 
The  bonds  issued  under  the  first  act  and  never  passed  under  the 
second  act  will  have  priority  and  take  rank  from  the  date  of  the 
former  act.  The  rights  of  those  holding  bonds  which  have  so 
passed  under  the  second  act  will  be  no  more  than  they  can  claim 
by  virtue  of  that  act.^ 

But  if  it  appears  from  a  consideration  of  the  whole  act  that  the 
lien  with  which  the  State  is  to  be  invested  was  created  to  secure 
payment  to  the  State  of  the  amount  of  indebtedness  it  undertook 
to  incur  by  issuing  its  aid  bonds,  and  not  payment  to  the  holders 
of  those  bonds,  the  State  can  accept  payment  of  the  bonds  in  other 
modes  than  those  pointed  out  by  the  statute  creating  the  lien,  and 
can  cause  the  property  to  be  released  from  it,  either  by  legisla- 
tion or  by  foreclosure  under  the  statute,  while  the  bonds  issued 
to  the  company  for  the  construction  of  the  road  are  still  outstand- 
ing and  unpaid.^ 

If  a  mortgage  is  made  subject  to  a  special  reservation  that, 
whenever  a  certain   State   loan  should  be  obtained,  and  bonds 


left  in  full  force."     The  effect  of  the  same  Co.  (1880),  13  S.  C.  228  ;  s.  c.  4  Am.  & 

act  as  the  one  under  which  the  bonds  in  Eng.  R.  R.  Cas.  459. 

this  case  were  issued  was  largely  discussed  '  Tennessee    Bond   Cases    (1885),   114 

in  Florida  v.  Anderson,  91  U.  S.  667.     The  U.  S.  663  (Harlan,   J.,  dissenting).     The 

question  of  its  unconstitutionality  was  not  court   distinguished  them  from  the  cases 

passed  upon,  the  court  saying  that,  in  a  -  like   Hand  i'.  Savannah  &  Charleston  R. 

suit  which  was  merely  ancillary  to  proceed-  Co.  (1879),  12  S.  C.  314,  where  tlie  pri- 

ings  in  the  State  courts,  such  a  question  mary  liability  for  the  payment  of  the  bonds 

should  be  left  for  the  latter  to  determine.  rests   on   the  company,  and  the  State  is 

1  Hand  v.  Savannah  &  Charleston  R.  bound  only  as  a  surety,  and  laid  great  stress 

Co.  (1879),  12  S.  C.  313  ;  Gibbesv.  Green-  npon  the  princijile  that  "  contracts  created 

ville  &  Columbia  R.  Co.  (1880),  13  S.  C.  by,  or  entered  into  under,  the  authority  of 

228  ;    8.   c.  4   Am.   &   Eng.   R.  R.    Cas.  statutes  are  to  be  interpreted  according  to 

459.  the  language  used  in  each  particular  case 

'■'  Gibbcs  V.  Greenville  &  Columbia  R.  to  express  the  obligation  assumed." 


§  315.]  STATUTORY   LIENS   IN    FAVOR   OP   BONDHOLDERS.  335 

executed  to  secure  the  payment  thereof,  those  bonds  should  have 
priority  over  the  mortgage,  a  subsequent  statute  authorizing  the 
company  to  mortgage  the  unfinished  portion  of  the  road,  on  con- 
dition of  relinquishing  all  claims  to  the  State  loan  so  far  as  that 
section  of  the  road  is  concerned,  is  to  be  construed  merely  as  a 
permission  given  to  the  company  to  substitute  some  other  lender 
in  the  place  of  the  State.  A  creditor  lending  in  pursuance  of  that 
statute  is,  therefore,  subrogated  to  the  right  of  the  State  as  re- 
spects the  priority  of  its  prospective  lien,  and  takes  precedence 
of  the  bondholders  secured  by  the  first  mortgage  so  far  as  the 
unfinished  section  of  the  road  is  concerned.  Such  a  statute  cannot 
be  objected  to  on  the  grounds  of  unconstitutionality,  even  though 
there  are  some  variations  between  the  stipulations  of  the  first 
issue  of  bonds  and  of  the  second,  provided  the  essential  elements 
of  the  transaction  are  left  unaffected.  The  controlling,  substan- 
tial agreement  between  the  company  and  the  first  bondholders 
was  that  the  State  should  furnish  a  loan,  and  that  this  loan  was 
to  be  a  first  lien.  All  the  rest  was  matter  of  detail  between 
the  company  and  the  State,  of  no  particular  concern  to  the 
bondholders.^ 

1  Campbell  v.  Tex.  &  N.  0.  R.  Co.  (1872),  2  Woods,  263 ;  s.  c.  4  Fed.  Cas.  1188, 
Case  No.  2369. 


336 


RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  XIV. 


CHAPTER  Xiy. 


ROLLING-STOCK   AND   CAR   TRUSTS. 


Art.  I.  —  Whether  Rolling-stock  is  a 
Fixture. 

Authorities  conflicting. 

Doctrine  in  New  York. 

Doctrine  in  New  Jersey. 

Doctrine  in  Illinois. 

Doctrine  in  Alabama. 

Doctrine  in  New  Hampshire. 

Doctrine  in  Ohio. 

Rule  under  Laws  of  California  and 
AVashington. 

Doctrine  of  the  Federal  Courts. 

Legal   Character  of  Rolling-stock 
considered  in  other  Connections. 

Opposing  Doctrines  discussed. 

—  Car  Trusts  and  other  Con- 
ditional Contracts  for  the 
Supply  of  Rolling-stock. 

Introductory. 

Definition  of  Car  Trust. 

Vendor  of  Rolling-stock  only  a 
General  Creditor  unless  Lien 
reserved. 
330.  Mortgage  Lien  generally  post- 
poned to  Rights  reserved  by 
Vendor  till  Price  is  paid. 


§316. 
317. 
318. 
319. 
320. 
321. 
322. 
323. 

324, 
325. 

326. 
Art.  II. 


§327. 
328. 
329. 


§  331.  Rights  of  Persons  lending  Money 
to  the  Company  for  the  Pur- 
chase of  Rolling-stock. 

332.  Title  of  Lessor   of  Rolling-stock 

paramount    to   that   of    Mort- 
gagees. 

333.  Car-trust  Certificates  which  are  in 

Effect  ]\Iortgage  Bonds  of  the 
Company. 

334.  Car-trust  Agreements  in  Breach  of 

Fiduciary  Obligations  of  Direc- 
tors. 

335.  How  far  Rolling-stock  Contracts 

are  effectual  against  Creditors 
of  the  Company. 

336.  Wording  of  Contract  not  conclu- 

sive as  to  its  Real  Character. 

337.  Rights  of  Dissenting  Holders  of 

Car-trust     Certificates     where 
Modifications  are  attempted. 

338.  Rights  under    Car    Trusts,   how 

affected     by    Appointment    of 
Receiver. 

339.  Can   the   Court   authorize   a  Re- 

ceiver to  create  a  Car  Trust  ? 


Article  I.  —  Whether  Rolling-stock  is  a  Fixture. 

§  316.  The  Authorities  are  irreconcilably  conflicting  in  regard  to 
the  (lucstion  -wlietlicr  rolling-stock  is  a  fixture  or  not,  —  that  is, 
there  is  no  uniformity  in  the  holdings  on  this  point,  and  the  law 
differs  in  different  States,  so  that  there  is  a  diversity  of  view  as 
to  the  applicahility  of  chattel-mortgage  acts  to  rolling-stock.  In 
treating  the  subject,  therefore,  statement  is  made  of  the  result  of 
the  decisions  in  some  of  the  principal  States  where  the  question 
has  been  raised. 

§  317.  Doctrine  in  New  York.  —  In  New  York,  when  this  ques- 
tion first  presented  itself,  it  was  held  by  the  Supreme  Court  that 


§  317.]  ROLLING-STOCK    AND    CAR   TRUSTS.  337 

locomotives  and  cars  were  covered  by  a  mortgage  of  the  road  and 
real  estate  generally  of  the  company. ^ 

Stress  was  laid  upon  the  fact  that  personalty  need  not  neces- 
sarily be  stationary  to  be  a  fixture  in  the  technical  sense,  and 
reference  made  to  the  common-law  rule  that  pigeons  in  a  pigeon- 
house,  deer  in  a  park,  and  lish  in  an  artificial  pond,  are  deemed 
fixtures.  "  That  railway  cars,"  said  Strong,  J.,  "  are  a  necessary 
part  of  the  entire  establishment,  without  which  it  would  be  in- 
operative and  valueless,  there  can,  of  course,  be  no  doubt.  Their 
wheels  are  fitted  to  the  rails  ;  they  are  constantly  on  the  rails, 
and,  except  in  cases  of  accidents  or  when  taken  off  for  repairs, 
nowhere  else ;  they  are  not  moved  off  the  land  belonging  to  the 
company ;  they  are  peculiarly  adapted  to  the  use  of  the  railway, 
and  in  fact  cannot  be  applied  to  any  other  purpose ;  they  are  not, 
like  farming  utensils,  and  possibly  the  machinery  in  factories,  and 
many  of  the  movable  appliances  in  stores  and  dwellings,  the  ob- 
jects of  general  trade  ;  they  are  permanently  used  on  the  particular 
road  where  they  are  employed,  and  seldom,  if  ever,  changed  to  any 
other.  Many  of  these  are  strong  characteristics  of  the  realty  ; 
some  of  them  have  often  been  deemed  conclusive."  This  view 
did  not  long  remain  unquestioned,  and  two  years  afterwards  the 
Supreme  Court  ruled  that  rolling-stock  was  personalty.'-^ 

The  question  was  finally  settled  in  New  York  by  a  decision  in 
the  Court  of  Appeals  to  the  effect  that  rolling-stock  was  per- 
sonalty.^ 

1  Farmers'  Loan  &  Trust  Co.  v.  Hen-  Ry.  Rep.  283,  reversing  the  decision  in 
drickson  (1857),  25  Barb.  484.  the  Supreme  Court,  which  had  returned  to 

2  Buffalo  V.  Buffalo  &  New  York  City  its  earlier  opinion.  It  was  said  that,  to 
E.  Co.  (1858),  31  Barb.  590  ;  Beardsley  u.  constitute  personal  property  a  fixture,  some 
Ontario  Bank  (1859),  31  Barb.  619.  In  element  of  annexation,  usually  physical, 
the  former  case  Judge  Grover,  in  his  must  be  present.  Cases  of  constructive 
concurring  opinion,  reviewed  the  several  annexation  were  few,  and  rested  on  peculiar 
grounds  on  which  Judge  Strong  had  based  reasons  of  their  own.  In  all  of  them  there 
his  decision  in  Farmers'  Loan  &  Trust  Co.  existed  both  adaptation  to  the  enjoyment 
V.  Hendrickson,  and  concluded  that  they  of  the  land,  and  localization  in  use  as 
were  inadequate  to  sustain  it.  Much  obvious  elements  of  distinction  from  mere 
emphasis  was  laid  on  the  fact  that  railway  chattels  personal.  The  coui-t  then  pro- 
cars  are  frequently  on  other  lines  and  con-  ceeded  thus :  — 

stantly  shifting  their  position,  and  there-  "  Even  in  respect  to  cases  of  actual  an- 

fore  did  not  correspond  with  the  leading  nexation    to   the   realty    and    consequent 

idea  of  a  fixture;  viz.,  that  "it  is  something  change  of  character  from  chattel  personal 

affixed  to  laud,  or   to    buildings   on   the  to  realty,  it  is  held  that  there  ought  to  be 

land  ;  something  fixed,  permanent  in  its  the  concurrence  of  actual  annexation,  of 

location,  or  a  mere  incident  to  something  applicability  to  the  use  to  which  that  part 

so  fixed."  of  the  realty  is  appropriated  with  which  it 

'  Hoj'le  V.  Plattsburgh  &  Montreal  R.  is  connected,  and,  lastly,  an  intention  on 

Co.  (1873),  54  N.  Y.  314;  s.  c.  7  Am.  the  part  of  the  party  making  the  annex- 

22 


338 


RAILWAY   BONDS    AND    MORTGAGIilS. 


[chap.  XIV. 


§  31S.  Doctrine  in  New  Jersey.  —  III  New  Jersey  the  question 
was  still  an  open  one,  in  1877,  when  it  presented  itself  in  Wil- 
liamson V.  New  Jersey  Southern  R.  Co.^ 

In  the  lower  court  the  chancellor  delivered  an  elaborate  opin- 
ion asserting  the  doctrine  that  rolling-stock  is  realty  ;  but  this 
ruling  was  unanimously  reversed  by  the  Court  of  Errors  and  Ap- 
peals. The  opinion  rendered  by  Depue,  J.,  contains  an  exhaustive 
and  extremely  careful  review  of  the  previous  decisions  ;  the  con- 
clusion that  rolling-stock  is  not  a  fixture  was  finally  rested  on 
grounds  very  similar  to  those  which  commended  themselves  to 
the  New  York  Court  of  Appeals.  The  difficulty  of  ascribing  the 
attributes  of  realty  to  property  which  is  so  frequently  disconnected 
from  the  road-bed  of  its  owners  and  scattered  over  many  different 
lines  was  strongly  emphasized,  as  it  had  been  in  the  sister  court. 

It  has  been  ruled  by  a  federal  court  sitting  in  New  Jersey  that 
the  enactment  of  a  supplement  to  the  Chattel  Mortgage  Act,  re- 
quiring certain  additional  formalities  in  the  filing  of  a  chattel 
mortgage,  was  not  intended  to  affect  the  act  which  had  placed 
railroad  mortgages  on  a  distinct  and  separate  footing.^ 

§  319.  Doctrine  in  Illinois.  —  In  Illinois  rolling-stock  was  held 
in  some  early  cases  to  be  a  fixture,  whether  on  the  authority  of 


ation  to  make  a  permanent  .accession  to 
the  freehold.  Potter  v.  Cromwell  (1869), 
40  N.  Y.  287  ;  Voorhees  v.  McGinuis 
(1872),  48  id.  278.  Looking  now  at  the 
rolling-stock  of  a  railroad,  it  is  originally- 
personal  in  its  character,  it  is  subservient 
to  a  mere  personal  trade,  —  the  transporta- 
tion of  freight  and  passengers.  The  track 
exists  for  the  use  of  the  cars  rather  than 
the  cars  for  the  use  of  the  track.  There 
is  no  annexation,  no  immobility  from 
weight ;  there  is  no  localization  in  use. 
The  only  element  on  which  an  argument 
can  be  based  to  support  the  character  of 
realty  is  adaptation  to  use,  with  and  upon 
the  track.  Even  in  respect  to  this,  were 
the  same  contrivance  adopted  by  a  tenant 
for  use  in  his  trade  upon  leased  lands,  his 
right  to  remove  both  cars  and  track  would 
be  beyond  (juestion.  It  is  perhaps  fortu- 
nate that  this  question  was  not  finally 
adjudicated  in  the  early  days  of  railroad 
enterprise,  for  then  unity  of  ownership  in 
track  and  cars,  and  independence  of  roads 
upon  each  other,  seemed  to  render  it  pos- 
fiiljle  to  consider  rolling-stock  part  of  the 
realty   without   introducing  great   incon- 


venience. At  the  present  time  independ- 
ent companies  exist,  owning  no  tracks, 
whose  trains  run  through  State  after  State 
on  the  railroad  track  of  other  companies. 
It  is  no  uncommon  sight  to  see  the  cars 
of  half  a  dozen  companies  formed  into  a 
single  train  and  running  from  New  York 
to  Illinois  and  Missouri.  It  is  impossible 
to  deal  with  such  property  as  part  of  the 
realty  without  introducing  anomalies  and 
uncertainties  of  the  gravest  character. 
Call  cars  and  engines  part  of  the  realty  ; 
where  shall  they  be  taxed  ?  Real  estate 
is  to  be  taxed  at  its  site.  What  is  the 
site  of  a  railroad  train  running  from  New 
York  to  Buffalo  in  a  day  ?  Shall  it  be 
taxed  in  each  town  where  the  assessors 
catch  sight  of  it  rushing  by  at  thirty 
miles  an  hour  ?  Or,  if  a  judgment  be 
docketed  in  one  county  on  the  line,  will 
its  lien  attach  on  each  car  as  it  is  whirled 
past  ?" 

1  28  N.  J.  Eq.  277  ;  s.  c.  on  appeal,  29 
N.  J.  Eq.  311  (1878). 

2  Metropolitan  Trust  Co.  v.  Pennsyl- 
vania, S.  &  N.  E.  R.  Co.  (1885),  25  Fed. 
Kcp.  760. 


§  320.]  ROLLING-STOCK   AND   CAR   TRUSTS.  339 

the  first  New  York  case  referred  to  above  or  independently,  it  is 
impossible  to  say,  as  the  court  did  not  cite  any  authorities.^ 

Some  years  later  the  same  court  declined  to  express  an  opinion 
whether  a  mortgage  of  rolling-stock  was  subject  to  the  provision 
of  the  Chattel  Mortgage  Act  ;2  but  when  the  question  was  squarely 
presented  soon  afterwards,  laid  down  the  doctrine  that  a  mortgage 
comprehending  the  company's  property  of  every  description,  both 
real  and  personal,  and  recorded  in  all  the  counties  througli  which 
the  road  passed,  created  a  valid  lien  on  the  personal  property, 
although  the  instrument  was  not  acknowledged  as  the  Chattel 
Mortgage  Act  required.*^ 

The  same  conclusion  as  regards  that  act  had  been  arrived  at 
two  years  earlier,  and  on  somewhat  similar  grounds,  by  the  Su- 
preme Court  of  the  United  States.* 

In  this  State  the  question  is  now  no  longer  an  open  one,  as  it 
had  been  provided  by  the  constitution  of  1870  that  rolling-stock 
is  to  be  considered  personal  property.^ 

§  320.  Doctrine  in  Alabama.  —  In  Alabama  it  has  been  held  that 
rolling-stock  is  a  chattel  personal,  not  converted  into  realty  by 
being  put  upon  the  railroad,  and  that  liens  attaching  to  it,  when 
delivered  to  tlie  company,  will  not  thereby  be  displaced  in  favor 
of  a  prior  mortgage  upon  the  road  and  its  equipments.^ 

1  Palmer  j;.  Forbes  (I860),  23  111.  301.  the  reasonable  inference  being  that  "it 
The  question  was  dismissed  very  briefly,  was  never  intended  to  have  any  application 
and  the  doctrine  of  constructive  annex-  to  a  species  of  property  whicli  then  had  no 
ation  was  certainly  carried  very  far  in  the  existence,  but  which  had  grown  up  since 
ruling  that  materials  provided  for  the  its  passage,  but  was  intended  to  apply  to 
repair  of  the  track  were  also  part  of  the  chattels  that  were  owned,  possessed,  and 
real  estate.  This  case  was  approved  in  used  as  they  were  at  that  time  in  use 
Hunt  V.Bullock  (1860),  23  111.  320,  and  among  the  people  in  their  pursuits  of  life." 
Titus  V.  Mabee  (1861),  25  111.  257.  (Walker,  J.,  dissented,  partly  on  account 

2  Binkerti'.  Wabash  Ry.  Co.  (1881),  98  of  the  earlier  rulings,  and  partly  because 
111.  205;  s.  c.  58  Am.  &  Eng.  R.  R.  Cas.  the  constitution  had  declared  rolling-stock, 
113.  etc.,  to  be  personal  property.) 

3  Cooper  V.  Corbin  (1883),  105  111.  224.  *  Hammock  v.  Farmers'  Loan  &  Trust 
The  reasons  assigned  for  the  decision  were:  Co.  (1881),  105  U.  S.  77. 

(1)  That  the  act  required  a  mortgage  of  ^  This  provision  has  been  declared  by 

chattels  to  be  recorded  in  the  township  in  a  federal  court  hot  to  change  the  rule  that 

which  the  mortgagor  resided,  a  provision  a    mortgage    covering    all    after-acquired 

quite  inapplicable  to  a  mortgagor  owning  property  includes  rolling-stock,  if  the  lien 

a  property  like  a  railroad  passing  through  of  the  mortgage  attaches  before  that  of  a 

numerous  townships  ;  (2)  that  under  the  contesting  judgment    creditor.      Scott   v. 

act  a  chattel   mortgage  would   run    only  Clinton  &  Springfield  R.    Co.    (1876),    6 

two  years,    and   therefore,   if   a   railroad  Biss.  529 ;    s.  c.   21  Fed.   Cas.   820,   Case 

mortgage  was  to  be  governed  by  its  pro-  No.  125,271. 

visions,  the  right  to  borrow  money  on  ^  Meyer  ij.  Johnston  (1875),  53  Ala.  237; 
long  time,  to  construct  or  equip  a  road,  s.  c.  15  Am.  Ry.  Rep.  467.  See  further 
would  in  eff'ect  be  taken  away  ;  (3)  that,  on  the  principle  here  made  to  depend  on 
when  the  act  first  became  a  law  of  the  the  character  of  rolling-stock  as  person- 
State,  railroad  mortgages  were  unknown,  alty.  Art.  II.,  post. 


340  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  XIV. 

§  321.  Doctrine  in  New  Hampshire.  —  In  this  State  also  rollillg- 
stock  appears  to  be  regarded  as  personalty .^ 

§  322.  Doctrine  in  Ohio.  —  The  question  does  not  seem  to  have 
been  passed  upon  definitely  in  this  State,  but  the  doctrine  that 
rolling-stock  is  personalty  seems  to  be  involved  in  one  case.^ 

§  323.  Under  the  Laws  of  Washington  and  California  a  mortgage 
of  rolling-stock,  whether  united  to  a  mortgage  of  the  realty  or  not, 
is  void  as  to  creditors  unless  executed  and  recorded  in  the  manner 
prescribed  for  chattel  mortgages.-"^ 

§  324.  The  Doctrine  of  the  Federal  Courts  is  a  matter  of  some 
uncertainty.  The  dissenting  justices  in  Minnesota  Co.  v.  St.  Paul 
Co.*  said,  amongst  other  things  :  "  We  agree  that  the  rolling-stock 
upon  this  road  covered  by  the  several  mortgages,  and  as  respects 
any  other  valid  liens  upon  the  same,  is  inseparably  connected  with 
the  road  ;  in  other  words,  is,  in  technical  language,  a  fixture  to  the 
road,  so  far  as  in  its  nature  and  use  it  can  be  called  a  fixture." 

But  the  doctrine  of  fixtures  was  not  invoked  by  the  majority  of 
the  court,  and  was  in  no  way  involved  in  the  case,  the  question 
being  whether  the  rolling-stock  was  appurtenant  to  the  entire  road 
or  to  the  several  divisions. 

In  one  case  in  a  Circuit  Court,^  Mr.  Justice  Miller,  while  de- 
clining to  express  an  opinion  as  to  whether  rolling-stock  was 
technically  a  fixture  or  not,  ruled  that  it  w^as  so  far  a  part  of  the 
]'oad  that  a  mortgage  purporting  to  cover  it  in  specific  words  was 
effectual  without  being  recorded  as  a  chattel  mortgage ;  and  in 
another  it  was  held  that  rolling-stock  was  not  a  fixture  in  the 
rigid  common-law  sense  of  the  word  so  as  to  become  a  part  of  the 
realty  independently  of  the  agreements  of  the  parties,  and  that  a 
mortgage,  although  in  terms  covering  after-acquired  property,  did 
not  attach  to  the  rolling-stock  of  a  third  person  subsequently 
placed  on  the  road  under  a  contract  with  the  company.^ 

§  325.  The  Legal  Character  of  Rolling-stock  has  been  also  con- 
sidered in  other  Connections,  with  results  exhibiting  the  same 
contrariety  as  the  cases  referred  to  in  the  foregoing  sections. 
It  has  been  held  in  Iowa  to  be  personalty  for  the  purposes  of 
tlic  mechanics'  lien  laws,  and  therefore  not  subject  to  such  liens." 

1  Boston,  Concorti,  &  Montreal  Railroad  *  2  Wall.  644  ;  also  6  Wall.  742  (1867). 
V.  Gilmore  (1858),  37  N.  H.  410.  ^  Fanners'  Loan  &  Trust  Co.  v.  St  Jo. 

2  Coe  V.  Columbus,  Piqua,  &  Indian-  &  Denver  City  R.  Co.  (1875),  3  Dill, 
apolis  R.  Co.  (1859),  10  Ohio  St.  372.  412. 

«  RadebauKh  v.  Taeoina  &  Puyallup  R.  »  Hardesty   v.    Pyle    (1883),    15   Fed. 

Co.    (1894),   8  Wash.  570  ;  .s.  c.  36  Pac.  Rep.  778. 

Rep.   460  ;   United  Loan   &  Trust  To.   v.  ''  Neilson    v.     Iowa     Eastern    R.    Co. 

Southern  Cal.  Motor  Road  Co.  (1892),  51  (1879),  51  Iowa,  184. 
Fed.  Rep.  840. 


§  326.]  ROLLING-STOCK   AND   CAR   TRUSTS.  341 

In  several  cases  it  has  been  treated  as  personalty  for  taxation 
purposes.^ 

This  view  has  prevailed  even  in  Wisconsin,  where  rolling-stock 
has  been  declared  to  be  realty  for  other  purposes.^ 

Yet  in  Kentucky  it  is  held  to  be  taxable  as  a  fixture.^ 

§  326,  Opposing  Doctrines  discussed.  —  The  courts  which  hold 
rolling-stock  to  be  personalty  have  laid  far  too  much  stress  upon 
the  fact  that  it  is  capable  of  being,  and  constantly  is,  transferred 
from  the  road-bed  of  the  company  to  which  it  belongs  to  the  road- 
beds of  other  companies.  The  instance  of  the  pigeons  flying  from 
and  returning  to  the  dove-cote  furnishes  at  least  one  illustration 
which  goes  to  show  that  this  circumstance  is  not  a  conclusive  test. 
But  this  is,  at  best,  a  rather  distant  analogy,  and  it  is  more  satis- 
factory to  recur  to  general  principles  in  determining  the  quality  of 
a  kind  of  property  so  essentially  novel,  relatively  speaking,  as  the 
rolling-stock  of  a  railroad.  The  really  important  fact  to  remember 
is  that  the  track  and  the  rolling-stock  form,  in  combination,  one 
great  piece  of  machinery  which  performs  the  work  of  transporta- 
tion, and  thus  enables  the  owners  to  carry  on  their  business  as 
carriers.* 

Such  machinery  is  not  complete  if  either  the  track  or  the 
vehicles  running  upon  it  are  missing.  Under  these  circum- 
stances it  would  seem  a  necessary  inference  that  the  character 
of  realty  which  is  indisputably  possessed  by  the  rails  should  be 
imparted  to  the  rest  of  the  machine  of  which  they  form  an  in- 
tegral part.  Under  the  general  law  of  mortgages  it  is  not 
tlioroughly  settled  to  what  extent  the  machinery  in  a  factory 
or  mill  will  pass  by  the  real-estate  mortgage,  but  it  would  be 
difficult,  we  think,  to  find  a  case  in  which  the  court,  having 
decided  that  a  portion  of  a  machine  was  a  fixture,  has,  never- 
theless, ruled  that  other  portions  necessary  for  its  proper  opera- 
tion are  not  fixtures.  If  such  a  mortgage  on  a  rolling-mill,  for 
instance,  will  cover  the  entire  set  of  rolls  used  in  the  mill,  even 

1  Randall  v.  Elwell  (1873),  52  N.  Y.  *  This  poiut  is  strongly  enforced  in  the 
521  ;  Sangamon  &  Morgan  R.  Co.  v.  lucid  and  erudite  opinion  of  the  chancel- 
County  of  Morgan  (1852),  14  111.  163;  lor  in  Williamson  u.  New  Jersey  Southern 
Pacific  R.  Co.  V.  Cass  Co.  (1873),  53  Mo.  Ry.  Co.  (1878),  28  N.  J.  Eq.  277  ;  and 
17;  s.  c.  12  Am.  Ry.  Rep.  336;  City  of  the  rule  that  rolling-stock  is  a  fixture, 
Dubuque  v.  Illinois  Central  R.  Co.  (1874),  which  prevails  in  Canada  upon  the  author- 
39  Iowa,  56  ;  s.  c.  8  Am.  Ry.  Rep.  496.  ity  of  the  expounders  of  the  French  Civil 

2  Chicago  &  North  Western  R.  Co.  v.  Code  and  of  the  civil  law,  is  based  upon 
Boroughof  Fort  Howard  (1866),  21  Wis.  44.  essentially   similar    reasoning.      See    the 

8  Elizabethtown  &  Paducah  R.  Co.  v.     opinion  of  Taschereau,  J.,  in  Wallbridge 
Trustees  of  Elizabethtown  (1876),  12  Bush     v.  Farwell  (1890),  18  Can.  S.  C.  1. 
(Ky.),  233. 


342  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  XIV. 

those  temporarily  detached,^  it  is  hard  to  see  why  the  cars  and 
locomotives  of  a  railroad  should  not  be  subject  to  a  like  rule. 
The  principle  involved  does  not  seem  to  be  at  all  different.  A 
still  closer  analogy  may  be  found  in  passenger  and  freight  eleva- 
tors. We  are  not  aware  that  it  has  ever  been  directly  ruled  that 
these  are  fixtures ;  but  it  would  scarcely  be  seriously  contended 
that  they  are  not.  How  do  these  vehicles  differ  in  any  essential 
point  from  the  rolling-stock  of  railroads  ?  They  both  move  in 
particular  lines,  established  in  the  one  case  by  the  ways,  in  the 
other  by  the  rails.  That  the  movement  of  the  one  is  vertical  and 
produced  by  a  cable  worked  from  a  stationary  engine,  and  the 
movement  of  the  other  horizontal  and  produced  by  an  engine 
travelling  with  its  train,  are  surely  quite  immaterial  details. 
And  if  on  such  grounds  as  these  we  should  conclude  that  rolling- 
stock  is  realty,  the  mere  fact  that  it  is  often  removed  from  the 
land  which  was  acquired  for  the  purpose  of  operating  the  machine, 
of  which  it  is  the  most  indispensable  portion,  seems  to  be  an  insuf- 
ficient reason  for  rejecting  that  conclusion.  Whatever  be  its 
true  quality,  that  can  hardly  be  dependent  on  mere  locality.  A 
mortgage  lien  on  a  building  is  not  lost  if  the  mortgagor  moves  it 
from  the  land  without  the  consent  of  the  mortgagee,  and  it  is 
impossible  to  argue  that  this  result  is  changed  by  the  fact  that 
such  consent  is  given  on  the  understanding  that  the  building  is 
to  be  restored  to  its  position,  when  the  purpose  for  which  it  was 
removed  has  been  fulfilled.  The  true  principle,  it  is  submitted,  is 
to  determine  the  character  of  the  property  by  considering  its 
relation  to  the  realty  on  which  it  is  ordinarily  placed,  and  to  treat 
the  fact  of  its  occasional  or  even  frequent  removal  from  that 
realty  as  a  mere  incident. 

Article  II.  —  Car  Trusts  and  other  Conditional  Contracts 
FOR  the  Supply  of  Rolling-stock. 

§  327.  Introductory. — In  an  earlier  chapter  (X.)  the  cases  were 
reviewed  which  deal  with  the  general  principle  that  the  lien  of 
the  "  after-acquired  propci'ty  "  clause  is,  as  against  one  who  sells 
property  to  the  railroad  company,  post})oned  to  any  rights  which 
the  vendor  may  have  reserved  in  such  property  when  it  passed 
out  of  his  possession.  The  special  application  of  this  rule  to 
transactions  which  contemplate  the  use  and  ultimately  the  trans- 
fer of  rolling-stock  is  of  sufficient  importance  to  warrant  a  more 

»  Ex  pnrlc,  Astbury,  L.  11.  4  Cli.  Aj)i).  630  ;  Voorhis  o.  Freeman  (1841),  2  Watts 
&Seig.  (I'a.)  116. 


§  328.]  ROLLING-STOCK    AND    CAR   TRUSTS.  343 

particular  discussion.  Manufacturers  or  others  who  desire  to 
enter  into  a  contract  of  this  kind  may,  apart  from  statute,  secure 
a  priority  not  only  against  the  mortgage  lienors,  but  also  against 
subse(iuent  creditors  of  the  railroad  company,  by  several  different 
forms  of  agreements ;  but,  in  the  ultimate  analysis,  these  reduce 
themselves  to  three,  —  viz.,  a  lease  (or,  more  correctly  speaking,  a 
bailment  for  hire),  a  conditional  sale,  or  a  reservation  of  a  lien  in 
the  nature  of  a  mortgage.^  But  where  the  rights  of  creditors  are 
concerned,  the  validity  of  the  agreement  will  depend  largely  upon 
the  character  of  the  chattel  mortgage  act  which  may  under  the 
circumstances  be  applicable.     (See  below.) 

The  interposition  of  a  trustee  and  the  creation  of  a  trust  are  by 
no  means  essential  features  of  these  transactions.  It  is  simply  a 
device  resorted  to  as  a  matter  of  convenience,  in  order  to  enable  a 
larger  number  of  investors  to  become  interested  in  a  single  con- 
tract. The  term  "  car  trust "  is,  however,  derived  from  this  prac- 
tice, and  has  become  in  popular,  if  not  in  legal,  phraseology  a 
generic  title  for  any  contract  of  this  class,  whether  it  is  accom- 
panied by  a  trust  or  not.  It  is  clear  that  a  form  of  association 
adopted  by  the  parties  cannot  either  limit  or  enlarge  the  rights  of 
the  railroad  company  or  others  interested  in  the  validity  of  the 
contract.  For  the  elucidation  of  the  subject  under  discussion, 
therefore,  cases  involving  leases  and  sales  of  rolling-stock  are 
equally  pertinent,  whether  the  contract  is  made  by  a  car-trust 
association,  by  an  individual,  or  by  a  corporation.^ 

§  328.  A  Car  Trust  may  be  defined  as  an  agreement  of  several 
owners  of  cars  to  place  them  in  the  hands  of  an  agent  to  sell  on 
the  instalment  plan,  the  agent  having  the  power  to  issue  certifi- 
cates representing  an  interest  in  the  instalments.  A  typical 
example  of  such  an  agreement  was  under  review  in  Ricker  v. 
American  Loan  &  Trust  Co.,^  the  subject  of  discussion  being 
the  amenability  of  the  car-trust  association  to  a  certain  taxation 
statute.  The  essential  features  of  the  contract  were  thus  de- 
scribed by  the  court :  "  A  number  of  persons  formed  an  associa- 
tion, by  an  instrument  in  writing  containing  numerous  articles, 

1  Except  in  Pennaj'lvania,  where  con-  cussed  the  subject  in  its  financial  and  legal 
ditional  sales  are  not  valid  against  cred-  aspects  in  an  address  to  the  American  Bar 
itors,  and  the  expedient  of  a  bailment  for  Association.  See  Vol.  8  of  the  publications 
hire,  with  an  option  of  purchase  after  a  of  that  association,  p.  277.  The  same  pam- 
certain  time,  is  resorted  to.  phlet  may  also  be  referred  to  for  iiiforma- 

2  An  interesting  article  by  Mr.  Brod-  tion  as  to  the  provisions  usually  found  in 
head,   dealing   in   popular   language  with  rolling-stock  contracts. 

car-trust  certificates,  will  be  found  in  tlie  8  140  Mass.  346  ;  s.  c.  5  N.  E.  Rep. 

"North    American    Keview "    for  March,     284(1885). 
1891.     Mr.  Rawle  has  also  very  ably  dis- 


344  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  XIV. 

for  the  purpose  of  buying,  selling,  and  leasing  railroad  rolling- 
stock,  to  be  sold  or  leased  to  the  New  York  and  New  England 
Railroad  Company,  with  provisions  for  admitting  other  persons  to 
membership.  The  members  of  the  car  trust  were  to  furnish 
money  for  the  purchase  of  the  rolling-stock,  and  were  to  have 
certificates  for  the  amounts  so  furnished,  providing  that  the  prin- 
cipal sum  contributed  by  each  member  should  be  repaid  in  ten 
annual  instalments,  with  interest;  both  principal  and  interest  being 
payable  only  out  of  the  rentals  received  for  the  rolling-stock. 
Instead  of  the  lease  being  made  to  the  railroad  company  directly 
by  the  car  trust,  a  plan  was  adopted  by  which  the  car  trust  de- 
livered the  property  to  the  American  Loan  and  Trust  Company, 
as  trustee,  which  trustee  issued  the  certificates  to  the  members  of 
the  car  trust,  and  also  executed  the  leases  to  the  railroad  com- 
pany with  provisions  for  a  rental  sufficient  to  meet  the  above  pay- 
ments, which  in  the  course  of  ten  years  would  pay  in  full  for  the 
rolling-stock,  so  that  the  rolling-stock  would  become  the  property 
of  the  railroad  company  at  the  end  of  that  time.  All  contracts 
relating  to  any  business  of  the  car  trust,  involving  liabilities  for 
the  payment  of  money,  were  to  be  in  writing,  and  made  under  the 
direction  of  the  board  of  managers.  The  original  board  of  man- 
agers was  named  in  the  articles  of  association,  but  the  share- 
holders were  to  have  the  power  to  remove  them  and  to  elect 
others.  At  all  meetings  every  shareholder  was  to  have  one  vote 
for  each  share  of  the  stock  owned  by  him,  and  provision  was 
made  for  the  transfer  of  shares,  and  the  association  was  not  to  be 
dissolved  by  the  death  of  members.  Every  owner  of  one  or  more 
shares  was  to  be  entitled  to  a  proportionate  share  of  the  rentals 
received."  ^ 

§  329.  Vendor  of  Rolling-stock  in  the  Ordinary  Course  of  Business 
ranks  only  as  a  General  Creditor.  —  The  rights  of  one  who,  in  pur- 
suance of  a  contract  of  sale  embracing  no  special  provisions  for 
his  protection,  delivers  possession  of  rolling-stock  to  the  company, 
without  receiving  payment  therefor,  can  assert  no  lien  upon  it, 
either  in  law  or  equity.  In  relation  to  the  company  he  stands  on 
the  same  footing  as  other  unsecured  creditors.^ 

1  Kicker   v.    Amorican   Loan    &   Trust  N.  Y.  435  ;  s.  c.  24  N.  E.   Rep.   695 ;  43 

Co.  (1885),  140  Mass.  346,  347;  s.  c.  5  Am.   &  Eng.   1!.    R.    Cas.    700.     On   the 

N.  E-.  Rep.  284.  Private    Ownersliip    of    Railway    Rolling 

Example   of  car  trust  :  MoGourkey  v.  Stock  in  England,  see  the  brief  treatise  by 

Toledo  &  0,  C.   R.  Co.  (18rt2),  146  U.  S.  Taynton. 

536  ;  K,  c.  13  Sup.  Ct.  Rep.  170.     Another  2  Qoe  v.    Pennock  (1857),  2  Redf.  Am. 

car-trust  agreement  is  set  out  at  length  in  Ry.    Cas.    669  ;    s.  c.  5   Fed.    Cas.    1172, 

the  report  of   Huiniihreys  v.   New  York,  Case  No.  2942  ;  6  Am.  L.  Reg.  27. 
Lake  Erie,  &  Western  R.  Co.  (1890),   121 


§  330.]  ROLLING-STOCK   AND    CAR   TRUSTS.  345 

§  380.  Mortgage  Lien  generally  postponed  to  Rights  reserved  by 
Vendor  until  the  Purchase  Price  is  paid.  —  It  is  well  settled  that  the 
title  of  a  vendor  of  rolling-stock  sold  under  a  contract  which  pro- 
vides that,  although  delivered  to  the  company,  it  is  to  remain  his 
property  until  the  price  is  paid,  will  prevail  against  the  lien 
created  by  the  after-acquired  property  clause  of  a  prior  mortgage.^ 
But  to  take  a  conditional  sale  out  of  Registration  Acts,  it  must  be 
conditional  both  as  to  the  payment  of  the  purchase-money  as  well 
as  the  passing  of  the  title.  An  agreement  by  the  terms  of  which 
the  purchaser  becomes  liable  unconditionally  for  the  purchase 
price,  although  he  may  never  acquire  the  ownership  of  the  prop- 
erty, is  an  evasion  of  such  acts,  as  its  purpose  is  simply  to  retain 
a  secret  lien.^ 

The  rights  of  the  vendor  are  the  same  as  under  a  conditional 
sale,  where,  instead  of  reserving  the  ownership  of  the  rolling-stock, 
he  fixes  a  lien  upon  it  for  the  payment  of  the  price.  Cars  being 
"  loose  property  susceptible  of  separate  ownership  and  separate 
liens,"  any  liens  which  are  binding  upon  a  railroad  company  itself 
are  unaffected  by  a  prior  general  mortgage  given  by  the  company, 
and  are  paramount  thereto.^ 

A  like  preference  for  like  reasons  will  be  given  to  a  lien  de- 
clared by  statute  in  favor  of  creditors  supplying  rolling-stock  to 
railroad  companies.^ 

The  paramount  rights  of  the  vendor  may  be  recognized  either 

1  Fosdick  V.  Schall  (1878),  99  U.  S.  146  U.  S.  536;  s.  c.  13  Sup.  Ct.  Rep.  170, 

235;  s.  c.  7  Rep.  449.  to  have  been  universally  recognized  by  the 

In  this  case  the  court  said  that  such  an  courts, 
agreement   was   undoubtedly   one   which.  The  same  doctrine  doubtless  applies  to 

under  the  Chattel  Mortgage  Act  of  Illinois,  all  agreements  which  are  within  the  terms 

could  not  be  valid  against  "  third  persons  "  of  chattel  mortgage  acts,  whatever  their 

unless  recorded,  but  declared  that  mort-  precise   provisions,    those    acts   being   in- 

gagees  could  not  properly  be  described  as  tended  for  the  protection   of  subsequent 

such.      "They   are,"    said   Chief  Justice  creditors   and   purchasers.    See   Frank   v. 

Waite,   "in   no   sense   purchasers   of  the  Denver  &  Rio  Grande  Ry.  Co.  (1885),  23 

cars.     The  mortgage  attaches  to  the  cars,  Fed.  Rep.  123. 

if  it  attaches  at  all,  because  they  are  after-  ^  Hart  v.  Barney  &   Smith    Mfg.    Co. 

acquired  property  of  the  company  ;  but  as  (1881),  7  Fed.   Rep.  543,  construing  the 

to  that  class  of  property  it  is  well  settled  Kentucky  statute. 

that  the  lien  attaches  subject  to  all  the  ^  United  States  v.  New  Orleans  Railroad 

conditions   with   which  it  is  incumbered  (1870),  12  Wall.  362;  Meyer  v.  Johnston 

when  it  comes  into  the  hands  of  the  mort-  (1879),  64  Ala.  603  ;   s.  c.  4  Am.  &  Eng. 

gagor.     The  mortgagees  take  just  such  an  R.  R.  Cas.  584. 

interest  in  the  property  as  the  mortgagor  *  Newgass   v.    Atlantic   &   D.   R.    Co. 

acquired  —  no  more,  no  less."   The  validity  (Central  Car  Trust  Co.,  Intervener)  (1893), 

of  bona  fide  contracts  of  this  description  56  Fed.  Rep.  676,  construing  the  Virginia 

was  stated,  in  the  recent  case  of  McGourkey  Code,  §  2462. 
0,  Toledo  &  Ohio  Central  R.  Co.  (1892), 


346  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  XIV. 

by  a  return  of  the  rolling-stock  in  specie^  or  by  the  payment  of 
the  price  out  of  the  proceeds  of  the  sale.^ 

§  331.  Rights  of  Persons  lending  Money  to  the  Company  for  the 
Purchase  of  Rolling-stock.  —  The  protection  to  vendors  is  also 
extended  to  persons  who  furnish  the  money  with  which  a  railroad 
company  purchases  rolling-stock.  If  they  reserve  a  lien  on  the 
property  as  security  for  repayment,  they  may  stand  in  the  place 
of  the  seller,  and  have  the  advantage  of  all  remedies  to  which  he 
would  be  entitled  in  the  same  situation.^ 

Directors  of  the  corporation  are  entitled  to  the  benefit  of  this 
rule  where  there  is  a  distinct  understanding  between  them  and 
their  colleagues  that  they  are  to  be  subrogated  to  the  rights  of 
the  vendors  to  secure  reimbursement  for  their  advances,  though, 
aside  from  such  an  understanding,  their  rights  would  be  measured 
by  the  rule  under  which  a  payment  by  a  director  to  secure  the 
property  of  the  corporation  does  not  of  itself  entitle  him  to  con- 
ventional subrogation.^ 

§  332.  Title  of  Lessor  of  Rolling-stock  paramount  to  that  of  Mort- 
gagees. —  The  title  of  one  who  makes  a  bona  fide  contract  for  the 
lease  of  rolling-stock  to  the  company  is  not  divested  by  the  delivery 
of  the  property  to  the  lessee ;  but  rolling-stock,  when  once  placed 
upon  the  road  under  circumstances  which  create  no  lien  in  favor 
of  a  car-trust  association,  cannot  be  brought  within  the  operation 
of  a  lease  subsequently  executed,  which  purports  to  embrace  the 
stock  thus  delivered.^ 

As  against  a  prior  mortgage  of  the  company  containing  an  after- 
acquired  property  clause  the  title  of  a  manufacturer  of  cars  will 
hold  good  under  an  unrecorded  contract  by  which  the  company 
agrees  to  pay  certain  monthly  sums  for  the  "  hire "  of  the  cars, 
and  is  to  have  the  option  of  buying  them  at  a  fixed  price ;  while 
the  'lessor"  is  to  have  the  right,  in  case  of  a  default  in  the 
monthly  payments,  to  rescind  the  contract  and  retake  the  cars.^ 

^  Fosdick  V.   Schall   (1878),  99   U.  S.  brought  out  more  clearly  in  the  opinion  of 

235  ;  s.  c.  7  Rep.  449.  the  lower  court.     See  pp.  530,  531,  of  the 

2  Fosdick  V.  Car  Co.  (1878),  99  U.  S.  report. 

256.  6  Meyer  v.  Car  Co.  (1880),  102  U.  S.  1. 

8  Frank  v.  Denver  &  Rio  Grande  R.  The  court  considered  it  unnecessary  to  de- 
Co.  (1885),  23  Fed.  Rep.  123.  cide  "  wliether  a  lease  of  personal  property 

*  Coe  V.   New  Jersey  Midland  R.  Co.  at  a  specified  rent,  with  an  option  in  the 

(1870),  31  N.  J.  Eij.  105.  lessee  to  buy  for  a  fixed  price,  is  in  effect  a 

''  McOonrkey  v.  Toledo  &  Ohio  Central  conditional  sale."     Tliat    question    would 

R.  Co.  (1892),   14G  U.   S.  536  ;    s.  c.   13  doubtless  have  been  of  paramount  impor- 

Snp.  Ct.  Rep.  170  ;  affirmed  Central  Trust  tance  if  the  adverse  interest  liad  been  that 

Co.  V.  Oliio  Central  R.  fJn.  (1888),  36  P'ed.  of  a  creditor.     See  below. 
Kcp.    520.     The    principle    is,    however, 


§  383.]  ROLLING-STOCK   AND    CAR   TRUSTS.  347 

§  333.  Car-trust  Certificates  in  Effect  Mortgage  Bonds  of  the  Com- 
pany itself.  —  Tiiese  are  inferior  in  point  of  lien  to  an  earlier 
mortgage  on  the  railroad  containing  the  after-acquired  property 
clause.  This  construction  has  been  placed  upon  a  contract  of 
lease  which  provided  that  the  yearly  instalments  to  be  paid  for 
the  use  of  rolling-stock  which  was  to  be  subsequently  manufac- 
tured and  delivered  to  the  company,  and  to  become  its  property 
when  all  the  instalments  during  the  stipulated  period  had  been 
paid,  should  be  evidenced  by  obligations  of  the  company  maturing 
at  different  times,  with  interest  coupons  attached.  The  rolling- 
stock  not  being  in  existence  at  the  time  the  contract  was  made, 
the  transaction  could  not,  it  was  held,  be  regarded  as  a  conditional 
sale ;  while  the  provisions  that,  if  the  annual  payments  were  made 
promptly  for  the  period  specified,  the  property  should  belong  to 
the  railroad  company  without  further  conveyance,  and  that  in 
case  of  default  the  lessor  might  resume  possession  for  the  pur- 
pose of  sale,  showed  that  it  was  not  an  ordinary  bailment  con- 
templating merely  the  use  of  the  equipment  by  the  company.  The 
so-called  "  lease  "  and  the  car-trust  agreements  entered  into  for 
the  purpose  of  carrying  it  out  really  amounted  to  a  contract  for 
the  loan  of  money  to  the  company,  for  which  it  was  to  execute  its 
bonds,  to  be  secured  by  a  mortgage  on  its  rolling-stock,  to  be 
selected  and  designated  at  a  future  day  after  it  had  come  into  the 
possession  of  the  company.^ 

In  an  earlier  case  in  another  court  a  very  similar  ruling  had 
been  made  as  to  the  status  of  persons  supplying  equipment  under 
a  contract  of  this  description,  it  being  held  by  Judge  Hallett  that, 
in  so  far  as  they  have  any  position  in  the  law,  lessors  of  rolling- 

^  Central  Trust  Co.  v.  Ohio  Central  R.  objection  insisted  upon  by  Judge  Jackson, 
Co.  (1888),  36  Fed.  Rep.  520.  This  view  that  if  such  agreements  are  to  be  given 
as  to  the  true  character  of  the  so-called  effect  to,  the  after-acquired  property  clauses 
leases  was  approved  by  the  Supreme  Court  would  become  idle  and  useless  provisions, 
(McGourkey  v.  Toledo  &  Ohio  Central  is  scarcely  conclusive,  when  it  is  conceded 
R.  Co.  (1892),  146  U.  S.  536  ;  s.  c.  13  that  certain  kinds  of  contracts  which  pro- 
Sup.  Ct.  Rep.  170),  which,  however,  relied  duce  that  result  are  enforceable.  Unless, 
mainly  on  the  principle  that,  as  the  car-  therefore,  such  contracts  are  subject  to  ex- 
trust  certificates  were  evidences  of  a  con-  ception,  for  some  reason  apart  from  the 
tract  made  by  the  directors  in  breach  of  fact  that  they  deprive  bondholders  of  their 
their  fiduciary  obligations,  the  transaction  lien  over  the  sulDJect-matter,  it  is  difficult 
was  a  constructive  fraud  upon,  and  there-  to  see  why  they  should  not  be  equall)- 
fore  voidable  by,  the  bondholders  or  valid,  in  whatever  form  they  are  couched, 
tliose  claiming  under  them.  (See  next  That  this  was  the  view  of  the  Supreme 
section.)  Court  may  perhaps  be  inferred  from  the 

Whether   the   case    can    be    sustained  stress  laid  upon  the  constructively  fraudu- 

solely   on   the    grounds    assigned   in   the  lent  character  of  the  transportation.     (See 

lower  court  seems  very  questionable.    The  the  case  next  cited. ) 


348  RAILWAY   BONDS   AND   MORTGAGES,  [CHAP.  XIV. 

stock  are  to  be  regarded  as  mortgagees,  where  neither  they  nor 
any  one  represented  by  them  have  at  any  time  owned  the  stock, 
and  the  so-called  "  lease  "  is  merely  a  contract  for  the  loan  of 
money,  to  be  repaid  by  periodical  instalments  styled  "  rent."  But 
it  was  at  the  same  time  declared  that  the  assumption  of  a  false 
character  by  the  payees  would  not  aifect  their  rights  if  the  equi- 
ties of  the  transaction  were  with  them.^ 

§  334.  Car-trust  Agreements  in  Breach  of  Fiduciary  Obligations 
of  Directors  not  upheld  as  against  Bondholders.  —  The  lien  of  the 
holders  of  car-trust  certificates  will  not  prevail  against  the  lien  of 
an  earlier  mortgage  covering  after-acquired  rolling-stock,  where 
the  transaction  violates  the  well-settled  rule  which  renders  any 
arrangements  by  which  the  directors  of  a  corporation  become  in- 
terested adversely  to  such  corporation  in  contracts  with  it  void- 
able at  the  option  of  parties  prejudiced  by  such  contracts.  If, 
therefore,  the  directors  make  with  themselves,  or  those  holding 
confidential  relations  to  them,  a  contract  for  the  supply  of 
rolling-stock  to  the  company,  which,  though  in  form  a  lease,  is 
in  effect  a  purchase  by  the  company,  with  a  lien  reserved  in  favor 
of  the  holders  of  the  car-trust  certificates,  most,  if  not  all,  of  such 
certificates  being  held  by  the  directors,  the  transaction  will  be 
construed  as  a  constructive  fraud  on  the  mortgagees.  The  device 
of  the  car-trust  certificates  will  in  such  a  case  be  inoperative  either 
to  vest  the  legal  title  in  the  trustee  named  therein,  or  to  prevent 
the  mortgage  attaching  as  a  prior  lien  to  such  rolling-stock 
as  is  delivered  under  the  contract.  The  position  of  the  holders 
of  the  car-trust  certificates  is  not  strengthened  in  such  a  case  by 
the  fact  that  the  lease  provides  that  the  company  may  contract 
for  the  delivery  of  the  stock  directly  with  the  maker,  and  that 
the  stock  shall  be  marked  in  such  a  manner  as  to  show  that  it 
belonged  to  the  car-trust  association.  The  essential  vice  of  such 
a  transaction  does  not  lie  in  any  attempted  concealment  of  the 
actual  facts,  but  inheres  in  the  very  nature  of  the  contract.  The 
purpose  being  unlawful,  an  open  avowal  of  that  purpose  does  not 
make  it  less  unlawful.^ 

§  335.  How  far  Rolling-stock  Contracts  are  effectual  against  Sub- 
sequent Creditors  of  the  Company.  —  At  common  law  a  contract  by 
which  tlio  owner  of  personalty  gives  to  another  party  the  posses- 
sion and  use  thereof  in  consideration  of  the  latter's  paying  certain 

1  Frank  v.  Denver  &  Rio  Grande  R.  Sup.  Ct.  Rep.  170,  Fuller,  C.  J.,  and 
Co.  (188.'>),  23  Fed.  Rf\>.  123.  Brewer,  J.,  ably  dissenting.     For  a  state- 

2  McOoiirkey  t>.  Toledo  &  Ohio  Central  nient  of  the  ruling  in  the  lower  court, 
R.  Co.  (1892),  146  U.  S.  536;   s.  c.  13  see  above. 


§  336.]  ROLLING-STOCK   AND    CAR   TRUSTS.  349 

suras  of  money  at  stated  times,  with  the  understanding  that  the 
title  to  the  property  will  not  pass  till  the  last  of  those  sums  is 
paid,  will  be  upheld  against  the  creditors  of  the  owner  of  the  per- 
sonalty, whether  he  be  called  bailor,  lessor,  or  vendor. ^ 

But  the  practical  working  of  this  principle  has  been  greatly 
modified  by  the  various  chattel  mortgage  acts,  the  effect  of 
which  may  in  many  cases  be  that  a  contract  of  sale  which  is  a 
perfect  })rotection  to  the  vendors,  so  far  as  the  mortgagees  are 
concerned,  may  some  time  be  treated  as  invalid  where  the  rights 
of  creditors  are  in  question.^ 

Where  the  policy  of  the  law  is,  as  in  Illinois,  against  the  main- 
tenance of  secret  liens  which  treat  the  vendor  of  personal  prop- 
erty, who  has  sold  and  delivered  possession  of  it  to  the  purchaser, 
as  the  owner  until  the  payment  of  the  purchase-money,  a  vendor 
of  rolling-stock,  if  he  wishes  to  retain  a  security  for  the  price 
which  will  prevail  against  the  creditors  of  the  company,  must 
comply  with  the  provisions  of  the  Chattel  Mortgage  Act." 

On  the  other  hand,  it  is  held  that  the  title  of  a  vendor  of 
rolling-stock  will  prevail  against  that  of  one  who  purchases  it  at 
an  execution  sale  of  the  company's  property,  where  the  registry 
law,  like  that  of  Missouri,  embraces  only  mortgages  and  deeds  of 
trust  of  personal  property.^ 

§  336.  Name  given  by  the  Parties  to  the  Contract  not  conclusive 
as  to  its  Real  Nature.  —  In  view  of  the  limitations  upon  the  free- 
dom of  contract  under  chattel  mortgage  acts,  the  point  upon 
which  a  case  in  which  the  rights  of  creditors  are  concerned  must 
often  turn  is  the  question  whether  the  contract  of  sale  is  within 
its  provisions.  It  is  well  settled  that  "  the  answer  to  this  ques- 
tion is  not  to  be  found  in  any  name  which  the  parties  may  have 

1  See  the  cases  cited  in  Bennett's  (1877),  4  Dill.  158.  Judge  Dillon,  however, 
edition  of  Benjamin  on  Sales,  Bk.  2,  Chap,  in  view  of  the  decision  in  the  case  last  cited, 
m-  expressed  a  wish  that  the  case  would  be 

2  See,  for  example,the  f;icts  of  Fosdick  taken  to  the  Supreme  Court.  The  correct- 
ly. Schall,  referred  to  ante.  ness  of  his  ruling  does  not  seem  to  have 

3  Hervey  v.  Rhode  Island  Locomotive  been  directly  passed  upon  by  that  court, 
Works  (1876),  93  U.  S.  664.  but  its   reasoning  in   Heryford   v.   Davis 

The  court  said :"  The  policy  of  the  law  (see   below)    shows   very  plainly   that   it 

in  Illinois  will  not  permit  the   owner  of  did   not   regard   a   hona  fide    conditional 

personal  property  to  sell  it,  either  abso-  sale  as  being  within  the  purview  of  the 

lutely  or  conditionally,  and  still  continue  Jlissouri  statute.     That   statute  provides 

in  possession  of  it.     Possession  is  one  of  that  no  chattel  mortgage  "  shall  be  valid 

the  strongest  evidences  of  title  to  this  class  against  any  other  person  than  the  parties 

of    property,    and    cannot    be    rightfully  thereto,  unless  possession  of  the  mortgaged 

separated    from   the    title,    except   in   the  property  shall  be  delivered  to  and  retained 

manner  pointed  out  by  the  statute."  by  the  mortgagee,  or  unless  the  mortgage 

*  Rogers  Locomotive  Works  v.    Lewis  shall  be  recorded  "  in  a  prescribed  manner. 


350  RAILWAY   BONDS    AND   MORTGAGES.  [CHAP.  XIV. 

given  to  the  instrument,  and  not  alone  in  any  particular  provision 
it  contains,  disconnected  from  all  others,  but  in  the  ruling  inten- 
tion of  the  parties,  gathered  from  all  the  language  they  have 
used.^ 

The  operation  of  a  statute  applicable  to  sales  in  which  the 
vendor  reserves  a  lien  upon  the  subject-matter  until  the  purchase 
price  is  fully  paid  cannot  be  evaded  by  giving  the  transaction  the 
form  of  a  lease.  Wherever  such  a  statute  exists,  its  provisions 
must  be  complied  with  in  order  to  validate  what  are  essentially 
conditional  sales ;  otherwise  they  are  liable  to  be  defeated  by 
creditors  of  the  purchaser  who  is  in  possession  of  it,  A  provision 
that  the  title  is  to  pass  to  the  purchaser  when  the  last  of  a  certain 
number  of  periodical  payments  is  discharged,  is  regarded  as 
almost  conclusive  evidence  that  the  transaction  is  a  sale  and  not 
a  lease,  even  though  the  sums  stipulated  to  be  paid  are  termed 
rent. 2 

Similarly  a  contract  in  the  form  of  a  lease  will  be  avoided  as 
against  the  creditors  of  the  so-called  lessee,  where  it  is  in  effect  a 
mortgage,  and  not  recorded  as  such  in  conformity  with  the  stat- 
ute. Since  genuine  contracts  of  lease  or  bailment  for  hire  must 
include,  as  one  of  their  essential  features,  a  stipulation  to  pay  for 
the  use  of  the  thing  hired,  an  instrument  which  not  only  does  not 
provide  for  any  such  payment,  but  strongly  negatives  the  inten- 
tion to  demand  it,  cannot  be  classed  among  such  contracts.  Thus 
where  the  manufacturing  company  takes  promissory  notes  for  the 
entire  selling  price  of  the  property,  and  in  addition  thereto  col- 
laterals to  a  large  amount,  and  those  notes  are  all  to  mature 
within  a  few  months,  the  result  being  that  the  vendors  will,  at 
the  end  of  that  time,  have  in  hand  the  full  price  of  the  cars,  the 
contract  cannot  be  construed  as  a  mere  letting  or  bailment  for 
hire.^ 

1  Heryford  ».  Davis  (1880),  102  TJ.  S.  235.  Mr.  Justice  Bradley,  dissenting,  helel 
235,  per  Strong,  J. ;  s.  p.  Hervey  v.  that  the  contract  was  a  valid  conditional 
Rhode  Island  Locomotive  Works  (1876),  sale.  This  decision  is  certainly  .".Cndissi/ja 
93  U.  S.  664  ;  Fidelity  Insurance,  Trust,  juris,  as  it  virtually  amounts  to  a  ruling 
&  Safe  Deposit  Co.  v.  Shenandoah  Valley  that,  even  under  a  chattel  mortgage  act 
R.  Co.  (1889),  32  West  Va.  244  ;  s.  c.  38  drawn  in  terms  apparently  very  favorable 
Am.  &  Eng.  R.  R.  Cas.  559  ;  9  S.  E.  to  the  validity  of  conditional  sales,  the 
Rep.  185  ;  Central  Trust  Cn.  v.  Ohio  Cen-  vendor  cannot  so  arrange  the  ))ayment  of 
tral  R.  Co.  (1888),  36  Fed.  Rep.  520.  the  instalments  of  the  price  or  the  rent  a3 
Compare  the  cases  cited  above  in  this  to  make  the  i)assing  of  the  title  conditional 
chapter.  on  the  payment  of  the  last  one,  without 

2  Hervoy  V.  Rhode  Island  Locomotive  running  a  serious  risk,  to  say  the  least,  of 
Works  (1876),  03  U.  S.  664,  citing  Murch  finding  himself  postponed  to  creditors, 
V.  Wn;.'ht,  46  111.  487.  The   jiractical  inference   which    may  per- 

8  Hery'ford  v.  Davis  (1880),  102  U.  S.     haps  be  drawn  from  this  and  other  deci- 


§  337.]  ROLLING-STOCK    AND   CAR   TRUSTS.  351 

In  the  case  just  cited  it  was  further  sought  to  sustain  the  pri- 
ority of  the  vendors'  rights  on  the  ground  that  the  transaction 
was  one  contemplating  a  reservation  of  the  ownership  until  the 
price  was  fully  paid.  The  contract  stated  that  the  cars  were  "  to 
remain  the  property  of  the  vendors,  to  be  accounted  for  and  to 
be  redelivered  to  them  when  demanded,  in  default  of  the  pay- 
ment" of  the  aggregate  sum  evidenced  by  the  promissory  notes 
given  by  the  railroad  company.  But  the  court  said  this  stipula- 
tion, when  construed  in  connection  with  the  other  provisions,  was 
plainly  inserted  to  enable  the  manufacturers  to  enforce  payment, 
not  of  any  rent  or  hire,  but  of  the  selling  price  for  which  they 
took  the  notes.  It  was,  in  short,  intended  as  additional  security 
for  the  payment  of  the  company's  debt. 

The  result  of  the  decision  cited  in  this  and  the  preceding 
section  would  seem  to  be  briefly  this:  The  true  nature  of  the 
contract  must  first  be  ascertained  by  a  consideration  of  all  its 
provisions.  If  it  is  construed  to  be  a  sale,  and  the  title  as  well 
as  the  possession  is  found  to  have  vested  in  the  vendee,  and  the 
only  interest  preserved  in  the  property  by  the  vendor  is  a  lien,  the 
transaction  will  probably  be  void  as  against  creditors  under  every 
chattel  mortgage  act.  If  the  title  remains  in  the  vendor,  and  the 
vendee  has  only  the  possession  and  use  of  the  property  until  the 
price  is  fully  paid,  the  question  whether  the  vendor's  riglits  will 
prevail  against  those  of  the  creditors  of  the  vendee  depends 
upon  whether  the  chattel  mortgage  act  which  is  applicable  be- 
longs to  the  same  class  as  that  of  Illinois  or  that  of  Missouri.  In 
the  latter  case  the  contract  will  protect  him,  in  the  former  it 
will  not. 

§  337.  Rights  of  Certificate  Holders  •who  refuse  to  assent  to  a 
Modification  of  a  Car-trust  Lease.  —  These  rights  are  those  secured 
to  them  by  the  original  instrument,  when  the  trustees  in  the 
second  contract  expressly  state  that  they  are  acting  on  behalf  of 
assenting  certificate  holders  only.  Under  such  circumstances  the 
actual  extent  of  the  trustees'  power  to  bind  dissentients  is  imma- 
terial.    The  trustees,  therefore,  are  not  assuming  an  inconsistent 

sions  is  that  the  safest  plan  in  every  case  is  option  to  purchase,  at  the  end  of  a  speci- 

to  bring  the  transaction  under  the  provision  fied   period,    for    a    substantial    and    not 

of    a    chattel   mortgage    act,    unless    the  merely  nominal  sum   of  money  over  and 

legislature  happens  to  enact  some  statute  above  what  he  may  already  have  paid  by 

which  contemplates  the  recording  of  con-  way  of  compensation  for  the  use  of  the 

ditional  sales  of  rolling-stock.     The  only  cars.     On  rights  after  default,  see  O'Hara 

alternative    plan    which    offers   anything  v.  Mobile  &  0.  R.  Co,  (1895),   75  Fed. 

like  equal  security  is  to  draw  the  contract  Kep.  130. 
so  that  the  leseees  or  vendee  may  have  an 


852  RAILWAY  BONDS  AND  MORTGAGES.      [CHAP.  XIV. 

position  when  they  undertake  to  sue  the  company  for  the  rent 
stipulated  in  the  first  lease,  provided  they  act  as  representatives 
of  those  certificate-holders  only  who  have  withheld  their  assent 
to  the  second  contract.  This  result  cannot  be  affected  by  the  fact 
that  the  railroad  company  and  the  assenting  holders  supposed  the 
action  of  the  trustees  to  be  binding  on  the  non-assenting  holders, 
as  that  would  merely  be  an  error  as  to  the  legal  effect  of  a  writ- 
ten instrument.^ 

§  338.  Rights  of  the  Holders  of  Rolling-stock  Securities  -wrhen  the 
Road  has  passed  into  the  Hands  of  a  Receiver.  —  Where  the  pay- 
ments due  under  a  car-trust  lease  have  been  in  default  for  some  time 
previous  to  the  appointment  of  a  receiver,  and  the  lessor,  when  such 
appointment  is  made,  demands  immediate  possession  of  the  cars, 
the  failure  of  the  receiver  to  comply  with  that  demand,  and  his 
continuing  the  use  of  the  cars  for  some  months  afterwards,  do  not 
amount  to  a  conversion  of  the  property  entitling  the  lessor  to 
have  a  lien  declared  upon  the  corpus  of  the  estate  for  the  amount 
due  to  him.  The  receiver  in  such  a  case  does  his  full  duty  in 
relation  to  the  car-trust  property  by  reporting  the  facts  to  the 
court  and  asking  its  direction,  and  he  cannot  surrender  it  Avithout 
the  authority  of  the  court.  Nor  can  the  lessor  assert  that  by 
permitting  the  insolvent  railroad  company  to  remain  in  possession 
of  the  road  after  default  had  occurred  the  bondholders  in  effect 
pledged  the  mortgaged  property  as  security  for  the  rental  in  ad- 
vance of  the  mortgages.  All  that  the  lessor  is  entitled  to  is  that 
the  cars  shall  be  surrendered  in  a  reasonable  time,  and  that  he 
shall  be  paid  a  fair  rental  as  on  a  quantum  meruit  for  the  use  by 
the  receiver.2 

Where  the  lessor  and  mortgagor  companies  are  dominated  by 
the  same  persons,  the  court  will  disregard  the  terms  of  the  lease 
and  award  the  lessor  company  such  reasonable  rent  as  it  could 
obtain  in  the  open  market  for  similar  cars  to  be  used  in  the  same 
manner.^ 

The  periodical  payments  maturing  within  a  reasonable  time 
prior  to  a  receivership  under  a  contract  of  sale  of  rolling-stock, 
whereby  the  title  is  reserved  to  the  vendor  until  all  the  payments 
are  made,  may  properly  be  included  among  the  debts  which  a 

1  Humphreys  v.  New  York,  Lake  Erie,  Fc<L  Rep.  6 ;  s.  c.  8  Ry.  &  Corp.  L.  J. 
&  Western  R.  Co.  (1890),  121  N.  Y.  435  ;     181. 

8.  c.  24  N.  E.  Rep.  695  ;  43  Am.  &  Eng.          »  Thomas   v.  Peoria  &  R.    I.   Rv.   Co. 

R.  R.  Cns.  700.  (Western  Car  Co.,  Intervener),  (1888),  36 

2  Earm<-rs'  Loan  &  Trust  Co.  v.  Fed.  Rep.  808  ;  36  Am.  &  Eng.  R.  R. 
Chicago   &   Atlantic   R.  Co.    (1889),   42  Cas.  381. 


§  338.] 


ROLLING-STOCK    AND    CAR   TRUSTS. 


353 


receiver  will  be  directed  by  the  order  appointing  him  to  discharge 
out  of  the  income  of  the  road.^ 

•But  such  payments  are  not  entitled  to  priority,  as  against  the 
mortgage  debt,  in  the  distribution  of  the  proceeds  of  the  sale.^ 

For  the  purposes  of  this  rule,  it  is  immaterial  whether  the  peri- 
odical payments  are  styled  rentals  or  instalments  of  the  price.^ 

If,  however,  the  receiver  takes  possession  of  and  uses  rolling- 
stock  sold  on  these  terms,  the  sum  which  he  thereby  becomes 
liable  to  pay  is  a  charge  upon  the  corpus  of  the  estate  prior  to  the 
mortgage  lien.* 

After  the  vendor  of  rolling-stock,  who  reserves  the  ownership 
thereof  until  the  purchase  price  is  paid,  has  exhausted  his  special 
remedy  by  reclaiming  the  property  from  the  receiver,  he  stands, 
as  regards  the  proceeds  of  the  foreclosure  sale,  merely  in  the  posi- 


1  Fosdick  V.  Schall  (1878),  99  U.  S. 
235  ;  s.  c.  7  Eep.  449  ;  Sage  v.  Central  R. 
Co.  (1878),  99  U.  S.  334  ;  Frank  v.  Den- 
ver &  Rio  Grande  R.  Co.  (1885),  23  Fed. 
Rep.  123. 

2  Kneeland  v.  American  Loan  &  Trust 
Co.,  136  U.  S.  89  ;  s.  c.  10  Sup.  Ct. 
Rep.  950  ;  43  Am.  &  Eng.  R.  R.  Cas.  519  ; 
Central  Trust  Co.  v.  Toledo,  D.  &  B.  R. 
Co.  (Circuit  Ct.,  Dist.  of  Ind.),  an  unre- 
ported case,  in  which,  as  stated  in  High 
on  Receivers  (2d  ed.),  340,  note  2,  it  was 
ordered  by  Greshani,  J.,  Woods,  J.,  concur- 
ring, that  rentals  of  rolling-stock  held  by 
the  company  under  car-trust  leases  should, 
for  the  period  of  use  by  the  receiver,  be 
paid  as  a  first  lien  out  of  receiver's  income, 
or  out  of  the  proceeds  of  foreclosure  sale 
before  distribution  to  mortgage  bondhold- 
ers, and  that  rentals  for  six  months  prior 
to  the  receivership  should  be  paid  out  of 
the  net  income  of  the  receiver.  See  also 
Mather  Humane  Stock  Trans.  Co.  v. 
Anderson  (1896),  76  t>d.  Rep.  164  ;  East- 
ern &  Midlands  Railway,  65  Law  Times, 
669. 

^  Kneeland  v.  American  Loan  &  Trust 
Co.  (1890),  136  U.  S.  89  ;  s.  c.  10  Sup. 
Ct.  Rep.  950 ;  43  Am.  &  Eng.  R.  R.  Cas. 
519. 

*  Fosdick  V.  Car  Co.  (1878),  99  U.  S. 
256  ;  Myer  v.  Car  Co.  (1880),  102  U.  S. 
1 ;  Kneeland  v.  American  Loan  &  Trust 
Co.  (1890),  136  U.  S.  89;  s.  c.  10  Sup. 
Ct.  Rep.  950  ;  43  Am.  &  Eng.  R.  R.  Cas. 
519  ;  Central  Trust  Co.  v.  Toledo,  D.  &  B. 


R.  Co.  (Circuit  Ct.,  Dist.  of  Ind.),  an  un- 
reported case. 

In  Turner  v.  Indianapolis,  Blooming- 
ton,  &  Western  R.  Co.  (1879),  8  Bias. 
527,  the  court  allowed  the  vendor  of  cer- 
tain locomotives  to  a  railroad  company  to 
bring  an  action  against  the  I'eceiver  for 
rental  and  for  damages  to  them  while  be- 
ing used  by  him,  and  held  that  the 
amount  found  to  be  due  was  payable  out 
of  the  funds  in  the  receiver's  hands. 
But  the  report  does  not  show  whether 
those  "  funds  "  were  earnings  or  the  pro- 
ceeds of  the  sale. 

The  "working  expenses"  which  a  re- 
ceiver appointed  at  the  instance  of  a  judg- 
ment creditor  under  the  English  act  of 
1867  is  required  to  pay,  include,  as 
against  the  debenture-holders,  the  instal- 
ments due  on  an  agreement  for  the  hire 
of  rolling-stock,  which  is  to  become  the 
property  of  the  company  upon  the  payment 
of  all  the  instalments  of  rent.  In  re 
Eastern  &  Midlands  Railway  Co.  (1890), 
L.  R.  45  Ch.  Div.  367.  See  also,  in  .same 
matter,  65  L.  T.  Rep.  668;  66  L.  T.  Rep. 
N.  S.  153 ;  8  Ry.  &  Corp.  L.  J.  384  ;  Re 
Cornwall  Minerals  Ry.  Co.,  48  L.  T.  N.  S. 
41.  The  former  case  holds  that  the  ex- 
pression "working  expenses"  covers  in- 
stalments in  arrear  as  well  as  the  current 
ones.  For  a  transaction  which  was  held 
not  to  be  a  borrowing  of  money,  but  a 
hona  fide  sale  and  hiring  of  rolling-stock, 
and  valid,  see  Yorkshire  Tiy.  Wagon  Co. 
V.  Maclure  (1882),  21  Ch.  Div.  309. 


23 


3<j4  railway    bonds    and    mortgages.  [chap.  XIV. 

tion  of  a  general  creditor,  and  therefore  cannot  claim  any  special 
preference  in  the  distribution  of  the  fund,  unless  it  can  be  shown 
that  the  current  income  of  the  receivership  or  of  the  company- 
has  been  employed  in  a  manner  which  has  deprived  him  of  his 
equitable  rights. ^ 

§  339.  Can  the  Court  authorize  a  Receiver  to  create  a  Car  Trust.  — 
The  essentially  temporary  nature  of  the  control  exercised  by  the 
court  over  the  corporate  property  during  a  receivership  renders  it 
very  doubtful  whether  the  equipment  of  a  road  through  a  car-trust 
agreement  which  it  will  require  a  considerable  period  to  carry 
out  is  within  the  proper  scope  of  a  chancellor's  authority.  But 
such  an  agreement  should,  at  all  events,  not  be  authorized  where 
the  ground  on  which  the  receiver  supports  his  application  is  that 
the  earnings  will,  as  a  result  of  the  car  trust,  be  set  free  for  the 
payment  of  the  bonded  interest.  It  is  better  to  allow  the  interest 
to  go  unpaid  rather  than  to  pay  it  by  means  of  borrowed  money, 
and  so  mislead  creditors  and  others  respecting  the  actual  condi- 
tion of  the  road.2 

1  Fosdick  V.   Schall  (1878),   99  U.  S.  not  in  reality  for  the  use  and  repair  of  the 

235 ;    s.  c.    7  Rep.    449 ;    Huidekoper   v.  engines,    but    on   account    of    what   was 

Hinckley   Locomotive  Works  (1878),   99  agreed  to  be  paid  for  the  purchase,   and 

U.  S.  258.  reversed  the  decree  of  the  Circuit  Court 

In  the  latter  case  locomotives,  after  be-  which  allowed   it  to   be  paid  out  of  the 

ing  used  for  some  time,  were  returned  in  proceeds   of    the    sale    in    the    receiver's 

an    injured   condition,  and  then   sold   to  hands. 

other  companies,   leaving  a   certain   sum  ^  Taylor  v.  Philadelphia  &  Reading  R. 

due  to  the  vendors.     The  Supreme  Court  Co.  (1881),  9  Fed.  Rep.  1  ;  s.  c.  3  Am.  & 

held  that  the  sum  thus  found  due   was  Eng.  R.  R.  Cas.  177. 


340.] 


PREVENTIVE   REMEDIES. 


355 


CHAPTER  XV. 

PREVENTIVE   REMEDIES,  OR   REMEDIES   OF   BONDHOLDERS  FOR   INTER- 
FERENCE  WITH   THE   MORTGAGED    PROPERTY. 


§  340.  Injunctions  against  Acts  of  the 
Mortgagor  impairing  the  Se- 
curity. 

341.  Injunctions  against  Acts  of  Third 

Persons  which  impair  the  Se- 
curity, generally. 

342.  Injunctions    against    Execution 

Sales  of  Personalty,  generally. 

343.  When   Equity  will  interfere   to 

protect  the  Lien  of  the  After- 
ac(iuired  Property  Clause. 

344.  Inadequacy  of  Legal  Remedy  as 

a  Ground  for  Interference  of 
Equity. 

345.  Public  Interest  in  Operation   of 

Road  a  Ground  for  Interference 
of  Equity. 

346.  Injunction   to  restrain  Levy  on 

Net  Revenues  specifically  ap- 
propriated to  Payment  of  State 
Loan. 


§  347.    Injunctions     against     Sales    of 
Realty. 

348.  Injunctions    against    Execution 

Sales  where  Trustees  have 
gone  into  Possession. 

349.  Injunctions  to  prevent  a  Bond- 

holder from  obtaining  an  In- 
equitable Preference  over  his 
Co-bondholders. 

350.  Execution    Sale   when   enjoined 

at  the  Instance  of  the  Mort- 
gagor, 

351.  Execution  issuing  out  of  State 

Court  cannot  be  enjoined  by 
Federal  Court. 

352.  Injunctions  in  Aid  of  Holders  of 

Income  Bonds. 

353.  Injunctions  against  Enforcement 

of  a  Railroad  Commission 
Law. 


§  340.  Injunctions  against  Acts  of  the  Mortgagor  impairing  the 
Security.  —  It  is  familiar  learning  that  equity  will  interfere  at  the 
instance  of  a  mortgagee  to  prevent  waste  by  the  mortgagor  in 
possession.! 

Thus  an  injunction  will  be  granted  against  the  company,  at  the 
suit  of  a  bondholder,  to  restrain  it  from  taking  up  any  part  of 
the  railroad  covered  by  the  mortgage.  The  company  have  no 
right  to  touch  it  except  for  proper  repairs  and  lawful  use ;  and  it 
is  no  defence  to  a  suit  for  such  injunction  that  the  security  of  the 
plaintiff  will  not  be  materially  impaired  by  the  proposed  action  of 
the  defendants,  or  that  the  portion  of  the  road  they  are  taking  up 
is  not  self-sustaining,  but  an  expense  to  other  roads  belonging  to 


^  High  on  Injunctions,  §  478. 


356  RAILWAY   BONDS  AND   MORTGAGES.  [CHAP.  XV. 

them,  or  that  the  defendants  are  willing  to  give  security  for  the 
moneys  received  from  the  sale  of  the  materials  of  that  part  of  the 
road  which  is  being  taken  up.^ 

§  341.  Injunctions  against  Acts  of  Third  Persons  impairing  the 
Security.  — Any  act  of  a  third  person  which  will  impair  the  secu- 
rity of  the  bondholders  by  diminishing  the  value  of  the  mortgaged 
property  presents  an  occasion  for  the  intervention  of  a  court  of 
equity,  provided  the  ordinary  condition  precedent  to  such  inter- 
vention exists,  viz.,  that  the  legal  remedy  is  inadequate. 

Thus  a  bondholder  secured  by  a  mortgage  on  the  lands  of  a 
corporation  has  an  interest  therein  equally  with  stockholders,  and 
may,  like  the  latter,  maintain  a  suit  to  prevent  another  corporation 
from  obtaining  the  same  lands  by  the  wrongful  use  of  the  name  of 
the  corporation  the  bonds  of  which  he  holds.  But  such  a  suit  can 
be  maintained  only  upon  an  allegation  that  the  corporation  has 
refused  to  take  proper  steps  to  protect  the  rights  of  the  peti- 
tioner.2  So  also  a  receiver  has  been  granted  an  ex  parte  injunc- 
tion to  restrain  another  company  from  building  approaches  to  a 
tunnel  over  the  mortgaged  property,  to  the  prejudice  of  the  bond- 
holders, where  the  right  to  do  so  was  claimed  under  an  agreement 
made  after  the  execution  of  the  mortgage.  But  it  was  held  to 
be  improper  to  determine  the  question  whether  the  license  thus 
granted  was  subordinate  to  the  rights  of  the  mortgagees,  without 
making  the  second  company  a  party  to  the  proceedings.  The 
temporary  injunction  was,  therefore,  modified  so  as  to  allow 
the  second  company  to  proceed  with  the  construction  of  the 
approaches,  upon  condition  that  it  should  pay  for  all  the  altera- 
tions in  the  petitioner's  track,  where  rendered  necessary  by  the 
work  to  be  done,  and  also  give  a  bond  to  pay  for  all  the  other 
damage  inflicted  in  case  the  result  of  the  proceedings  was  un- 
favorable to  it.2 

§  ?A1.  Injunctions  against  Execution  Sales  of  Personal  Property 
generally.  —  The  settled  rule  is  that  "  until  the  mortgage  is  en- 
forced by  entry  or  judicial  claim  the  personal  property  of  the 
railroad  company  is  subject  to  its  disposal  in  the  ordinary  course 

1  Watt    V.    Hestonville,     Mantua,    &  140  (1893);   Watt  v.  Senecal,  4  Q.  L.  R. 

Fairmount   Passenger  Ry.   Co.   (1867),   1  76  ;  1  L.  N.  98  ;  Morrison  v.  G.  T.  Ry. 

Brewst.    (Pa.)    418;    s.   c.    6    Phil.    386.  Co.,  5  L.  C.  J.  313  ;   Legg  v.  Matthieson,  2 

That  waste  by  the  mortgagor  may  also  bo  Giff.  71  ;  Wild  v.  Mid.  Hants  Ily.  Co.,  16 

a   ground    for   a])pointing  a  receiver,   see  W.  K.  409. 

post.    Chap.    XXIX.      For    iniseellaneous  ^  Newby   v.    Oregon    Central    R.    Co. 

cases  on  tlie  remc<lies  of  bondholders  for  (1870),  1  Savvy.  64. 

protection  of  the  property  mortgaged  see  ••  Coe  v.  New  Jersey  Midland  R.  Co. 

the  following  cases :  25  Nova  Scotia  R.  (1877),  28  N.  J.  Eq.  27. 


§  343.]  PREVENTIVE   REMEDIES.  357 

of  business,  and  as  such  is  liable  to  be  seized  and  taken  on  exe- 
cution for  its  debts."  ^ 

•  Under  Minnesota  Gen.  Stat.  1878,  ch.  34,  §§  72,  73,  the  rolling- 
stock  and  property  of  a  railroad  mortgaged  under  these  sections 
is  an  entirety,  and  cannot  be  levied  on  separately,  and  an  execu- 
tion sale  will  be  enjoined  at  the  instance  of  the  mortgagee.^ 

Under  Texas  Const.,  art.  10,  §  4,  providing  that  rolling-stock 
shall  be  personal  property,  and  that  all  of  the  property  of  a  rail- 
road shall  be  subject  to  execution,  and  Texas  Rev.  Stat.,  art.  2287, 
providing  that  a  levy  shall  be  first  made  on  personal  property 
where  it  is  delivered  into  possession  of  an  officer,  the  fact  that  a 
levy  on  a  box-car  was  not  made  before  a  levy  upon  the  realty  will 
not  be  ground  for  an  injunction  where  possession  was  not  deliv- 
ered as  required  by  the  statute.^ 

In  England,  before  the  act  of  1867  was  passed,  a  judgment  cred- 
itor could  issue  his  fi.  fa.  and  seize  all  the  rolling-stock  and  all 
other  chattels  of  the  company.  As  this  placed  it  in  the  power  of 
such  a  creditor  to  strangle  the  whole  undertaking.  Parliament 
interfered  and  limited  his  remedy  to  a  receivership.* 

A  dock  company  authorized  by  the  act  incorporating  it  to  build 
a  railway  is  entitled  to  the  protection  given  by  the  act  of  1867.^ 

§  343.  When  Equity  ■wrill  interfere  to  protect  the  Lien  of  an  After- 
acquired  Property  Clause.  —  In  practice  tlie  effect  of  the  rule  just 
stated  is  considerably  modified  by  the  fact  that  railroad  personalty 
is  almost  invariably  subject  to  the  lien  of  an  after-acquired  clause. 
Tliat  this  lien  must  be  allowed  priority  over  a  subsequent  judg- 
ment follows  from  the  nature  of  the  contract  creating  it.  (See 
Chap.  X.,  ante.^  That  a  court  of  equity  will  always  interfere 
when  the  result  of  an  execution  sale  will  be  to  render  an  already 
inadequate  security  still  more  inadequate,  or  change  an  adequate 
security  into  an  inadequate  one,  also  follows  from  the  general 
principle  that  an  irreparable  injury  to  property  rights  will  be  pre- 
vented as  a  matter  of  course  by  injunction.  So  far  the  authorities 
are  quite  harmonious.'' 

1  Union  Trust  Co.  v.  Morrison  (1888),  Eastern  &  Midland  Ry,  Co.  (1890),  L. 
125  U.  S.  591  ;  s.  c.  8  Sup.  Ct.  Rep.  R.  45  Ch.  Div.  367  ;  s.  c.  8  Ry.  &  Corp. 
1004  ;  3.3  Am.  &  Eng.  R.  R.  Cas.  33.  L.  J.  384. 

2  Central  Trust  Co.  v.  Moran  (1894),  6  Great  Northern  Ry.  Co.  v.  Tabour- 
56  Minn.  188  ;  s.  c.  57  N.  W.  Rep.  471  ;  den,  L.  R.  13  Q.  B.  D.  320,  where  an 
29  Law  Rep.  Ann.  212.  execution  sale  of  a  hydraulic  lift  used  by 

^  Texas  &  Mexican  Ry.  Co.  v.  Wright  the  company  was  enjoined. 
(Tex.    Sup.   Ct.,    1895),    31    S.   W.    Rep.  6  Coe  j,    Columbus,   Piqua,  &  Ind.  R. 

613.  Co.  (1859),  10  Ohio  St.  372;  Coe  v.  Pea- 

*  Sec  the   opinion   of  Kay,   J.,   In  re  cock   (1863),   14   Ohio  St.  190  ;  Lane  v. 


358  RAILWAY    BONDS    AND    MORTGAGES.  [CHAP.  XV. 

Upon  the  ground  of  the  resulting  inadequacy  of  the  security, 
the  court  will  enjoin  an  execution  sale  by  a  creditor  whose  claims 
come  under  the  head  of  "  running  expenses,"  even  though  the 
mortgage  contains  an  express  reservation  of  so  much  of  the  in- 
come as  may  be  necessary  to  pay  for  those  expenses.  The  proper 
remedy  of  such  a  creditor  is,  in  equity,  to  charge  the  earnings  of 
the  company  as  a  fund,  and  to  subject  so  much  thereof  as  may  be 
necessary  to  the  payment  of  the  judgment  not  to  remove  and 
sell  by  execution  disconnected  portions  of  the  road,  and  thus 
deprive  the  mortgagee  of  his  security.^ 

But  a  somewhat  embarrassing  divergence  of  view  is  disclosed 
by  the  cases  in  regard  to  the  further  question,  whether  the 
inadequacy  of  security  resulting  from  a  sale  on  execution  is 
the  sole  ground  on  which  an  injunction  to  restrain  it  will  be 
granted. 

In  some  jurisdictions  it  would  appear  that,  unless  some  special 
equity  is  alleged,  the  bondholder  will  not  be  granted  an  injunction 
even  for  the  temporary  purpose  of  ascertaining  whether  the  case 
is  a  proper  one  for  interposition.  In  other  words,  a  judgment 
creditor  is  allowed  to  act  on  the  defensive  all  through  the  proceed- 
ings, and  compel  the  bondholders  to  show  affirmatively  that  there 
is  some  reason  besides  the  mere  existence  of  the  lien  which  ren- 
ders it  inequitable  to  permit  the  judgment  to  be  enforced.  This 
is  the  doctrine  in  Ohio,  where  at  any  stage  of  the  proceedings 
the  one  essential  condition  precedent  to  obtaining  equitable 
relief  against  the  enforcement  of  a  judgment  is  to  show  that 
the  mortgaged  property  will  be  rendered  by  the  execution  sale 
an  inadequate  security  for  the  mortgage  debt.  That  the  constant 
and  uninterrupted  use  of  the  property  by  the  company  is  indis- 

Baugliman  (1867),  17  Ohio  St.  642  ;  Lud-  he  was  ultimately  obliged  to  pay  on  liis 

low  I'.   Hunl  (1857),   1  Dis.   (Ohio)  552.  bond. 

In  Union  Trust  Co.  v.  Morrison  (1888),         In  Brady  u.  State  (1866),  26  Md.  290, 

125  IJ.  S.  591  ;  s.  c.  8  Sup.  Ct.  Kep.  1004  ;  a  part  of  the  relief  asked  for  in  a  petition 

33  Am.  &  Eng.  R.  R.  Cas.  33,  the  opinion  for  an  injunction  against  an  attachment 

of  the  court  that  the  serious  dislocation  of  was  that  the  sale  of  certain  specific  articles 

the  business  of  the  company  which  must  of  personal  property  subject  to  a  statutory 

result  from  a  seizure  of  rolling-stock,  and  mortgage  shouKl  be  restrained,  inasmuch 

its  consequent  separation  from  the  corpus  as  they  were  necessary  to  keep  the  canal 

of  the  estate,  was  a   sufficient  reason  for  subject  to  the  mortgage  in  proper  repair, 

giving   a   person    who    prevented   such   a  Under  the  circumstances  disclosed  in  the 

catastrophe   by   becoming    surety   on    an  record  the  court  did  not  tliink  it  necessary 

injunction  bond,  in   a  suit   filed  by   the  to  express  any  formal  opinion,  but  thought 

conij)any  to  restrain  the  levy,  a  preference  that  the  facts  showed  a  case  in  which  an 

over  tlic  mortgagexis,  in  the  distribution  of  injunction  would  l)e  proper. 
the  proceeds  of  a  subsecpient  foreclosure  ^  I>ane  v.   Baughman  (1867),  17  Ohio 

sale  of  the  estate,  for  the  amount  which  St.  642. 


§  343.] 


PREVENTIVE  REMEDIES. 


359 


pen  sable  to  enable  it  to  earn  money  with  which  to  pay  interest 
on  the  bonds  is  not  a  circumstance  which  will  raise  a  superior 
equity  in  favor  of  the  bondholders.^ 

A  similar  view  has  been  taken  by  a  federal  judge  who  denied 
the  petition  of  a  trustee  for  an  injunction  against  an  execution 
sale  of  certain  portions  of  the  property  of  a  railroad  company, 
taking  the  broad  ground  that  the  sale  would  be  made  subject 
to  any  prior  rights  of  the  bondholders,  and  that  he  could  not 
assent  to  the  theory  on  which  the  bill  was  framed ;  viz.,  that 
none  of  the  obligations  of  the  corporation,  even  though  judicially 
determined,  are  enforceable  against  its  property,  where  there  is 
a  prior  mortgage  covering  such  property .^ 

In  Illinois  also  it  would  appear  that  a  court  of  equity,  when 
asked  to  restrain  an  execution  sale  of  railroad  personalty,  requires 
some  special  ground  to  be  shown  for  an  injunction  besides  the 
mere  fact  that  it  is  subject  to  a  mortgage.  Where  a  bill  was 
filed  on  the  theory  that  rails,  bridge  timber,  and  wood  were  not 
subject  to  levy,  it  was  held  that  no  injunction  should  have  been 
issued  to  restrain  the  sale  of  the  wood.  The  other  two  species 
of  property  were  protected  as  being  fixtures.^ 


1  Coe  V.  Knox  County  Bank  (1859),  10 
Ohio  St.  412.  In  Coe  v.  Peacock,  14  Ohio 
St.  187  (-1862),  the  trustee  undertook  to 
replevy  the  property  after  the  sale.  It  was 
held  that,  as  the  mortgage  gave  him  no 
right  "  to  take  from  the  corporation  por- 
tions of  the  property  mortgaged,  except 
when  exercising  a  bona  fide  attempt  to 
possess  himself  of  the  whole  work,  he  stood 
upon  no  higher  ground  in  this  respect  than 
an  officer  who  had  legally  levied  an  execu- 
tion on  the  property,  and  thereby  succeeded 
to  all  the  interests  which  the  corporation 
had,  and  that  in  no  event  could  he  be 
permitted  to  use  the  power,  either  with  or 
without  legal  process,  for  the  purpose  of 
restoiing  to  the  corporation  the  possession 
and  use  of  the  property  which  had  been 
taken  from  it  "(by  the  levy).  The  replevy, 
therefore,  was  wrongful,  but  as  it  appeared 
that  the  lien  very  far  exceeded  the  entire 
value  of  the  property  included  in  the  mort- 
gages, the  defendant  in  the  replevin  suit 
was  allowed  to  recover  only  nominal  dam- 
ages. Under  such  circumstances  the  levy 
bound  no  substantial  interest,  and  the 
defendants  lost  substantially  nothing  in 
losing  the  possession  of  the  property. 

2  Eells  V.  Johann  (1886),  27  Fed.  Rep. 


327.  The  learned  judge  does  not  refer  to 
any  of  the  earlier  authorities  on  the  subject, 
which  are  cited  in  the  present  section,  and 
the  case  seems  to  have  been  decided  without 
much  consideration.  It  is  quite  possible 
to  agree  fully  with  the  propositions  on 
which  the  opinion  was  based,  and  yet 
dissent  from  the  conclusion  drawn  from 
them,  unless  it  is  intended  merely  as  a 
ruling  that  on  the  pleadings  submitted 
the  relief  asked  for  could  not  be  granted. 
Possibly  this  is  all  that  the  case  is  really 
meant  to  decide,  though  the  report  does 
not  state  what  the  precise  allegations  of 
the  bill  were.  If  its  contents  were  at  all 
similar  to  those  of  the  bill  in  Pennock  v. 
Coe,  infra,  it  is  evident  that  the  case  is  in 
conflict  with  the  doctrine  adopted  by  the 
Supreme  Court.  The  questions  raised  by 
the  learned  judge,  however,  were  quite 
unnecessary,  as  the  execution  had  issued 
out  of  a  state  court,  and  in  such  a  case  a 
federal  court  is  powerless  to  act.  (See 
post.) 

3  Fahs  V.  Roberts  (1870),  54  111.  192. 
The  report  is  too  meagre  to  show  whether 
this  case  is  not  open  to  the  same  objection 
as  the  one  last  cited. 


360  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  XV. 

Other  courts  have  shown  much  greater  readiness  in  interfering 
for  the  protection  of  the  bondholders,  and  we  think  that  a  reason- 
able inference  from  the  authorities  cited  below  is,  that  the  mere 
fact  of  the  property  levied  upon  being  subject  to  the  lien  of  the 
after-acquired  property  clause  will  warrant  a  court  of  equity  in 
issuing  an  injunction  to  stay  the  sale,  the  question  whether  the 
injunction  shall  be  made  perpetual  being  left  to  be  decided  by 
the  facts  disclosed.  Several  very  weighty  reasons,  as  will  be 
seen,  may  be  given  for  at  least  a  temporary  assumption  of  exclu- 
sive control  of  the  proceedings  by  a  court  of  equity. 

One  of  the  grounds  upon  which  the  Supreme  Court  of  the 
United  States,  in  the  leading  case  of  Pennock  v.  Coe,^  upheld 
the  issuance  of  an  injunction  restraining  a  judgment  creditor 
from  levying  on  certain  rolling-stock  subject  to  the  lien  of  an 
after-acquired  property  clause,  was  that  the  bondholders  presented 
the  superior  equity  to  have  the  property  in  question  applied  to  the 
discharge  of  the  bonds. 

The  remedy  suggested,  in  case  the  property  was  more  than 
sufficient  to  pay  the  demands  of  the  bondholders,  was,  not  to 
allow  the  execution  creditor  to  sell  the  property  covered  by  the 
mortgage,  but  to  compel  the  prior  incumbrances  to  satisfy  the 
execution,  or,  on  a  refusal,  the  mortgage  having  become  forfeited, 
compel  foreclosure  and  satisfaction  of  the  bond  debt,  so  as  to 
enable  the  judgment  execution  creditor  to  reach  the  surplus,  or 
upon  any  unreasonable  resistance  of  the  claim  of  the  execution 
creditor,  or  inequitable  interposition  for  delay,  and  to  hinder  and 
defeat  the  execution,  permit  a  sale  of  the  rolling-stock  sufficient 
to  satisfy  it.  So  in  Kentucky  it  has  been  held  that  a  party 
having  an  equitable  lien  on  railroad  property  by  virtue  of  the 
after-acquired  clause  of  a  mortgage  may,  if  such  property  is 
sold  on  execution  by  a  third  person,  apply  to  a  court  of  equity 
for  a  redelivery  thereof,  or  for  an  order  restraining  its  removal, 
and,  if  the  sale  has  not  yet  taken  place,  procure  an  injunction  to 
stay  it.^ 

1  23  How.  117  (1859).  The  judgment  complained  of  (in  this  case  an  actual  sale) 
creditor  in  this  case  was  a  holder  of  Vjonds  was  not  only  in  violation  of  the  plain- 
secured  by  a  junior  mortgage,  and  the  tiff's  right ;  (2)  that  it  was  of  a  character 
injunetion  was  asked  for  by  the  trustees  of  that  might  produce  irreparable  injury  to 
the  first  mortgage.  But  from  the  present  the  plaintiff,  and  great  inconvenience  to 
point  of  view  it  is  clearly  quite  immaterial  the  public.  The  jurisdictional  {lowers  of 
that  the  execution  was  to  satisfy  a  secured  the  court  were  placed  upon  the  ground 
and  not  an  unsecured  debt.  that,    "as   the   mortgagee    had    only    an 

2  Phillii)s  V.  Winslow  (1857),  18  B.  equitable  right  to  the  property,  he  had  a 
Men.  (Ky.)  431.  The  court  placed  its  clear  right  to  apply  to  a  court  of  equity  for 
decision  on  two  grounds  :  (1)  that  the  act  relief." 


§  343.]  PREVENTIVE   REMEDIES.  361 

So  also  it  has  been  ruled  in  Pennsylvania  that  the  rolling- 
stock  and  equipments  of  a  railroad  cannot  be  seized  in  execution 
after  the  company  has  become  insolvent,  or  has  mortgaged  such 
rolling-stock  and  equipments,  the  equity  which  in  such  a  case 
will  restrain  the  sale,  springing  out  of  the  insolvency,  or  the 
trusts  created  by  the  mortgage.^ 

So  also  in  Iowa  the  rights  of  the  trustee  to  restrain  an  attachment 
or  execution  against  the  earnings  of  a  railroad  was  placed  upon 
the  ground  that  they  were  among  the  property  expressly  pledged,^ 

These  four  cases  receive  a  negative  support  from  a  Maine  case, 
where  the  court  denied  an  injunction,  on  the  ground  that  the 
consent  of  a  mortgagee  that  a  railroad  may  use  and  dispose  of 
articles  like  fuel  for  its  own  benefit,  and  the  use  of  such  articles 
in  pursuance  of  that  consent,  are  acts  tantamount  to  a  waiver  of 
the  lien  of  the  mortgage,  and  therefore  constitute  a  sufficient 
reason  for  the  refusal  of  a  court  of  equity  to  interfere  for  the 
protection  of  the  lienors'  rights.^ 

Possibly  it  may  be  said  that  in  Maryland  also  the  same  view 
prevails."* 

It  is  also  deserving  of  notice  that  the  ground  on  which  general 
creditors  were  allowed,  prior  to  the  English  Railway  Act  of  1867, 
to  levy  on  the  property  of  a  company  was  that  the  bondholders  had 
no  specific  lien  on  the  property  of  the  company  under  the  forty- 
fourth  section  of  the  Companies  Clauses  Act,  providing  to  be  paid 
out  of  the  "  tolls,  property,  and  effects  "  of  the  company.^ 

Plainly,  therefore,  if  they  had  been  held  to  have  such  as  bond- 
holders in  this  country  have,  an  execution  sale  would  have  been 
illegal,  and  would  presumably  have  been  restrained  as  a  matter  of 
course,  as  in  the  cases  cited  above. 

1  Londenslager  v.  Benton  (1861),  4  the  pertinency  of  the  authority  in  regard 
Phil.  382.  In  this  case,  as  there  was  a  to  the  subject  under  discussion.  As  to  the 
doubt  about  the  power  of  the  company  to  rights  of  the  lienor  where  the  earnings  are 
mortgage,  the  court,  while  refusing  to  de-  specifically  appropriated  to  certain  pur- 
cide  that  question  on  a  motion  for  a  special  poses,  see  post. 

injunction,    enjoined    the    creditors    and  8  cjty  gf  B^th  y.  Miller  (ISB.')),  53  Me. 

sheriff  from  selling  the  property  covered  308. 

by  the  mortgage,  but  directed  that  the  lien  *  See  Brady  v.  State  (1866),    26  Md. 

o[  the  Ji.  fas.  should  continue  till  further  290;  Brady  v.   Johnson   (1892),   75   Md. 

orders.      As  to  the  special  case  in  which  445  ;  s.  c.  26  Atl.  Rep.  49,  where,  however, 

the  judgment  creditor  is  one  of  the  bond-  the  fact  that  the  rights  of  the  parties  were 

holders,  see  below.  created  by  legislation  having  some  peculiar 

2  Dunham  v.  Isett  (1863),  15  Iowa,  features  may,  to  some  extent,  have  influ- 
284.     Other  cases  hold  that  such  a  pledge  enced  the  courts. 

does  not  change  the  general  rule    that  a  ^  Russell   v.    East   Anglican   Ry.    Co. 

mortgagor  is  entitled  to  the  income  of  the  (1850),  3  Mac.  &  G.  124.     See  note  at  end 

mortgaged  property  as  long  as  he  remains  of  chapter, 
in  possession.   But  this  fact  does  not  affect 


362  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  XV, 

The  difference  of  opinion  disclosed  by  the  above  summary  is 
perhaps  due,  in  some  degree,  to  a  difference  of  opinion  as  to  the 
precise  nature  of  a  trust  deed.  The  attitude  of  the  courts  which 
decline  to  interfere  with  an  execution  sale,  unless  it  is  affirma- 
tively shown  that  impairment  of  the  security  will  result,  is 
intelligible  if  the  deed  merely  creates  a  lien,  for  on  technical 
grounds,  at  least,  there  is  then  no  reason  why  the  mere  existence 
of  this,  any  more  than  other  liens,  should  preclude  an  execution 
sale.  The  maxim  caveat  emptor  being  applicable,  the  property 
remains  burdened  with  the  lien  after  as  before  the  transfer. 
On  the  other  hand,  if,  as  seems  to  be  most  in  accordance  with 
principle,  and  perhaps  with  authority,^  a  conveyance  to  trustees 
which  leaves  nothing  but  the  equity  of  redemption  in  the  grantor, 
it  is  difficult  to  see  how  a  sale  of  the  property  itself  can  be 
proper  except  through  equitable  proceedings.  Even  where  stat- 
utes have  made  such  an  interest  subject  to  levy,  the  sale  will 
not  deprive  tiie  corporation  of  the  use  of  the  property  ;  for  if 
the  words  of  the  trust  deed  are  to  have  due  force,  it  can  only 
be  deprived  of  such  use  by  proceedings  taken  upon  breach  of  one 
or  other  of  the  conditions  of  that  instrument.  In  an  early  Indiana 
case,  however,  it  was  held  that  the  sheriff  would  not  be  enjoined 
from  selling  the  company's  equity  of  redemption  in  personalty 
covered  by  an  "  after-acquired  property  "  clause,  but  that  the  pur- 
chaser Avould  not  be  allowed  to  take  possession  of  the  property 
until  he  had  complied  with  the  conditions  of  the  mortgage.^ 

§  344.  Inadequacy  of  Legal  Remedy  as  a  Ground  for  Interference  of 
Equity. — A  consideration  not  emphasized  very  stronglv  in  the 
cases  cited  in  the  latter  part  of  the  preceding  section,  but  ap- 
parently sufficient  of  itself  to  turn  the  scale  in  favor  of  the  doctrine 
which  they  announce,  is  that,  under  the  peculiar  circumstances 

1  In  Commonwealth  v.  Susquehanna  &  its  effect  on  the  legal  title,  it  must  be  con- 
Delaware  Kiver  R.  Co.  (1888),  122  Pa.  St.  sidered  as  the  equivalent  of  a  conimou-law 
306  ;  s.  c.  15  Atl.  Kep.  448  ;  36  Am.  &  mortgage. 

Eng.  R.  E.  Cas.  269,  the  court  said,  in  tlie  2  Coe  v.  McBrown  (1864),  22  Ind.  252. 

course  of  its  opinion  :  "  If  the  title  (to  the  The    trial    judge,    whose   judgment    was 

corporate  property)  had  been  pledged   or  affirmed  without  comment  in    that   ease, 

conveyed  to  trustees  before  the  seizure  (on  cites  Coe  v.  Pennock,  supra,  but  seems  to 

execution),  the  defendant  corporation  has  have  assumed  that  the  effect  of  the  statute 

only  an  equity  of  re<lemption  in  the  prop-  making  the  equity  of  redemj)tion  a  leviable 

erty  mortgaged  or  conveyed."     The  conse-  interest  was  to  do  away  with  the  special 

quence  here  predicated  of  the  execution  of  reason  for  drawing  the  proceedings  into  a 

an  ordinary  mortgage  would  doubtless  not  court   of  equity.     This    can    scarcely    be 

Ije  admitted  in  the  States  where  the  lien  regarded   as   an  indisputable  proposition, 

theory,  pure  and  simple,  is  accepted.    But  but  the  obligation   imposed  on  the   pur- 

in  the  alisence  of  some  statute  expressly  chaser  by  the  ruling  was  doubtless  a  full 

declaring  a  trust  deed  a  mere  hypotheca-  protection  to  the  bondholders, 
tion,  it  would  seem  that,  so  far  as  regards 


§  344.]  PREVENTIVE  REMEDIES.  363 

involved  in  the  adjustment  of  conflicting  rights  to  railroad  prop- 
erty, a  court  of  equity  is,  as  a  general  rule,  the  only  forum  where 
complete  justice  can  be  done  to  all  the  parties  in  interest.  The 
unsatisfactory  consequences  from  this  point  of  view,  of  allowing 
a  judgment  creditor  to  sell  a  part  of  the  mortgaged  property, 
without  reference  to  the  claims  of  other  creditors,  are  very 
clearly  brought  out  in  the  opinion  of  Mr.  Justice  McLean,  in 
delivering  the  judgment  of  the  lower  court  in  the  case  of  Pen- 
nock  V.  Coe,^  supra.  He  said :  "  There  are  three  insuperable 
objections  against  such  a  procedure  :  (1)  A  sale  on  execution 
would  convey  to  the  purchaser  no  exclusive  right  to  the  property 
sold.  (2)  Such  a  sale  would  not  divest  the  equitable  rights  of  the 
bondholders.  (3)  The  claim  must  be  prosecuted  in  ecpiity,  where 
all  who  have  an  interest  in  the  subject-matter  may  be  made  par- 
ties.    In  equity  only  can  the  rights  of  the  parties  be  adjusted."  ^ 

That  the  learned  justice  intended  to  lay  down  the  doctrine  that 
the  inadequacy  of  legal  remedies  was,  apart  from  any  question  of 
the  impairment  of  the  security,  a  sufficient  ground  for  enjoining 
an  execution  sale  of  the  mortgaged  personalty  of  a  railroad  com- 
pany is,  we  think,  clearly  shown  by  the  remark  which  follows  the 
above  citation :  "  And  this  is  especially  the  case  where  tlie  property 
mortgaged  is  inadequate  to  the  payment  of  all  the  creditors.  In 
addition  to  these  considerations,  from  the  nature  of  the  property 
levied  on  it  could  not  be  separated  from  the  road  without  suspend- 
ing in  whole  or  in  part  its  operations.  And  what  can  be  more 
unjust  than  this  to  the  other  bondholders  ?  The  operation  of  the 
machinery  on  the  road  in  the  transportation  of  passengers  and 
freight  constitute  its  chief  value.  The  railroad,  like  a  compli- 
cated machine,  consists  of  a  great  number  of  parts,  a  combined 
action  of  which  is  essential  to  produce  revenue.  And  as  well 
might  a  creditor  claim  the  right  to  levy  on  and  abstract  some 
essential  part  from  Woodworth's  planing  machine,  or  any  other 
combination  of  machinery,  as  to  take  from  a  railroad  its  locomo- 
tives or  its  passenger  cars.  Such  an  abstraction  would  cause  the 
operations  to  cease  in  both  cases." 

1  See  Coe  v.  Pennoek  (1857),  5  Fed.  and  existing  liens  on  the  road  can  only  be 
Cai.  1172,  Case  No.  2942;  s.  c.  2  Redf.  adjusted  by  a  court  of  equity."  William- 
Am.  Ey.  Cas.  673  ;  6  Am.  L.  Reg.  27.  son  v.  New  Albany,  etc.  R.   Co.   (1857),  1 

2  The  same  judge,  in  a  case  decided  Biss.  198.  In  Eckfelt  v.  Starr  (1864),  5 
about  the  same  time,  states  the  same  prin-  Phil.  497,  an  injunction  against  an  execu- 
ciple  somewhat  more  succinctly,  as  follows  :  tion  sale  of  railroad  personalty  was  denied 
"  When  property  is  purchased  and  placed  on  the  ground  that  the  Interpleader  Act  of 
upon  the  road,  no  lien  being  taken  by  the  Pennsylvania  furnished  the  trustees  with 
seller,  it  becomes  subject  to  the  mortgage  an  adequate  legal  remedy  for  the  assertion 
lien  on  the  road,  so  that  it  is  not  liable  to  of  their  rights. 

an  execution,  except  under  the  mortgage  ; 


364  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP,  XV, 

§  345.  Public  Interest  in  Operation  of  Railroad  a  Ground  for  Inter- 
ference of  Equity.  —  Still  another  aspect  of  the  question  which  tends 
to  support  the  same  view  is  that  the  restraining  power  of  a  court 
of  equity  seems  to  be  absolutely  necessary  for  the  purpose  of  giving 
time  in  each  case  to  determine  whethei"  the  sale  of  the  property 
levied  upon  will  prejudice  the  public,  whose  interests  in  the  con- 
tinued operation  of  the  road  are,  as  is  shown  in  another  part  of 
this  treatise,^  paramount  for  some  purposes  even  to  those  of  secured 
creditors.  The  presumption  certainly  is  that  any  severance  from 
the  property  of  articles  covered  by  the  mortgage,  and  coming  under 
the  head  of  appurtenances,  will  cripple  the  company  to  some  ex- 
tent. Is  it  not  more  consistent  with  the  view  ordinarily  taken  as 
to  the  quasi  public  character  of  the  functions  of  a  railroad  com- 
pany, to  require  a  judgment  creditor  to  overcome  that  presumption 
before  he  shall  be  allowed  to  take  final  action  on  his  judgment, 
than  to  throw  the  burden  of  proof  on  the  mortgagor  ? 

§  346.  Injunction  to  restrain  Levy  upon  Net  Revenues  specifically 
appropriated  to  Payment  of  State  Loan.  —  Where  the  effect  of  a 
statutory  mortgage  giving  the  State  a  lien  on  the  tolls  and  rev- 
enues of  a  canal  company  is  specifically  to  appropriate,  in  so  far  as 
it  is  not  required  for  current  expenses,  the  money  derived  from 
that  source  to  the  payment  of  a  loan  made  by  the  State,  the  right 
which  unsecured  creditors  ordinarily  have  to  levy  on  the  corpo- 
rate income  as  long  as  the  mortgagees  are  out  of  possession  does  not 
exist,  and  an  attempt  to  make  such  a  levy  will  be  restrained  by  an 
injunction,  unless  the  debt  for  which  the  judgment  was  obtained 
is  one  for  current  expenses.^ 

In  an  earlier  case  in  the  Maryland  court  the  rights  of  the  State 
to  restrain  the  attachment  of  the  revenues  pledged  under  the  same 
statute  was  also  considered,  and  the  same  conclusion  was  arrived 
at.  The  injunction  was  asked  on  the  ground  that  the  moneys 
attached  were  required  to  keep  the  canal  in  proper  repair,  as  the 
company  had  expressly  stipulated  to  do.  The  court  said  that  this 
part  of  the  income  was  as  much  protected  as  the  net  earnings, 
since  upon  its  use  depended  both  the  vitality  of  the  canal  as  a 
pul)lic  and  profitable  improvement,  and  also  the  ultimate  security 
of  the  State  as  a  creditor.     The  right  of  the  State  to  see  to  the 

1  Chapter  on  receivers.  and  of  tliP  trustees  for  bondholders  secured 

2  Macalaster's  Admrs.  v.  Marj'land  by  a  i)rior  mort<(age  of  the  canal  would 
(1885),  114  U.  S.  598;  s.  c.  5  Sup.  Ct.  be  airected  by  a  levy  which  diverted  the 
Rep.  10G5.  This  case  raises  a  somewhat  money  in  suit  from  its  lawful  olyect,  is 
different  question  from  that  of  the  suscep-  (|uite  analogous  to  that  which  underlies 
tibility  of  railroad  personalty  generally  to  I'cnnock  v.  Ooe  (18.")9),  23  How.  117,  and 
levy,  Init  tin;  ]>riiieipl(!  on   which  it  was  similar  rulings  cited  above. 

decided,  viz.,  that  the  security  of  the  State 


§  347.]  PREVENTIVE   REMEDIES.  "  365 

proper  application  of  the  revenues  to  the  repairs,  as  well  as  to  the 
other  legitimate  objects  contemplated  by  the  legislation  relating 
to  the  property,  could  not,  it  was  said,  be  interfered  with  by  the 
application  of  the  technical  rules  which  govern  the  ordinary  rela- 
tion of  mortgagor  and  mortgagee.^ 

§  347.  Injunctions  against  Execution  Sales  of  Realty.  —  For  prac- 
tical purposes  the  conflict  of  opinion  noticed  above  is  confined  to 
cases  where  personalty  is  levied  upon.  So  far  as  regards  the  real 
estate  of  a  railroad  company  acquired  for  railroad  purposes,  any 
attempt  of  a  judgment  creditor  to  sell  a  portion  of  it  must,  in  the 
nature  of  the  case,  be  prejudicial  to  a  bondholder,  and  it  seems  to 
be  an  established  doctrine  that  the  sale  will,  as  a  matter  of  course, 
be  stayed,  so  as  to  compel  the  creditor  to  obtain  such  relief  as  he 
may  be  entitled  to  by  applying  to  a  court  of  equity.  Impairment 
of  the  security  is  a  necessary  result  of  a  breaking  up  a  property 
which  the  intention  clearly  is  to  have  operated  as  an  entirety  for 
the  benefit  of  the  lienors.  The  unity  of  the  mortgaged  realty  of 
a  railroad  company  or  other  corporation  of  similar  character  may 
be  threatened  in  two  ways  by  a  levy.  It  may  be  made  on  an  entire 
division  of  the  road,  including  both  the  land  occupied  by  the  track 
and  that  required  for  the  convenient  transaction  of  its  business.^ 

An  injunction  is  especially  appropriate  where  the  sale  of  a  sec- 
tion of  the  road  is  being  pressed  by  numerous  creditors  ;  for  a 
court  of  equity  then  has  a  double  foundation  for  the  exercise  of 
its  jurisdiction,  viz.,  the  prevention  of  a  multiplicity  of  suits,  and 
the  prevention  of  irreparable  damage  to  the  other  creditors  whose 
interest  it  is  that  the  road  should  be  sold  as  an  entirety,  and,  in 
the  meantime,  that  it  should  be  operated  throughout  its  entire 
length,  for  the  benefit  of  all  concerned,  so  that,  when  it  is  sold,  it 
may  bring  its  full  market  value.^ 

1  Brady  v.  State  (1866),  26  Md.  290.  the  jurisdiction  of  the  court  under  the 

See  also  Brady  v.  Johnson  (1892),  75  Md.  Judiciary  Act,  suggested  that  some  anii- 

445  ;  s.  c.  26  Atl.  Rep.  49.  cable  arrangement  should  be  made. 

•^  In  Du  Pont  v.  Bushong  (1875),  1  W.  »  Noble  Bros,  et  al.  v.  State  of  Alabama 

N.  C.  (Pa. )  378,  an  injunction  was  sought  (1871),   43  Ga.    466.     Compare   also   the 

in   a   federal   court   by   a   bondholder   to  remark  of  the  court  in  South  Carolina  R. 

restrain  another  bondholder  from  levying  Co.  v.  Peoples'  Sav.   Inst.   (1879),  64  Ga. 

on  and  selling  that  part  of  the  property  of  18,  to  the  effect  that  a  court  of  equity,  on 

a  railroad  company  which  was  sulyect  to  a  projier  case  being  made,  would  perhaps 

the  jurisdiction  of  the  court.      The  point  restrain  judgment  creditors  of  a  company 

emphasized  by  the  applicant's  counsel  was  having  property  both  beyond  and  within 

that  the  value  of  the  property  would  be  the  State  limits  from  levying  on  the  latter 

gi-eatly  diminished  if  it  was  broken  up.  portion,   and  order  the  whole  road  to  be 

The  court  said  he  had  no  doubt  that  the  sold.      But  this  question  was  not  directly 

circumstances  presented  a  case  for  equitable  presented, 
interference,  but,  having  some  doubt  as  to 


366 


RAILWAY   BONDS    AND   MORTGAGES. 


[chap.  XV. 


Or  the  judgment  creditor  may  be  undertaking  to  sell  merely  a 
particular  piece  of  land  belonging  to  the  company  and  essential  to 
the  exercise  of  its  franchises.^ 

Wherever  an  injunction  will  be  granted  to  restrain  an  execution 
sale  of  real  estate,  the  same  relief  is  of  course  appropriate  where 
a  levy  is  made  on  personalty  which  is  a  fixture ;  but,  as  we  have 
already  seen,  the  courts  are  not  entirely  in  harmony  as  to  what 
property  is  embraced  in  that  term.     (See  Chap.  IX.) 

§  348.  Injunctions  against  Execution  Sales  where  Trustees  have 
gone  into  Possession.  —  In  this  case  they  can,  of  course,  restrain 
an  execution  sale  of  all  corporate  property  covered  by  an  after- 
acquired  property  clause.^ 

Particularly  must  this  be  so  where  the  trustees  hold  under  a 
decree  which  authorizes  their  possession,  and  obligates  them  to 
account  to  the  court  for  the  faithful  performance  of  their  duties. 
The  property  being  then  in  the  custody  of  the  court,  an  injunction 
will,  upon  familiar  principles,  be  granted  to  restrain  any  pi'oceed- 
ings  to  enforce  a  judgment,  unless  the  leave  of  the  court  is  first 
obtained  for  that  purpose.^ 

§  349.  Injunctions  to  prevent  a  Bondholder  from  obtaining  an  In- 
equitable  Preference    over    his  Co-bondholders.  —  If    a  bondholder 

V.  Johnson  (1892),  75  Md.  445;  s.  c.  26 
Atl.  Rep.  49,  where  one  of  the  grounds 
assigned  for  restraining  a  sale  of  certain 
realty  belonging  to  a  canal  company  was 
that  it  was  essential  for  the  operation  of 
the  canal,  the  petition  for  the  injunction 
being  filed  by  the  trustees. 

In  Coe  V.  Columbus,  Piqua,  &  Ind.  R. 
Co.  (1859),  10  Ohio  St.  372,  the  judgment 
creditor  had  undertaken  to  levy  on  a  part 
of  the  road.  In  the  appellate  court  his 
right  to  do  so  was  not  pressed,  and  the 
discussion  centred  upon  the  extent  of  his 
rights  in  regard  to  the  personalty.  But  it 
was  observed  in  passing  that,  being  an 
interest  in  real  estate,  held  for  the  sole  aud 
exclusive  purpose  of  the  exercise  of  a  fran- 
chise, the  road  could  not  be  alienated  by 
the  corporation,  and,  of  course,  would  not 
be  liable  to  execution.  For  a  list  of  the 
authorities  sujiporting  the  general  prin- 
ciple here  referied  to  see  Brunswick,  etc. 
Co.  V.  United  Gas  Co.,  35  Am.  St.  Hep. 
466. 

2  Felton  V.  Potomac  Ins.  Co.  (1873), 
4  Del.  Ch.  573.  Compare  Palmer  v. 
Forbes  (1860),  23  111.  301. 

8  Brady  w.  Johnson  (1892),  75  Md.  445  ; 
.s.  c.  26  Atl.  Kep.  49. 


1  In  Gue  V.  Tide  Water  Canal  Co. 
(1860),  24  How.  257,  the  company  was 
granted  an  injunction  to  restrain  the  sale 
of  a  part  of  its  property  on  this  ground. 
"  It  would,"  said  Chief  Justice  Taney,  "be 
against  the  principles  of  equity  to  allow  a 
single  creditor  to  destroy  a  fund  to  which 
other  creditors  had  a  right  to  look  for  pay- 
ment, and  equally  against  the  principles 
of  equity  to  permit  him  to  destroy  the 
value  of  the  property  of  the  stockholders, 
dissevering  from  the  franchise  property 
which  is  essential  to  its  useful  existence." 
It  was  further  said  that  the  court  did  not 
deem  it  proper  to  express  any  opinion  as 
to  the  right  of  such  a  creditor  in  some 
other  form  of  judicial  proceeding  to  compel 
the  sale  of  the  whole  property  for  the  pay- 
ment of  his  debt.  If  so,  his  remedy 
was  in  a  court  of  chancery,  where  the 
priorities  of  all  the  creditors  might  be  pro- 
tected, and  the  corjwrate  property  disposed 
of  to  the  best  advantage  for  the  interests 
of  all  concerned.  The  reasoning  of  the 
court  is  [)crfectly  general,  and  it  can 
scarcely  b*;  doubted  that  the  injunction 
would  have  been  granted  at  the  suit  of  a 
bomlholder.  In  fact,  it  was  cited  as  an 
apt  authority  in  the  recent  case  of  Brady 


j§  349,  350.] 


PREVENTIVE   REMEDIES. 


367 


levies  upon  property  covered  by  the  after-acquired  property  clause, 
any  of  his  co-bondholders  may  file  a  bill  to  restrain  the  sale  and 
procure  a  decree  that  the  property  is  exempt  from  sale  under  that 
or  any  other  execution  that  may  be  issued  on  the  same  judgment.^ 

So  also  an  injunction  will  be  granted  to  the  bondholders  secured 
by  a  first  mortgage  to  restrain  a  bondholder  secured  by  a  second 
mortgage  from  selling  on  execution  property  so  covered,  both  be- 
cause it  would  disturb  the  pro  rata  distribution  in  case  of  a  defi- 
ciency, and  give  him  an  inequitable  preference  over  his  associates, 
and  also  because  it  would  have  the  effect  of  prejudicing  the  superior 
equity  of  the  bondholders  secured  by  the  prior  mortgage.^ 

It  would  seem,  however,  that  bondholders  may  attach  the  mort- 
gaged property  in  an  action  at  law,  if  they  allege  that  the  residue 
of  the  secured  debts  have  been  paid,  and  make  the  trustees  or 
legal  title-holders  parties  to  the  proceedings.^ 

§  350.  Execution  Sale  not  enjoined  at  the  Instance  of  the  Mort- 
gagor.—  The  railroad  company  itself  cannot  shield  its  property 
from  execution  by  the  allegation  that  it  is  covered  by  sundry 
mortgages.  Whatever  protection  the  mortgagee  may  be  entitled 
to  must  be  asserted  by  itself,  and  cannot  be  considered  in  pro- 
ceedings instituted  by  the  company  to  enjoin  the  sale.* 

The  mortgagor  may,  however,  take  action  when  an  injunction 
is  asked  for  on  the  ground  that  the  property  to  be  sold  is  essen- 
tial for  the  useful  existence  of  the  franchise.^ 


1  Philadelphia,  AVilm.  &  Bait.  E.  Co.  v. 
Woellper  (1870),  64  Pa.  St.  366  ;  Common- 
wealth V.  Susquehanna  &  Delaware  River 
R.  Co.  (1888),  122  Pa.  St.  306  ;  s.  c.  15  Ath 
Rep.  448 ;  36  Am.  &  Eng.  R.  R.  Cas.  269. 

a  Pennocki;.  Coe  (1859),  23  How.  117. 

8  Martin  &  Meriwether  v.  Mobile  & 
Ohio  R.  Co.  (1870),  7  Bush  (Ky.),  116. 

*  Boyd  V.  Chesapeake  &  Ohio  Canal 
Co.  (1860),  17  Md.  195. 

5  Gue  V.  Tide  Water  Canal  Co.  (1860), 
24  How.  257 ;  Northern  Pac.  Co.  v. 
Shimmell  (1886),  6  Mont.  161  ;  s.  c.  9 
Pac.  Rep.  889  ;  24  Am.  &  Eng.  R.  R.  Cas.  1. 
Contra,  see  Midland  Ry.  Co.  r.  Steven- 
son (1891),  130  Ind.  97  ;  s.  c.  29  N.  E. 
Rep.  385,  where  the  court  denied  a  petition 
by  the  mortgagor  company  for  an  injunc- 
tion, asked  on  double  ground  :  (1)  that 
the  rolling-stock  levied  upon  was  realty, 
and  (2)  that  it  was  property  essential  to 
the  exercise  of  the  franchise.  The  dis- 
cussion of  these  vexed  questions  was 
deemed  unnecessary  for  the  decision  of  the 
case,  the  position  being  taken  that  a  com- 
pany not  insolvent,  and  not  unable,  but 


merely  unwilling,  to  pay  a  debt  had  no 
standing  in  a  court  of  equity  to  have  its 
collection  enjoined.  "  If  the  company  was 
insolvent,"  said  the  court,  "and  this  suit 
had  been  instituted  by  the  trustees  for  the 
bondholders,  as  was  the  case  in  Titus  v. 
Mabee  (1861),  25  111.  257,  and  Titus  v. 
Ginheimer  (1861),  27  111.  462,  a  different 
question  would  be  presented."  This  de- 
cision, it  is  submitted,  is  contrary  to 
authority.  It  is  doubtless  true  that  the 
question  whether  certain  personalty  is  a 
fixture  cannot  be  raised,  as  against  a 
creditor,  by  the  mortgagor  itself,  but  the 
question  whether  personalty  is  protected 
from  levy  as  being  essential  to  the  exercise 
of  the  franchise,  so  far  from  being  one 
wliich  cannot  be  raised  by  the  owner,  is 
one  which  has  almost  always,  in  the 
numerous  cases  on  the  subject,  been  raised 
by  such  owner.  See  the  list  in  the  note  to 
Brunswick  Gaslight  Co.  v.  Brunswick  Gas 
Co.,  35  Am.  St.  Rep.  405.  Whether  such 
property  is  or  is  not  mortgaged  is  a  matter 
entirely  outside  the  issue  when  exemption 
from  levy  is  claimed  on  this  ground. 


368  RAILWAY   BONDS   AND    MORTGAGES.  [CHAP.  XV- 

§  351.  A  Federal  Court  has  no  Jurisdiction  to  restrain  an  Execu- 
tion Sale  under  the  Process  of  a  State  Court.  —  Under  1  U.  S.  Stat. 
L.  335,  §  5,  such  an  injunction  is  illegal,  and  a  federal  court  is 
powerless  to  act,  in  spite  of  the  doctrine  of  Pennock  v.  Coe,  supra} 

§  352.  Injunctions  in  Aid  of  Holders  of  Income  Bonds.^  —  It  has 
been  shown  in  another  part  of  this  treatise  (Chap.  XV.),  that, 
as  long  as  the  company  is  permitted  to  remain  in  possession  of 
the  estate,  the  holders  of  bonds  secured  by  a  general  mortgage 
which  specifically  pledges  the  income  amongst  other  kinds  of 
property  have  no  right  to  interfere  with  the  use  of  the  earnings 
by  the  mortgagor. 

Doubtless  an  abuse  of  the  discretion  thus  reserved  to  the  com- 
pany would  furnish  a  ground  for  the  interposition  of  a  court  of 
equity,  but  the  circumstances  under  which  relief  against  a  posi- 
tive misapplication  of  the  funds  would  be  granted  where  the 
income  is  only  a  part  of  the  security  do  not  seem  to  have  been 
judicially  considered. 

The  question  has,  however,  been  raised  in  regard  to  income 
bonds  which  expressly  obligate  the  company  to  devote  whatever 
surplus  of  the  earnings  remains,  after  paying  the  operating  ex- 
penses, to  keeping  down  the  interest.  The  holders  of  such  bonds 
may  file  a  bill  for  an  accounting  and  enjoin  any  misapplication.^ 

But  no  misapplication  is  shown  where  the  principal  only  of 
income  bonds  is  secured  by  the  mortgage,  the  payment  of  interest 

1  Ruggles  V.  Simonton  (1872),  3  Biss.  incurred  on  account  of  old  indebtedness 
326.  existing  before  the  mortgage  was  created, 

2  Dividends  on  preferred  stock  must  be  or  arising  from  a  loss  incurred  by  the  sale 
paid  after  interest  on  bonds.  See  chapter  of  bonds  issued  to  pay  off  old  indebtedness." 
on  reorganization.  Afterwards,  in  the  same   matter,   this 

3  Barry  v.  Missouri,  Kans.  &  Tex.  R.  judge  held  that  if  the  court  had  seen  fit  to 
Co.  (188.5),  27  Fed.  Rep.  1.  There  the  pay  a  higher  rate  of  interest  than  needful 
court  refused  to  allow  the  company  to  upon  prior  incumbrances,  it  could  not 
charge  against  income,  for  any  period  chai'ge  the  diU'erence  against  the  income  to 
during  the  life  of  the  mortgage,  a  liability  the  injury  of  the  bondholders,  in  direct 
incurred  on  account  of  old  indebtedness  contravention  of  the  provisions  of  the 
existing  before  the  mortgage  was  created,  mortgage  securing  the  income  bonds.  He 
or  arising  from  a  loss  incurred  by  the  sale  also  sustained  the  rejection  by  the  master 
of  bonds  issued  to  pay  off  old  indebtedness,  of  a  lump  sum  of  money  paid  to  a  company 

The  basis  on  which  an  accounting  in  whose  road  had  been  leased  by  the  mort- 
Ruch  a  case  will  be  had  was  thus  stated  by  gagor  as  a  comjiensation  for  what  was 
Wallace,  J.:  "The  expen.ses  defrayed  or  styled  an  "allowance"  to  the  lessor  corn- 
incurred  in  ]>roducing  the  earnings  for  a  pany,  on  adjustment  of  earnings  diverted 
given  interest  period  are  the  only  charges  from  its  line  to  the  lessor's  railway.  The 
which  can  enter  into  the  income  account  master  had  disallowed  it  as  not  falling 
for  tliat  period,  except  the  ])ayment  of  within  the  category  of  expenses  incurred 
interest  on  prior  incumbrances,  as  stipu-  in  operating  and  keeping  in  repair  the 
lated  b)'  the  terms  of  the  mortgagor,  and  road  as  covered  by  the  income  mortgage, 
tlie  company  cannot  charge  against  income  Bariy  v.  Missouri,  Kans.  &  Tex.  K.  Co. 
for  any  perio<l  during  the  life  of  the  (in-  (1888),  34  Fed.  Rep.  829  ;  s.  C.  4  Ry.  & 
come)  mortgagor,  a  payment  or  liability  Corp.  L.  J.  198. 


§  353.]  PREVENTIVE    REMEDIES.  369 

being  subject  to  the  condition  that  "  the  net  earnings  "  for  each 
year  should  be  sulhcient  to  i)ay  it,  and  the  amount  of  the  net 
earnings  left  to  be  determined  by  the  board  of  directors,  and  the 
mortgagor,  having  under  the  mortgage  the  right  "  to  retain 
the  free  and  uncontrolled  use,  enjoyment,  and  management "  of 
the  property,  so  long  as  no  default  is  made  in  payment,  accord- 
ing to  the  terms  of  the  bonds,  expends  money  in  carrying  out 
a  lease,  and  thereby  absorbs  earnings  which  would  otherwise  be 
available  for  the  payment  of  interest.  So  far  as  that  interest  is 
concerned,  the  income  bondholders  are,  in  such  a  case,  sinij)ly 
general  creditors,  having  no  lien  or  right  other  than  to  have  it 
paid  out  of  the  proper  fund,  i.  e.  "  the  net  earnings."  The 
power  of  the  company  to  change  the  condition  of  the  road  by 
additions,  extensions,  or  improvements,  consistent  with  the  pur- 
poses of  its  corporation,  is  not  restricted  by  provisions  of  this 
character.  The  parties  contemplate  a  line  of  active  and  efficient 
railroad  managed  in  the  usual  manner  according  to  the  discretion 
of  the  company's  directors,  not  one  in  discharge  or  liquidation ; 
and  the  directors,  therefore,  have  the  right  to  use  the  earnings 
of  the  corporation  for  such  improvements  or  other  lawful  pur- 
poses in  its  business  as  they  may  think  best.-^ 

§  353.  Right  of  Bondholders  to  maintain  a  Suit  to  enjoin  Enforce- 
ment of  a  Railroad  Commission  Law.  —  In  a  recent  case  the  bond- 
holders of  several  Texas  railroads  filed  bills  against  the  railroad 
companies,  the  State  railroad  commissioners,  and  the  Attorney- 
General,  alleging  that  the  interest  on  the  bonds  was  not  being 
paid,  that  the  companies  were  willing  and  anxious  to  meet  all  their 
obligations  to  the  complainants,  but  were  unable  to  do  so  owing 
to  the  action  of  the  railroad  commissioners  in  fixing  unprofitable 
rates.  The  statute  under  which  those  officials  undertook  to  pre- 
scribe the  rates  complained  of  was  asserted  to  be  unconstitutional, 
and  the  petition  of  the  bondholders  was  for  an  injunction  restrain- 
ing its  enforcement.  They  were  held  to  have  shown  a  sufficient 
interest  in  the  road  to  enable  them  to  maintain  the  suit.^ 

1  Day  V.  Ogdensburgh  &  Lake  Cham-  interfere,  and  it  was  taken  for  granted  that 

plain  R.  Co.  (1887),  107  N.  Y.  129  ;  s.  c.  they  had  a  sufficient  interest  in  the  matter. 

13  N.  E.  Eep.  765.  A  stoekhokler  has  also  a  right  to   biing 

2  Mercantile  Trust  Co.  v.  Texas  &  Pac.  a   suit  for   the   same   purpose  :    Tilley  v. 

Ry.  Co.  (1892),  51  Fed.  Rep.  529.  Savannah,    Florida,    &    Western    R.    Co, 

The  rights  of  a  trustee  to  maintain  such  (1881),  5  Fed.  Rep.  641  ;   s.  c.  4  Woods, 

a  suit  are  fully  recognized  in  the  recent  427  ;    where  the  injunction  was  dissolved 

case  of  Reagan  v.  Farmers'  Loan  &  Trust  on  the  broad  ground  that  the  legislature 

Co.  (1894),  154  U.  S.  362;  but  the  ques-  has  power  to  modify  railway  rates.     Since 

lion  was  discussed  merely  with  reference  the  decision  in  Reagan  v.  Farmers'  Loan  & 

to  the  extent  of  the  power  of  the  courts  to  Trust  Co.,  supra,  this  case  must  be  taken 

24 


370 


RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  XV. 


with  the  qualification  that  the  power 
canuot  be  used  so  as  to  destroy  the  value 
of  the  property  altogether. 

The  following  cases  from  the  English 
courts  illustrate  the  principles  discussed 
in  this  chapter  :  — 

In  England,  prior  to  the  Eailway  Com- 
panies Act  of  1867,  a  judgment  creditor 
might  prevent  a  company  from  carrying 
on  business  at  all  by  seizing  all  its  rolling- 
stock,  and  a  debenture-holder  could  do 
nothing  to  prevent  the  seizure,  for  he  had 
no  specific  lien  upon  the  property  of  the 
comi)any,  under  the  Companies  Clauses 
Act,  but  merely  the  company's  "under- 
taking "  as  a  going  concern.  Gardner  v. 
London,  C.  &  D.  Ry.  Co.  (1866),  L.  R. 
2  Ch.  App.  201.  By  the  act  of  1867,  how- 
ever, the  judgment  creditor  was  deprived 
of  his  power,  for  which  was  substituted  a 
power  to  obtain  a  receiver  and  manager 
of  the  line.  In  re  Eastern  &,  Midlands  Ry. 
Co.  (1890),  L.  R.  45  Ch.  D.  367  ;  Russell 
V.  East  Anglican  Ry.  Co.  (1850),  3  Mac. 
&  G.  124.  A  dock  company,  although 
not  a  railway  company  in  the  ordinary 
sense  of  the  term,  was  held  to  be  a  "  com- 
pany "  within  section  3  of  the  act  of  1867, 
as  being  a  part  of  the  plant  of  a  railway, 
notwithstanding  that  the  railway  was 
merely  an  ancillary  and  subordinate  part 
of  the  whole  undertaking,  and  the  dock 
plant  was  protected  by  injunction  from 
seizure  under  an  execution.  The  Great 
Northern  R.  Co.  v.  Tahourden  (1883), 
13  Q.  B.  Div.  320.  Once  a  railway  is 
opened  for  public  traflic,  the  protection  of 
the  act  arises,  and  continues,  although 
the  railway  is  afterwards  closed  for  traffic. 
The  Midland  Waggon  Company  v.  The 
Potteries  S.  &  N.  W.  Co.  (1880)',  6  Q.  B. 
Div.  36.  Where  the  security  is  endan- 
gered, a  debenture-holder  may  obtain  the 
appointment  of  a  receiver  and  manager  of 
a  railway,  although  no  interest  is  due  on 
the  debentures,  and  the  time  for  payment 
has  not  arrived.  Edwards  v.  Standard 
Rolling  Stock  Syn.  (1893),  3  R.  226  ; 
Thorn  v.  Nine  Reefs  (1892),  67  Law 
Times,  93.  In  a  winding-up  proceeding, 
where  tliere  apy)ears  a  probalnlity  that  the 
property  comy)rised  in  the  debenture  will 
have  to  be  realized  by  sale  in  the  near 
future,  the  court  will  appoint  a  receiver 
and  manager  of  the  business  of  the  com- 
pany, thongli  no  winding-up  order  has  yet 
been  made  ami   iir)tliing  has  become  ac- 


tually due  upon  the  debenture.  In  re 
Victoria  Steamboats,  Limited  (1897),  66 
L.  J.  Ch.  21.  A  debenture  of  a  tramway 
company  governed  by  the  Tramways  Act 
of  1870  does  not  entitle  the  holder  to 
have  the  "undertaking"  sold,  or  a  man- 
ager as  well  as  a  receiver  appointed.  Mar- 
shall V.  South  Staffordshire  Tramways  Co. 
(1895),  64  L.  J.  Ch.  481,  the  court  dis- 
ap[)roving  a  number  of  prior  decisions 
tending  to  the  contrarj'.  Nevertheless, 
where  such  a  receiver  and  manager  had 
been  appointed  prior  to  the  decision  in 
the  case  last  cited,  his  acts  were  recog- 
nized as  valid  and  binding.  Pegge  v. 
Neath  District  Tramways  Co.  (1895),  64 
L.  J.  Ch.  737.  Where  the  proceeds  of 
chattels  of  a  company  sold  under  an  exe- 
cution have  not  been  handed  over  to  the 
execution  creditor,  the  holder  of  a  debent- 
ure which  creates  a  charge  on  the  chat- 
tels may,  on  behalf  of  himself  and  the  other 
debenture-holders,  intervene  and  claim 
the  proceeds,  if  the  amount  secured  by  the 
debenture  is  presently  payable.  Taunton 
V.  Warwickshire  (Sheriff),  (1895),  1  Ch. 
734,  affirmed  (1895),  2  Ch.  319. 

Injunction  proceedings  and  kindred 
remedies  are  available  to  debenture-hold- 
ers to  the  same  extent  in  England  as  in 
this  country.  "  The  court,  by  coercion  of 
the  person  within  its  jurisdiction,  is  en- 
abled in  effect  to  exercise  jurisdiction  over 
the  property  of  that  person  wherever  it 
may  be  situate."  Jessel,  M.  R.  In  re 
Longdendale  Cotton  Spinning  Co.  (1878), 
L.  R.  8  Ch.  Div.  152.  The  appointment 
of  a  receiver  as  a  preventive  remedy  is 
the  remedy  most  frequently  resorted  to  as 
being  the  most  appropriate  in  the  large 
majority  of  cases.  A  receiver  will  be  ap- 
pointed on  grounds  of  insolvency,  although 
the  principal  of  the  debenture  is  not  im- 
mediately payable  :  ilcMahon  v.  North 
Kent  Ironworks  Co.  (1891),  2  Ch.  148; 
or  where  there  is  danger  of  the  property 
which  is  the  subject  of  the  debenture  be- 
ing disposed  of  during  the  progress  of  the 
tiial,  otherwise  than  in  the  ordinary  course 
of  business:  Hubbuck  v.  Helms  (1887), 
56  L.  T.  R.  232;  and  in  a  variety  of  other 
cases  in  which  the  security  of  the  debent- 
ure-holders is  jeopardized:  Yorkshire  Ry. 
Wagon  Co.  v.  Maclure  (1882),  21  Ch.  D. 
309  ;  In  re  Colonial  Trust  Corporation 
Co.   (1879),  15  Ch.  D.  473. 


§  354.] 


REMEDIES  OF  BONDHOLDERS,  ETC. 


871 


CHAPTER  XVI. 

REMEDIES     OP     BONDHOLDERS     FOR     THE     ENFORCEMENT    OF     BONDS. 
REMEDIES   IN   GENERAL. 


354.  Introductory. 

355.  Bondholders    not    restricted    to 

any  Single  Remedy. 

356.  General  Powers  of  Eciuity  for  the 

Relief  of  Bondholders. 

357.  State    when    not   a   Trustee    for 

Benefit  of  Junior  Mortgagees. 

358.  Chancery     Powers     of     Federal 


Courts  independent  of  State 
Laws. 
§  359.  Statutes  affecting  Remedies  onl)', 
not  unconstitutional  as  im- 
pairing the  Obligation  of  Con- 
tracts. 
359  a.  Illustrative  Cases  on  English 
Debentures. 


§  354.  Introductory.  —  The  remedies  available  to  bondholders  ^ 
for  the  enforcement  of  their  rights  may  be  divided  into  three 
classes  :  — 

1.  Those  which  they  have  in  common  with  all  creditors, 
whether  secured  or  unsecured.  This  class  includes  the  common- 
law  remedies  by  action  of  assumpsit  on  the  debt  itself,  or  of 
covenant  on  the  bond,  and  the  equitable  remedy  of  sequestration 
of  profits,  wherever  that  is  appropriate. 

2.  Those  which  are  incident  to  the  mortgage  contract  itself, 
without  regard  to  any  special  provisions  therein.  This  class 
includes  the  legal  action  of  ejectment  (except  in  jurisdictions 
where  the  doctrine  that  a  mortgage  is  merely  a  lien  has  been 
adopted),  and  the  equitable  remedies  of  sequestration  of  profits 
and  suits  for  foreclosure  and  sale. 

Various  local  modifications  of  the  remedies  in  this  class  have 
been  introduced  in  some  States.  But  these  it  is  not  material  to 
notice  in  the  present  connection. 

3.  Those  which  are  provided  by  the  instrument  for  the  pur- 
pose of  enabling  the  bondholder  to  obtain  a  more  speedy  enforce- 
ment of  his  lien  than  is  possible  by  proceedings  taken  in  the 
ordinary  manner.  This  class  includes  the  summary  powers  of 
entry  and  sale,  which  the  mortgage  itself  usually  authorizes  the 
trustee  to  exercise,  upon  certain  specified  conditions,  in  behalf 
of  the  beneficiaries. 


^  For  remedies  of  bondholders  secured  by  statutory  liens  in  the  nature  of  mort- 
gages, see  Chap.  XIII. 


372  EAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  XVI. 

The  above  statement  is  based  on  the  following  passage  of  the 
opinion  in  Oilman  v.  Illinois  &  Mississippi,  etc.  Tel.  Co.  (1876), 
91  U.  S.  603,  in  which  the  historical  reason  for  the  existence  of 
several  concurrent  remedies  is  also  glanced  at :  "  The  civil  law 
is  the  spring-head  of  the  English  jurisprudence  upon  the  subject 
of  these  securities  (conveyances  subject  to  defeasance).  Origi- 
nally, according  to  that  jurisprudence,  mortgages  of  the  class  to 
which  those  here  in  q^iestion  belong  vested  the  fee,  subject  to  be 
divested  by  the  discharge  of  the  debt  at  the  day  limited  for  its 
payment.  If  default  was  then  made,  the  premises  were  finally 
lost  to  the  debtor.  In  the  progress  of  time  more  liberal  views 
prevailed,  and  the  debt  came  to  be  considered  as  the  principal 
thing,  and  the  mortgage  only  as  an  incident  and  security.  In  the 
present  state  of  the  law,  where  there  is  no  prohibition  by  statute 
it  is  competent  for  the  mortgagee  to  pursue  three  remedies  at  the 
same  time.  He  may  sue  on  the  note  or  obligation,  he  may  bring 
an  action  of  ejectment,  and  he  may  file  a  bill  for  foreclosure  and 
sale."  1 

§  355.  Bondholders  not  restricted  to  any  Single  Remedy.  —  The 
several  remedies  available  for  the  enforcement  of  the  mortgage 
may  be  pursued  concurrently  or  successively,-  and  in  any  order 
that  the  mortgagee  may  think  fit.^ 

This  choice  of  remedies  is  of  course  narrowed  where  the  right 
of  action  on  the  bonds  is  barred  by  the  Statute  of  Limitations.  In 
that  case  resort  must  be  had  to  the  remedy  on  the  mortgage, 
which  is  not  barred  by  any  lapse  of  any  shorter  period  than  that 
sufficient  to  raise  the  presumption  of  its  discharge.* 

The  special  illustrations  of  the  general  rule  afforded  by  those 
cases  which  hold  that  special  remedies  created  by  the  agreement 
of  the  parties  are  cumulative  upon  the  remedy  by  foreclosure  in  a 
court  of  equity  are  referred  to  below. 

§  356.  General  Pow^ers  of  a  Court  of  Equity  for  the  Relief  of  Bond- 
holders. —  The  fact  that  an  ordinary  railroad  mortgage  is  drawn 

1  Some  useful  information  as  to  the  Railroad  &  P.kg.  Co.  (1879),  63  Ga.  ins. 
remedies  of  mortgagees  will  be  found  in  an  For  a  short  sketch  of  the  law  regulating  the 
article  in  2  Mo.  West.  Jur.  641.  See  also  enforcement  of  powers  of  sale,  and  a  state- 
2  Hedfield's  Law  of  Railways,  484.  ment  of  the  reason  wh)'  that  remedy  is 

On  injunction  by  debenture-liolders  to  regarded  as  concurrent  with  that  of  fore- 
restrain  payments  to  bondholders,  see  The  closure,  see  16  Cent.  L.  J.  247. 
Ooverimients  Stock,  etc.  Co.  v.  Tlie  ^  McAllister  v.  Plant  (1876),  54  Miss. 
Manila  Uy.  Co.  &  Others  (1897),  1  L.  II.  106  ;  s.  c.  17  Am.  ity.  Rip.  183. 
App.  Ca,s.  81.  On  the  character  of  a  *  Smith's  Execrs.  v.  Washington  City, 
debenture-holder's  action,  see  Madeley  v.  Va.  Midi.  &  Great  Southern  R.  Co.  (1880), 
Ross  (18!)7),  1  Ch.  Div.  nO't.  33  Gratt.  (Va.)  017. 

2  Macon  &  Augusta  R.  Co.  o.  Georgia 


§  35G.]  REMEDIES   OP    BONDHOLDERS,    ETC.  373 

in  the  form  of  a  deed  of  trust  brings  such  instruments  within  the 
rule,  tliat  a  court  of  equity  will  assume  jurisdiction  of  a  con- 
ventional trust  and  direct  its  administration,  on  the  application 
of  the  trustee  or  a  party  in  interest,  where  there  is  any  dilliculty 
or  complication  likely  to  arise  in  the  execution  of  the  trust,  or 
any  question  or  dispute  as  to  the  powers  or  duties  of  the  trustee, 
or  as  to  the  rights  of  the  parties  beneficially  interested  in  the 
trust.i 

Even  if  a  court  of  equity  has  no  general  jurisdiction  over  mort- 
gages, as  was  formerly  the  case  in  Pennsylvania,  where  the  en- 
forcement of  such  liens  was  left  to  the  common  law  and  statutory 
remedies,  yet  if  a  mortgage  creates  a  trust  and  provides  that  the 
power  of  sale  is  to  be  exercised  by  the  trustee  in  certain  contin- 
gencies, he  may  be  controlled,  restrained,  and  directed  by  such  a 
court,  at  the  suit  of  a  party  standing  in  the  relation  of  cestui  que 
trust,  the  rule  for  his  guidance  being  derived  from  the  instrument 
itself.2 

The  fact  that  a  discovery  is  asked  maybe  a  sufficient  ground  for 
the  interposition  of  equity  in  a  case  where  a  bill  would  otherwise 
be  dismissed.  Thus,  although  a  statement  that  the  defendant,  a 
reorganized  company,  is  about  to  issue  its  own  bonds  to  certain 
holders  of  the  first-mortgage  bonds  issued  by  the  original  com- 
pany, the  bill  not  showing  that  the  new  bonds  were  to  be  secured 
by  mortgage,  does  not  lay  a  ground  for  equitable  jurisdiction  in 
favor  of  the  complainant,  a  holder  of  a  first-mortgage  bond,  who 
had  agreed  to  come  in  under  the  reorganization  scheme  ;  yet  equity 
will  take  cognizance  of  such  a  suit  where  there  is  also  an  allega- 


1  Northern  Central  Ry.  Co.  v.  Keighler  R.  Co.  (1867),  55  Pa.  St.  189  ;  but  it  was 
(186S),  29  Md.  572.  held  that  this  objection  could  not  be  sus- 

2  Bradley  v.  Chester  Valley  R.  Co.  tained,  since  it  merely  provided  a  new 
(1860),  36  Pa.  St.  141.  Compare  Menden-  remedy  for  the  mortj:;agor's  breach  of  con- 
hall  V.  Westchester  &  Philadelphia  R.  Co.  tract.  The  jurisdiction  thus  conferred  on 
(1860),  36  Pa.  St.  14?5  ;  Youngmau  v.  the  Supreme  Court  was  taken  away  by  the 
Elmira  &  Williamsport  R.  Co.  (1870),  65  constitution  of  1874.  See  Fargo  v.  Oil 
Pa.  278.  Before  the  statute  of  1862  was  Creek  &  Alleghany  City  Ry.  Co.  (1875), 
passed  (1  Brightly's  Purdon's  Dig.  593),  a  81  Pa.  St.  266,  where  a  bill  was  filed  in 
court  of  equity  in  Pennsylvania  had  no  the  Supreme  Court  for  a  decree  to  sell,  etc. 
power  to  decree  a  sale  of  the  mortgaged  One  of  the  prayers  was  for  an  injunction  to 
property  at  the  instance  of  the  mortgagee,  restrain  the  defendants  from  selling,  or  in 
even  though  the  mortgage  was  in  the  form  any  manner  disposing  of,  the  property 
of  a  deed  of  trust  to  secure  bonds.  Ash-  covered  by  the  mortgage.  Held,  that  the 
hurst  V.  Montour  Iron  Co.  (1860),  35  Pa.  injunction  was  merely  incidental  to  the 
St.  30.  The  constitutionalit}'-  of  that  act  sale,  the  substantial  thing  asked  for,  and 
was  attacked,  so  far  as  it  was  made  ap-  did  not  therefore  bring  the  bill  within  the 
plicable  to  mortgages  before  its  passage,  jurisdiction  of  the  Supreme  Court.  The 
in  McElrath  v.   Pittsburg  &  Steubenville  decree  of  sale  was  accordingly  vacated. 


374  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  XVI. 

tion  that  the  defendant  refused  to  disclose  what  the  scheme  was. 
"The  complainant,"  said  the  court,  "is  entitled  to  this  infor- 
mation, and  it  is  also  clear  that  we  cannot  say  whether  her 
rights  are  legal  or  equitable  until  such  discovery  shall  have  been 
obtained,"  ^ 

In  an  oft-cited  New  Jersey  case,  decided  when  questions  aris- 
ing under  corporate  mortgages  and  trust-deeds  were  still  new,  it 
was  argued  that  the  remedy  of  the  mortgagee  was  confined  to  the 
sequestration  of  the  profits  of  the  business.  The  court  rejected 
this  doctrine,  and  held  that  the  legislature,  by  giving  authority  to 
the  company  to  execute  a  mortgage,  intended  to  invest  tbe  mort- 
gagee with  all  the  powers  incident  to  such  an  instrument,  the 
power  to  foreclose  and  sell  being  one  of  those  powers.^ 

The  remedy  of  sequestration  under  the  general  powers  of  a 
court  of  equity  is  very  rarely,  if  ever,  resorted  to  for  the  relief  of 
railroad  bondholders,  except  for  temporary  purposes,  as  where 
the  property  is  placed  in  the  hands  of  a  receiver  with  a  view  to 
foreclosure  and  sale.  The  rights  and.  liabilities  of  the  various 
parties  in  interest  under  such  circumstances  are  reviewed  in  the 
chapters  relating  to  receivers,  post. 

A  remedy  in  the  nature  of  sequestration  is  also  given  by  most 
railroad  mortgages,  those  instruments  usually  embracing  provi- 
sions stipulating  that  the  trustees  may,  if  certain  specified  condi- 
tions are  broken  by  the  mortgagor,  enter  into  possession  of  the 
road  and  operate  it  for  the  benefit  of  the  bondholders.  The  legal 
relations  arising  from  a  resort  to  this  remedy  are  discussed 
below,  and  in  the  chapter  on  trustees. 

Provisions  similar  to  those  inserted  in  mortgages  for  this  pur- 
pose are  usually  found  in  those  statutes  which  create  a  lien  in 
favor  of  the  State  to  secure  it  for  its  loan  of  its  own  bonds  to  the 
company,  or  for  its  indorsement  of  the  company's  bonds.^ 

§  357.  State  Tvhen  not  a  Trustee  of  Earnings  for  Benefit  of  Junior 
Mortgagees.  —  A  State  which  subscribes  for  the  majority  of  the 
stock  in  a  railroad  corporation  organized  by  special  statute  does 
not  by  such  subscription  become  a  trustee  of  the  earnings  of  the 

1  Midland  Railway  Co.  v.  Hitchcock  Sup.  Ct.  Rep.  762;  Florida  v.  Anderson 
(1881),  34  N.  J.  Eq.  278;  s.  c.  4  Am.  &     (1875),  91  U.  S.  667. 

Kn^.  H.  R.  Cas.  278.  Conijiare  the  remarks  of  Judge  Wood- 

2  Willink  V.  Morris  Canal  &  Bkg.  Co.  ward  in  Bradley  v.  Chester  Valley  R.  Co. 
(1843),  4  N.  J.  Kq.  377.  (1860),  36  Pa.  St.  141,  as  to  the  recognized 

*  See,  for  exam])]!',  the  statutes  discnsaed  legal  remedies  of  mortgagees,  wlierever  the 
in  Tompkins  V.  Little  Rock  &  Fort  Smith  common-law  and  chancery  jurisdictions 
Ry.   Co.  (1888),    \2:>  U.  S.  109;  s.   c.   8     have  not  been  restrained  and  regulated  by 

statute. 


§  358.]  REMEDIES    OF    BONDHOLDERS,    ETC.  375 

road  for  the  benefit  of  the  holders  of  bonds  secured  by  statutory 
mortgages  thereafter  declared  upon  its  stock.  Hence,  if  the  road 
is'  leased  to  another  company  for  a  rent  sufficient  only  to  pay  the 
interest  upon  a  first  mortgage  so  declared,  a  bondholder  secured 
by  a  junior  mortgage  of  the  same  kind  cannot  maintain  a  bill 
against  the  lessee  company,  to  compel  it  to  account  for  the  excess 
of  the  earnings  of  the  leased  road  over  the  stipulated  rent,  upon 
the  theory  that  the  State,  by  the  hypothecation  of  its  stock,  im- 
pliedly assumed  a  fiduciary  relation  to  the  complainant  and  other 
bondholders,  and  agreed  to  exercise  its  control  as  a  majority  stock- 
holder of  the  lessor  company,  so  as  to  preserve  the  earnings  for 
the  benefit  of  their  bonds,  thus  making  such  earnings  a  trust 
fund  which  the  bondholders  could  follow  into  the  hands  of  any 
one  receiving  them  with  notice.  "  Such  a  case  is  not  distinguish- 
able in  its  legal  aspects  from  one  where  an  individual  who  is  a 
majority  stockholder  in  a  corporation  has  hypothecated  his  shares 
to  a  creditor  as  security  for  a  loan.  In  such  a  case  it  may  be 
assumed  that  both  parties  to  the  transaction  understand  at  the 
time  that  the  value  of  the  security  is  to  depend  upon  the  finan- 
cial prosperity  of  the  corporation ;  but  no  promise  or  duty  can 
reasonably  be  implied  from  that  understanding  that  the  share- 
holder who  has  mortgaged  his  shares  is  to  use  his  power  of  control 
in  the  corporate  affairs  exclusively  in  the  interest  of  the  mort- 
gagor, or  is  not  to  consent  to  or  promote  any  scheme  or  under- 
taking in  the  conduct  of  its  business  which  is  within  the  scope  of 
its  legitimate  functions,  and  which  he  may  believe  to  be  expedient 
and  proper."  ^ 

§  358.  Chancery  Powers  of  Federal  Courts  are  independent  of 
State  Laws.  — The  doctrine  that  the  jurisdiction  of  federal  courts 
in  equity  coincides  and  is  coextensive  with  the  jurisdiction  of 
chancery  in  England,  and  cannot  be  limited  and  restrained  by 
State  laws,  has  been  repeatedly  recognized.^ 

Thus  a  controversy  between  a  cestui  que  trust  and  a  trustee 
respecting  the  latter's  management  of  the  trust  estate  belongs 
peculiarly  to  a  court  of  chancery,  and  is  therefore  within  the  juris- 
diction of  the  federal  courts,  when  the  proper  parties  are  before 
them,  and  the  required  sum  is  in  dispute ;  nor  can  they  be  deprived 

1  Gibson  v.  Richmond  &  Danville  R.  (1819),  4  Wheat.  108,  11.5  ;  Neves  i- 
Co.  (1889),  37  Fed.  Rep.  743,  per  Wal-  Scott  (1851),  13  How.  268,  271;  Noonan  i;. 
lace,  J.  Lee  (1860),  2  Black,  499  ;   Payne  v.  Hook 

2  Lorman  V.  Clarke  (1841),  2  McLean,  (1868),  7  Wall.  425  ;  Pratt  v.  Northani 
568;  Boyle  V.  Zacbarie  (1837),  6  Pet.  635,  (1828),  5  Mason,  95,  105;  Chapman  v. 
658;    Robinson    v.    Campbell    (1818),    3  Borer  (1880),  1  McCrary,  49. 

Wheat.  212  ;    United  States  v.  Howiaud 


376 


RAILWAY   BONDS   AND   MORTGAGES. 


[chap.  XVI. 


of  this  jurisdiction,  or  any  portion  of  it,  by  its  absorption,  through 
State  legislation,  into  any  State  tribunals,  or  by  any  attempted 
transfer  of  the  subjects  of  litigation  from  one  department  of  juris- 
prudence to  another.^ 

§  359.  Statutes  affecting  Remedies  only  are  not  unconstitutional, 
as  impairing  the  Obligation  of  Contracts.'^  —  The  legislature  may, 
therefore,  vary  or  add  to  or  diminish  the  different  modes  of  fore- 
closure as  to  existing  mortgages,  provided  no  essential  right  that 
existed  before  is  taken  from  either  of  the  parties  to  the  mortgage. 
If  the  distinctive  features  of  the  law  regulating  foreclosures  when 
the  mortgage  is  made  are,  on  one  side,  a  right  to  redeem  within 
three  years,  and  on  the  other  a  mode  of  foreclosure  of  which 
reasonable  notice  must  be  given  to  the  mortgagor,  a  foreclosure 
is  valid  which  is  made  under  a  subsequent  statute  which  pre- 
serves those  rights,  but  prescribes  new  forms  of  procedure  for  the 
enforcement.^ 


1  Parsons  v.  Lyman  (1863),  5  Blatch. 


170. 

-  Bronson  v.  McKinzie  (IS-IS),  1  How. 
311. 

^  Kennebec  &  Portland  R.  Co.  v.  Port- 
land &  Kennebec  R.  Co.  (1871),  59  Me.  9. 
In  this  case  the  original  mortgagor  filed  a 
bill  to  be  allowed  to  redeem,  contending 
that  the  statute  law  of  Maine,  as  it  existed 
in  1852,  was  not  applicable  to  railroad 
mortgages  ;  that,  from  the  peculiar  nature 
of  those  instruments,  there  could  be  no 
foreclosure  of  them  except  by  bill  in 
equity  without  a  special  legislative  pro- 
vision therefor  ;  and  that  this  right  to 
foreclose  by  bill  in  equity  was  a  vested 
one,  which  entered  into  the  contract. 

Under  these  circumstances,  it  was  ar- 
gued, a  subsequent  statute  prescribing  a 
new  and  exclusive  proceeding  for  the  fore- 
closure of  such  mortgages  necessarily  vio- 
lated the  obligation  of  the  contract.  The 
majority  of  the  court  adopted  the  view 
that,  as  the  courts  of  Maine  had  no  general 
equity  j)Owers,  the  rights  of  mortgagors 
and  mortgagees  were  merely  what  the 
legislature  had  made  them,  and  that  the 
mortgagee  had  therefore  no  "  equity  of  re- 
demption," as  that  term  is  understood  in 
England,  and  in  the  States  which  have 
adopteii  the  English  doctrine  on  the  sub- 
ject, wlietlier  by  statutes  dealing  directly 
with  the  remcfly,  or  b}'  statutes  investing 
courts   with    powers    analogous    to    those 


exercised  by  the  English  Court  of  Chan- 
cery. Barrows  and  Tapley,  J  J.,  dissented. 
The  latter  filed  an  elaborate  opinion,  in 
which  he  took  the  ground  that  there  was 
nothing  in  the  words  of  the  statute  to  show 
that  it  was  intended  to  act  retrospectively, 
and  much  to  indicate  the  reverse  ;  that 
the  prior  statute  in  force  when  the  mort- 
gage was  executed  did  not  reach  a  railroad 
mortgage,  and  was  not  designed  to  do  so ; 
that  consequently  the  only  remedy  exist- 
ing when  the  contract  was  entered  into  by 
which  the  right  of  redemption  could  be 
foreclosed  was  by  application  to  a  court  of 
equity  ;  and  that  the  courts  of  Maine  had 
power  to  deal  with  cases  under  the  general 
legislation  defining  their  authority.  The 
learned  judge  also  took  the  ground  that 
whether  the  equit)'  powers  of  those  courts 
were  or  were  not  sufficient,  treating  the 
suit  as  one  for  foreclosure  merely,  their 
powers  in  regard  to  trusts  were  such  as  to 
furnish  an  adequate  and  complete  remedy 
for  the  enforcement  of  rights  springing 
from  a  conveyance  in  trust.  The  later 
statutes,  therefore,  having  in  no  way  modi- 
fied the  rights  of  the  eomjilainants,  the 
ti'ustees  still  held  the  title  in  trust  and 
were  answerable  as  such. 

In  Sullivan  v.  Portland  &  Kennebec  R. 
Co.  (1874),  4  Cliff.  '212,  it  was  held  that 
this  judgment  as  to  the  validity  of  this 
forecdosun^  was  binding  on  a  feileral  court. 

The  statutes  of  Maine  (187G,  ch.  122) 


§  359.] 


REMEDIES  OF  BONDHOLDERS,  ETC. 


377 


The  Supreme  Judicial  Court  of  Maine,  in  the  case  Last  cited, 
have  said  on  the  subject  of  foreclosure :  "  Aside  from  the  fore- 
closure proceedings  authorized  by  the  trustees,  equity  furnishes 
the  best  and  perhaps  now  the  exclusive  forum  for  foreclosure  of 
this  class  of  mortgages.  The  ordinary  method  of  foreclosure  of 
mortgages  on  real  estate  is  ill  adai)tcd  to  the  foreclosure  of  rail- 
road mortgages.  The  protection  of  all  the  large  interests  usually 
involved  in  the  latter  may  require  a  receivership,  or  an  injunction, 
or  an  order  of  sale,  none  of  wliich  can  be  accomplished  by  the 
ordinary  proceedings  for  foreclosure,  but  can  easily  be  provided 
for  by  the  flexible  processes  of  equity.  The  case  of  Kennebec  & 
Portland  Railroad  v.  Portland  &  Kennebec  Railroad,  59  Maine,  1, 
holding  otherwise,  was  decided  when  the  equity  powers  of  this 
court  were  limited,  and  is  not  applicable  under  tlie  full  equity 
powers  now  possessed. "  ^ 

On  the  other  hand,  where  a  mortgagee  has  a  fixed,  certain,  and 
definite  right  to  a  foreclosure  under  a  bill  in  equity,  and  to  a 
decree  of  the  court  for  an  absolute  and  immediate  sale  of  the 
premises  for  the  payment  of  his  debt,  the  legislature  cannot  de- 
prive him  of  this  right  by  statutes  creating  a  new  equity  of 
redemption  after  the  sale,  and  abrogating  the  right  to  sell  under 


gave  the  benefit  of  the  provisions  of  R.  S. 
1871,  ch.  51,  from  §§  47  to  70,  to  the 
holders  of  all  mortgage  bonds,  whether 
the  mortgage  was  foreclosed  as  provided  in 
ch.  51,  "  or  in  any  other  legal  manner  ;  " 
and  1878,  ch.  53,  having  made  the  same 
sections  of  ch.  51  of  R.  S.  1871  apply  to 
and  inchide  all  such  mortgages,  "in  all 
cases  in  which  the  principal  of  said  scrip 
or  bonds  shall  have  been  due  and  payable 
for  more  than  three  years,  and  shall  re- 
main unpaid  in  whole  or  in  part,  in  the 
same  way  and  to  the  same  extent  as  if  the 
mortgage  had  been  legally  foreclosed." 
The  bondholders  of  the  Somerset  Railway 
Company,  there  having  been  a  default  in 
payment  of  interest  on  their  bonds  for 
more  than  three  years,  by  the  votes  of 
one-half  in  interest,  had  the  Somerset 
Railway  Company  incorporated  and  took 
possession  of  the  property,  the  votes  of 
the  stockholders  of  the  Somerset  Railway 
Company  having  also  been  cast  in  favor  of 
the  new  organization.  Under  the  pro- 
visions of  the  statutes  the  most  of  the 
bondholders  surrendered  their  bonds  in 
exchange  for  shares  of  stock  at  their  face 


value.  There  was  a  sale  of  the  equit}''  of 
redemption  under  the  mortgage  under 
execution,  and  the  railway  company  pur- 
chased it.  The  trustees  under  the  mort- 
gage afterwards  instituted  an  action  for 
foreclosure  of  the  mortgage.  The  Supreme 
Judicial  Court  held  that  the  action  of  the 
bondliolders  under  the  statutes  amounted 
to  a  complete  foreclosure  of  the  mortgage  ; 
that  the  bondholders  who  had  surrendered 
their  bonds  for  stock  were  stockholders, 
and  those  who  had  not  surrendered  their 
bonds,  shareholders  in  the  Somerset  Rail- 
way Company,  and  that  the  title  of  the 
latter  to  the  property  of  the  former  com- 
pany was  absolute  and  complete,  and 
enjoined  the  trustees  against  further 
proceeding  in  their  foreclosure  suit,  and 
ordered  them  to  convey  their  naked  legal 
title  to  the  newly  organized  railway  com- 
pany. Somerset  Railway  v.  Pierce  et  al. 
(1895),  88  Me.  86;  s.  c.  33  All.  Rep. 
772. 

1  Somerset  Railway  v.  Pierce  et  al. 
(1895),  88  Me.  86,  96,  97  ;  s.  c.  33  Atl. 
Rep.  772. 


378  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  XVI, 

the  decree,  except  where  two-thirds  of  a  value  fixed  by  apprais- 
ers shall  be  offered  at  the  auction  sale.^ 

Where  bondholders  of  a  corporation,  by  a  bill  alleging  the  in- 
solvency and  unfitness  of  its  trustee  to  serve  the  holders  of  bonds 
of  the  corporation,  as  well  as  its  holding  an  adverse  interest  to 
them,  have  a  receiver  appointed,  this  is  equivalent  to  a  removal 
of  the  trustee.  The  bondholders  then  will  be  entitled  to  declare 
the  principal  of  the  bonds  due  in  default  of  interest  when  pro- 
vided for  in  the  mortgage,  and  to  foreclose  the  mortgage  without 
any  request  of  the  trustee  prior  to  beginning  the  action.^ 

§  359  a.  Illustrative  Cases  on  English  Debentures.  —  English 
bondholders  secure  to  themselves  a  summary  method  of  realizing 
upon  their  security  by  procuring  to  be  executed  along  with  their 
mortgage  an  instrument  called  a  receivership  deed,  under  which 
a  receiver,  to  collect  the  rents  and  profits  of  the  mortgaged  prem- 
ises to  be  applied  in  extinguishment  of  the  debt,  may  be  appointed 
without  an  application  to  court.^ 

Power  of  sale  under  the  Conveyancing  and  Law  of  Property 
Act,  1881,  which  applies  "  to  any  charge,  or  any  property,  for 
securing  money  or  money's  worth,"  does  not  apply  to  limited 
companies  formed  under  the  Companies  Act  of  1862,  and  such 
companies  can  have  that  power  only  by  express  agreement.* 

A  debenture-holder  has  the  right  of  an  ordinary  creditor  to 
petition  for  a  winding-up  order  under  section  199  of  the  Compa- 
nies Act  of  1862,  and  he  is  not  debarred  from  the  exercise  of  that 
right  by  the  circumstance  that  he  has  pursued  another  remedy, 
that,  to  enforce  his  security.^  But  a  winding-up  order  will  not 
be  made  where  no  good  could  result  from  it.^ 

Where,  in  an  act  of  Parliament  incorporating  a  company,  it  is 
stated  that  the  construction  of  the  works  authorized  by  the  act  is 
of  public  advantage,  the  court  will  be  reluctant  to  make  an  order 
to  wind  up  the  company,  unless  it  is  shown  that  there  is  no  other 
process  by  which  its  difficulties  may  be  overcome.'^ 

1  F.ronson  v.  McKinzie,  1  How.  311.  *  Blaker  v.  Herts  &  Essex  Waterworks 

2  Clay  et  al.  v.  Selali  Valley  Irrigation     Co.  (1889),  41  Ch.  D.  399. 

Co.  et  al.    (Wash.,    189G),    45   Pac.   liep.  ^  In  re  Burrough  of  Portsmouth,  etc. 

141.  Tramways  Co.  (1892),  2  Ch.  3G2. 

Certain  sections  of  an  act  of  Parliament  ^  In  re  Barton  ui)on  Humber  and  Dis- 

held  not  to  i)rohihit  an  action  by  a  mort-  trict   Water  Co.    (1889),  42  Ch.  D.  585; 

gagee    of    the    company    to    recover    the  In  re  The  Company  of  Free  Fishermen  of 

princijial  due  on  it.     Coleman  v.  Llanelly  Faversham  (1887),  36  Ch.  D.  329. 
Ry.  &  Dock  Co.  (1867),    17   L.   T.    Kep.  ^  /^^  re  Exmouth  Docks  Co.  (1873),  17 

N.  S.  86.  Equity,  181  ;  In  re  The  Company  of  Free 

8  Law    i;.   Glenn   (18C7),    2  Ch.   App.  Fishermen,  etc.  (1887),  36  Ch.  D.  329. 
684. 


§  359  a.]        REMEDIES  OF  BONDHOLDERS,  ETC.  379 

Where  debenture-holders  of  a  company,  formed  under  a  special 
act  which  gives  them  only  one  remedy,  namely,  the  aj)j)ointment 
of  a  receiver,  with  that  remedy  they  must  be  content,  and  a  peti- 
tion to  wind  up,  presented  on  their  behalf,  will  not  be  sustained.^ 

The  benefits  of  a  personal  judgment  may  be  secured  by  debent- 
ure-holders, whereby  they  may  avail  themselves  of  any  property 
not  included  in  their  security.  Such  a  judgment  may  be  recov- 
ered in  an  action  by  one  holder  on  behalf  of  himself  and  the  others, 
or  rather  the  court  will  declare  that  the  debenture-holders  are 
entitled  to  stand  in  the  position  of  judgment  creditors.^ 

Debenture-holders  are  entitled  to  recover  interest  by  way  of 
damages,  after  the  last  interest  coupon  has  been  presented  and 
paid  by  the  company,  if  tlie  principal  be  not  paid  at  maturity.^ 

The  holder  of  a  bond  issued,  under  the  provisions  of  a  trust 
deed,  by  a  company  is  not  a  creditor  of  the  company,  either  at 
law  or  in  equity,  within  the  meaning  of  the  Companies  Act  of 
1862,  his  right  of  action  being  through  the  -trustees  only.^  But 
it  has  been  held  that  the  holder  of  a  bond,  transferred  to  him 
under  the  Companies  Clauses  Consolidation  Act,  8  <fe  9  Vict., 
ch.  16,  is  entitled  to  sue  upon  it  in  his  own  name  and  behalf.^ 

A  debenture-holder  who  has  recovered  judgment  against  the 
company  issuing  the  debentures,  and  obtained  the  appointment 
of  a  receiver  of  the  company's  earnings,  is  not  entitled  to  issue 
execution,  except  as  a  trustee  for  himself  and  the  other  debenture- 
holders,  but  the  receiver  may  be  directed  to  take  proceedings  for 
the  purpose  of  making  the  judgment  available  for  the  benefit 
of  all.6 

^  In   re   Heme   Bay  Waterworks   Co.  *  In  re  Uruguay  Central,  etc.  Ry.  Co. 

(1878),  10  Ch.  D.  42.  (1879),  11  Ch.  D.  372. 

2  Hope  V.  Croydon  &  Norwood  Tram-  ^  Vertue  v.  The  East  Anglian  Ry.  Co. 
ways  Co.  (1887),  34  Ch.  D.  730.  (1850),  19  L.  J.  Exch.  235. 

3  Price  V.  Great  Western  Ry.  Co.  (1847),  ^  Bowen  v.  Brecon  Railway  Co.  (1867), 
244.  3  L.  R.  Eq.  Cases,  551. 


380 


RAILWAY   BONDS    AND   MORTGAGES.  [CHAP.  XVII. 


CHAPTER   XYII. 

REMEDIES   OF   BONDHOLDERS    FOR   THE   ENFORCEMENT    OF   THEIR 
BONDS.  —  ACTIONS   ON    THE   BONDS   AND    COUPONS. 


§  360.    Eight  of  Individual  Bondhold- 
ers to  maintain   an  Action  at 
Law  on  their  Bonds. 
{a)  General  Rule. 

(b)  Right      restricted     in     the 

Bonds  and  Mortgage. 

(c)  Right  not  suspended  by  Im- 

plication merely. 

(d)  Right    of    Personal     Action 

when    Money    is   lent   on 
the  Credit  of  the  ' '  Under- 
taking." 
361.    Individual   Bondholders   cannot 
levy  upon  the  Propertj'  mort- 


gaged for  the  Security  of  the 
Whole  Class. 
§  362.    Suit     maintainable     on      Bonds 
though  Mortgage  is  void. 

363.  Coupons    payable    out   of    Rev- 

enues, no  Recovery  on,  unless 
Existence  of  Fund  is  shown. 

364.  In  whose  Name  an  Action  on  a 

Bond  may  be  brought. 

365.  Demand   of  Payment,    how    far 

necessary  before  bringing  Suit 
on  a  Bond  or  Coupon. 

366.  Suits  on  Lost  Coupons. 


§  360.  Right  of  Individual  Bondholders  to  maintain  an  Action  at 
Law  upon  their  Bonds.  —  (a)  General  Rule.  —  Since  railroad  bonds 
import  an  absolute  promise  to  pay,  the  company  is  personally  liable 
for  the  principal  and  interest  thereof,  and  upon  its  failing  to  pay  is 
liable  to  suit  for  the  amount  due.^ 

The  bond  is  the  principal  debt ;  the  mortgage  an  incidental  se- 
curity. Remedies  peculiar  to  each  exist  both  in  law  and  equity  ; 
but  they  do  not  clash  and  destroy  each  other  :  they  coexist.  In 
an  action  of  debt  upon  the  obligation  itself,  the  fact  that  the  mort- 
gage contains  a  provision  whereby  the  trustees  are  empowered  to 
sell  for  breach  of  condition  upon  the  written  request  of  the  holders 
of  not  less  than  a  given  amount  of  the  bonds  is  entirely  irrelevant 
as  a  defence.'^ 

N(jr,  it  has  been  held,  can  the  company  defend  against  an  action 
for  defaulted  interest  uj)on  the  ground  that  the  mortgage  provides 
that  if  the  coupons  are  not  paid,  the  trustees,  at  the  request  of  hold- 

'  Florida  v.  Anderson  (1875),  91  U.  S.  Montgomery     Co.    Agricultural     Soc.    v. 

667.  Francis  (1883),  103  Pa.  St.  379;  Welch  v. 

2  Pliiladclphia  &  P.alt.  Central  R.  Co.  St.  Paul  &  Pacific  R.  Co.  (1878),  25  Minn. 

V.  Johnson  (1867),  61  Pa.  St.  127;  8.  p.  314. 


§  3G0.]  REMEDIES    OF   BONDHOLDERS,    ETC.  381 

ers  of  a  certain  amount  of  the  bonds,  shall  enter  into  possession 
of  the  railroad  and  sell  it  for  the  benefit  of  the  creditors ;  and  also 
contains  the  following  stipulations  :  "  It  being  further  expressly 
understood  and  agreed  (any  law  or  usage  to  the  contrary  notwith- 
standing) that  neither  the  whole  nor  any  part  of  the  property  .  .  . 
shall  be  sold  under  proceedings,  either  in  law  or  equity,  for  the 
recovery  ...  by  the  holder  or  holders  of  the  bonds  ...  of  the 
whole  or  any  portion  of  the  principal  or  interest  of  the  said  bonds, 
it  being  the  agreement  and  intention  of  the  parties  for  the  better 
sccurin'g  the  largest  possible  price  .  .  .  that  the  method  of  sale 
hereinbefore  provided  shall  be  exclusive  of  all  others.^ 

The  well-settled  rule  that  a  coupon  is  itself  a  negotiable  instru- 
ment, and  when  detached  may  be  sued  on  independently  of  whether 
the  bond  has  been  paid  or  not,  has  already  been  noticed  (Chap.  III., 
mite).     See  also  post,  this  chapter. 

The  amount  of  a  coupon  so  detached,  with  interest  after  demand 
of  payment,  is  recoverable  under  a  general  count  in  debt.^ 

(b)  lUglit  restricted  by  Provisions  in  the  Bonds  and  Mortgage.  — 
A  provision  in  the  mortgage  that  upon  the  continuance  of  a  de- 
fault for  six  months  the  principal  shall  become  due  and  payable, 
does  not  entitle  an  individual  bondholder  to  recover  the  principal 
as  well  as  the  interest  of  his  bonds  upon  the  occurrence  of  the  event 
referred  to,  where  the  provision  is  followed  by  one  to  the  effect 
that  the  trustee,  upon  the  written  request  of  the  holders  of  a  ma- 
jority of  the  bonds,  shall  proceed  to  collect  both  the  principal  and 
interest  of  all  such  bonds  by  foreclosure  and  sale.  The  method 
prescribed  iu  the  second  provision  for  the  euforcement  of  the  debt 
im})liedly  excludes  all  other  methods,  and  confines  the  bondholder 
to  the  remedies  expressly  provided.^ 

So  it  has  been  held  that  a  bondholder  cannot  maintain  an  action 
on  his  bonds,  so  far  as  the  principal  is  concerned,  because  of  a 
provision  contained  in  the  mortgage  but  not  in  the  bond,  "  that 
the  principal  sum  secured  shall  become  due  in  case  the  interest 
on  the  bonds  remains  unpaid  for  four  months."  A  provision  of 
this  kind  in  a  mortgage  is  not  designed  to  give  the  several  bond- 

1  Widener  v.  Eailroad  Co.  (Phila.  did  not  import  a  promise,  but  was  a  mere 
Com.  PL,  1875),  1  W.  N.  C.  472.  acknowledgment  of  indebtedness  for  inter- 

2  National  Exchange  Bank  v.  Hartford,  est  on  the  bond  itself,  and  therefore  could 
Prov.  &  Fitchburg  R.  Co.  (1866),  8  R.  I.  not  be  made  the  ground  of  an  action. 
375.  Crosby   v.  New   London,   Willimautic,  & 

In   an  early   Connecticut   case,  a  suit  Palmer  Pi.  Co.  (1857),  26  Conn.  121. 
to  recover  the  amount  of  an  interest  war-  ^  Batehelder  v.  Council  Grove  Water 

rant,  the  court  held  that  au  interest  war-  Co.  (1892),  131  N.  Y.  42  ;  s.  c.  29  N.  E. 

rant  of  the  old  style  on  a  railroad  bond  Rep.  801. 


382  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  XVTT. 

holders  actions  at  law  for  the  principal  of  their  bonds  in  case  of 
non-payment  of  interest,  but  to  give  the  trustees  a  right  to  bring 
suit  for  the  foreclosure  of  the  mortgage,  thus  making  the  mortgage 
a  more  complete  security  to  the  bondholders.^ 

So  where  the  bonds  themselves  as  well  as  the  mortgage  contain 
conditions  that  the  time  of  payment  of  principal  and  interest  may 
be  changed  and  postponed  from  time  to  time  at  the  option  of  the 
majority  of  the  bondholders,  the  coupons  are  not  negotiable  in- 
struments, and  a  coupon-holder,  being  chargeable  with  notice  of 
the  terms  of  the  bonds,  cannot  maintain  an  action  at  law  upon  his 
coupons  until  an  extension  of  the  time  for  payment  of  interest 
granted  by  the  majority  of  the  bondholders  has  expired,  although 
he  has  not  assented  to  the  postponement.^  But  the  conditions 
under  which  the  powers  of  the  trustees  or  the  majority  are  to  be 
exercised  must  be  fully  and  exactly  complied  with  in  order  to  de- 
prive a  coupon-holder  of  his  right  of  action  against  the  company. 
Bonds  which  provide  that  a  majority  of  the  holders  shall  have  the 
power  to  postpone  the  time  of  payment  "  in  case  of  a  default,"  do 
not  entitle  them  to  grant  an  extension  of  time  before  a  default 
has  actually  occurred,  so  as  to  debar  a  coupon-holder  who  has  not 
assented  to  the  postponement  from  enforcing  his  claim  by  a  suit 
at  law.2 

The  fact  that  the  mortgage  which  secures  the  bonds  covers  all 
the  property  of  the  corporation,  and  must  eventually  be  enforced 
for  the  benefit  of  all  the  bondholders  equally,  although  it  may 
subject  the  plaintiff  to  the  imputation  of  attempting  to  extort 
payment  from  the  company,  constitutes  no  defence  to  such  an 
action.  The  remedy  of  the  bondholders,  if  any  there  is,  must  be 
found  in  the  exercise  by  the  trustees  of  the  power  conferred  upon 
them  by  the  mortgage  to  take  possession  of  the  property  covered 
thereby,  and  use  its  proceeds  for  the  benefit  of  all  the  secured 
creditors.* 

(c)  Right  not  suspended  hy  Implication  merely.  —  This  right  of 
suing  to  judgment  upon  a  written  obligation  admitted  to  be  valid 
is  of  too  high  a  character  to  be  taken  away  by  implications,  espe- 
cially if  these  are  drawn  from  instruments  other  than  that  which 

1  Mallory  v,  "West  Shore  &  Hudson  On  remedy  by  petition  to  wind  np,  see 
River  R.  Co.  (1873),  35  N.  Y.  Sup.  Ct.  Portsmoutii  Tramways  Co.  (1892),  2  Cli. 
174.  ])iv.  363. 

2  Mcf'lelland  v.  Norfolk  Soutliern  R.  «  MrClelland  v.  Norfolk  Soiitliern  R. 
Co.  (1888),  110  N.  Y.  460  ;  s.  c.  18  N.  E.  Co.  (1888),  110  N.  Y.  469  ;  s.  0.  18  N.  E. 
Rep.  237.     Manning  v.  Norfolk  Southern  Rep.  237. 

R.  Co.  (see  foUowinff  section)  was  cited  hy  *  Ibid, 

counsel,  but  not  referred  to  by  the  court. 


§  360.]  REMEDIES   OF   BONDHOLDERS,   ETC.  383 

is  given  in  direct  and  positive  acknowledgment  of  the  debt.  The 
provisions  of  a  mortgage  securing  the  bonds  control  the  disposi- 
tion of  the  property  which  it  conveys,  but  do  not,  in  the  absence  of 
some  explicit  declaration  to  that  effect,  prevent  bondholders  from 
enforcing  their  claims  by  an  action  upon  the  bonds  themselves. 
This  right  of  action  is  not  taken  away  by  the  provision  commonly 
found  in  a  railroad  mortgage,  to  the  effect  that  if  interest  shall  re- 
main in  default  for  the  specified  period  the  principal  may,  at  the 
option  of  the  bondholder,  become  forthwith  due  and  payable,  and 
that  the  trustee  shall  exei'cise  such  option  and  declare  the  whole 
amount  due  upon  the  request  of  a  majority  in  interest  of  the  bond- 
holders, or  upon  a  like  request  waive  his  right  to  exercise  the 
option.  Nor  is  the  right  affected  by  a  provision  that  the  election 
of  the  trustees  to  pursue  one  or  other  of  the  alternative  remedies 
given  by  the  mortgage  shall  be  subject  to  the  power  of  a  majority 
in  interest  of  the  bondholders  to  instruct  the  trustees  to  waive  a 
default  or  to  enforce  their  claims.  Hence,  although  the  mortgage 
contains  provisions  of  this  description,  a  bondholder  who  refused 
to  assent  to  a  funding  scheme,  whereby  the  majority  of  his  co-bond- 
holders agree  to  extend  the  time  of  payment  of  the  coupons,  may 
sue  in  assumpsit  upon  defaulted  coupons.^ 

(d)  Rigid  of  Persoyial  Action  when  Money  is  lent  on  the  Credit 
of  the  Undertaking.  —  Where  a  canal  company  is  authorized  to 
borrow  money  on  the  credit  of  the  "  undertaking,"  and  it  is  spe- 
cially provided  that  the  creditors  are  to  have  no  priority  over  each 
other,  an  assignment  of  the  property  and  its  dues  to  the  persons 
lending  the  money,  as  a  security  for  the  principal  and  a  stipulation 
that  the  interest  is  "  to  be  paid  half-yearly,"  does  not  give  the 
lenders  a  right  of  action  against  the  company  itself.  Their 
remedy  is  by  entering  on  the  corporate  property .^ 

1  Manning  v.  Norfolk  Southern  R.  Co.  Where,  however,  the  instrument  evi- 
(1887),  29  Fed.  Rep.  838.  dancing  the  contract  not   only  implies  a 

2  Tontet  V.  Basingstoke  Canal  Co.  transfer  of  the  sulject-matter  till  the  debt 
(1837),  3  Bing.  N.  C.  433.  The  Canal  is  satisfied,  but  also  includes  a  stipulation 
Acts,  one  of  which  was  here  construed,  that  the  principal  is  to  be  repaid  on  a 
were  modelled  on  the  theory  that  the  specified  date,  this  imports  a  covenant  by 
proprietors  were  to  derive  the  returns  the  company  that  the  money  shall  be  paid 
from  their  investment,  chiefly  through  the  at  the  time  appointed,  and  for  the  breach 
use  of  the  canal  by  the  public  in  general,  of  this  covenant  an  action  lies  against  the 
Parke,  B.,  in  Hart  v.  liastern  Union  Ry.  company,  the  judgment  thereon  to  be 
Co.  (185'2),  7  Exch.  246.  That  the  cred-  satisfied  out  of  the  whole  property  be- 
itors  who  had  lent  money  on  the  security  Ibnging  to  it.  Hart  v.  Eastern  Union 
of  an  assignment  such  as  that  referred  to  Ry.  Co.  (1852),  7  Exch.  246;  affirmed 
in  the  text  should  have  no  personal  right  by  the  Exchequer  Chamber,  8  Exch. 
of  action  against   the   proprietors   was   a  116. 

necessary  deduction  from  this  theory. 


384  RAILWAY    BONDS    AND    MORTGAGES.  [CHAP.  XVU. 

§  3G1.  Individual  Bondholders  cannot  levy  upon  the  Property 
mortgaged  for  the  Security  of  the  Whole  Class.  —  A  bondholder 
when  suing  at  law  stands  on  the  same  plane  as  any  other  creditor. 
An  execution  sale  of  the  property  covered  by  the  mortgag:e  in  pur- 
suance of  a  judgment  obtained  in  such  a  suit  does  not  affect  in 
any  manner  the  title  of  the  trustees,  and  passes  only  such  interest 
as  the  company  has  in  the  property.^ 

As  to  the  rights  to  restrain  such  a  levy,  see  Chap.  XV. 

A  bondholder  may,  however,  subject  the  mortgaged  property  to 
the  payment  of  a  judgment  in  an  action  on  his  bonds,  if  he  is  in  a 
position  to  allege  that  the  residue  of  the  debts  secured  by  the 
mortgage  have  been  satisfied,  and  brings  the  trustees  before  the 
court.2 

§  362.  Suit  maintainable  on  Bonds  though  Mortgage  is  void. — 
As  already  stated  (Chap.  IL),  the  invalidity  of  a  mortgage  does 
not  render  invalid  the  bonds  secured  by  it.  An  action  to  recover 
the  debt  evidenced  by  a  bond  may,  therefore,  be  maintained  by 
the  holder,  although  the  mortgage  is  void.^ 

§  303.  Coupons  payable  out  of  Revenues,  no  Recovery  on,  unless 
Existence  of  Fund  shown.  —  Where  coupons  are  expressly  made 
payable  out  of  net  revenues  it  is  necessary,  in  a  suit  to  establish 
the  lien  of  the  bondholders,  to  allege  and  prove  the  existence  of 


1  Commonwealth  v.  Susquehanna  &  The  English  Companies  Clauses  Act 
Delaware  River  R.  Co.  (1888),  122  Pa.  St.  provides  ex])ressly  that  debenture-holders 
306  ;  s.  c.  15  Atl.  Rep.  448  ;  36  Am.  &  shall  be  paid  without  any  respect  to  pri- 
Eng.  R.  R.  Cas.  269.  "The  corporation  ority  in  the  date  of  their  debentures,  and 
in  such  a  case,"  said  the  court,  "  mort-  this  provision  has  been  held  to  be  incon- 
gages  its  franchises,  the  gift  of  the  State,  sistent  with  a  right  of  any  individual  de- 
its  corporate  powers  and  corporate  prop-  benture-holder  to  have  execution  of  a 
ei"ty.  These  are  not  land,  and  the  mort-  judgment  for  his  debt  otherwise  than  as 
gage  is  a  lien  upon  them  only  because  the  a  trustee  for  all  the  debenture-holders, 
making  of  such  a  mortgage  is  expressly  Bower  v.  Breen  Ry.  Co.  (1867),  L.  R-  3 
authorized  by  law.  By  the  terms  of  the  Eq.  540.  See  also  Brinsley  v.  Lynton 
mortgage  this  personal  property  is  con-  Hotel  Co.  (1895),  13  Rep.  371. 
veyed  to  the  mortgagee  in  trust  for  sale  2  Martin  &  Merriwether  v.  Mobile  & 
and  conversion  into  money  in  a  particular  Ohio  R.  Co.  (1870),  7  Bush  (Ky.),  116. 
manner,  and  he  is  charged  to  apply  tlie  »  Shaver  v.  Bear  River  &  Auburn  Water 
proceeds  to  the  payment  of  the  bondhold-  &  Mining  Co.  (1858),  10  Cal.  396. 
ers  pro  rata.  .  .  .  Tliat  the  remedy  of  the  Upon  much  the  same  principle  a  bona 
bondholders  against  the  property  conveyed  fide  creditor  is  not  precluded  from  par- 
te the  trustees  is  througli  him  only,  is  ticipating  in  the  assets  of  an  insolvent 
fairly  to  be  inferred  from  the  cases.  .  .  .  corporation,  for  the  reason  that  he  has 
When  it  becomes  necessary  for  him  to  taken  a  mortgage-  to  secure  his  debt; 
reacli  the  property,  he  must  proceed  and  this  is  declared  invalid  as  an  illegal 
against  the  trustee,  not  for  his  own  sep-  preference  of  a  creditor.  Thompson  v. 
arate  benefit,  but  as  a  bondliolder,  and  on  Huron  Lumber  Co.  (1891),  4  Wash.  600; 
behalf  of  the  bondholders  as  a  class."  s.  c.  30  Pac.  Rep.  741  ;  31  Pac.  Rep.  25. 


§§  364-366.]    REMEDIES  OF  BONDHOLDERS,  ETC.  885 

the  fund ;  and  when  there  are  no  such  revenues  on  hand,  a  demand 
of  payment  is  properly  refused. ^ 

§  364.  In  whose  Name  an  Action  on  a  Bond  may  be  brought.  — 
Wherever  bonds  are  conceded  to  be  negotiable  instruments,  or  in 
the  nature  of  negotiable  instruments  (see  Chap.  II.,  ante)^  the 
holder  may,  of  course,  sue  on  them  in  his  own  name  ;  but  in  l*enn- 
sylvania  a  distinction  has  been  taken  between  a  bond  payable  "  to 
bearer  "  and  one  payable  "  to  A.  or  his  assigns."  A  bond  in  the 
latter  form  cannot  be  sued  on  in  the  name  of  the  assignee  unless 
the  provisions  of  the  statute  of  1715  are  complied  with,  which  allow 
a  suit  by  such  assignee  only  when  the  assignment  has  been  made 
under  hand  and  seal  before  two  or  more  credible  witnesses.^ 

§  365.  Demand  of  Payment,  how  far  necessary  before  bringing 
Suit  on  a  Bond  or  Coupon.  —  As  to  whether  the  obligor  is  in  de- 
fault on  a  bond  or  coupon  payable  at  a  particular  place,  where  no 
demand  of  payment  has  been  made,  the  authorities  are  in  conflict.^ 
In  Pennsylvania  it  is  held  that  coupons  payable  at  a  particular 
place  import  that  the  debtor  will  have  a  deposit  at  the  time  and 
place  specified  to  answer  what  is  substantially  a  draft  on  the  funds 
of  the  debtor.  Without  showing  that  such  a  fund  was  provided,  it 
is  no  defence  to  an  action  on  coupons  to  allege  a  want  of  demand.* 

On  the  other  hand,  the  rule  in  South  Carolina  is  that  an  action 
may  be  maintained  on  a  bond  payable  on  a  day  certain  at  a  place 
named,  without  allegations  or  proof  of  demand  of  payment  at  the 
time  and  place  mentioned.^ 

Where  a  railroad  company  issues  bonds  payable  at  its  office  in 
a  particular  way,  and  at  the  maturity  of  the  bonds  there  is  no 
office  at  that  place,  a  demand  for  payment  elsewhere  is  sufficient.^ 

§  366.  Suits  on  Lost  Coupons.  —  The  right  to  sue  on  a  lost 
coupon  is  subject  to  the  same  limitation  as  the  right  to  sue  on 
any  lost  negotiable  instrument,  —  that  is  to  say,  the  plaintiff  must 
tender  indemnity  as  a  condition  of  being  allowed  to  bring  the 
action.^ 

1  Corcoran  v.  Che.sapeake  &  Ohio  ^  See  as  to  commercial  paper  generallj', 
Canal    Co.    (1874),     1    MacArthur,     358     Dan.  on  Neg.  Instr.,  §  1514. 

(1874).  4  Philadelphia  &  Bait.  Central  R.  Co.  v. 

As  to  the  liability  of  the  trustees  of  the  Johnson  (1867),  54  Pa.  St.  127  ;  Northern 

Internal  Improvement  Fund  of  the  State  of  Pennsylvania  R.  Co.  v.  Adams  (1867),  54 

Florida  to  pay  out  of  that  fund  the  interest  Pa.  St.  94. 

on  the  railroad  bonds  guarantied  by   the  ^  Langston  v.   South   Carolina  H.  Co. 

State,  see  Hawkins  v.  Mitchell  (1895),  34  (1870),  2  S.  C.  (U.  S.)  248. 
Fla.  405  ;  s.  c.   16  So.  Rep.  311.  '^  Alexander  v.  Atlantic,    Tennessee,  & 

2  Bunting's  Adnirs.  v.  Camden  &  At-  Ohio  K,  Co.  (1872),  &7  N.  C.  198. 

lantic  R.  Co.  (1876),  81  Pa.  St.  254;  s.  c.  ^  Fitchett  v.  Northern  Pennsylvania  R. 

15  Am.  Ry.  Rep.  570.  Co.  (1863),  5  Phil.  133. 

25 


386 


RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  XVIII. 


CHAPTER  XVIII. 


REMEDIES    OF   BONDHOLDERS.  —  SUITS    FOR    POSSESSION. 


367. 
368. 


369. 


Generally. 

The  Trustee's  Right  of  Entry 
must  be  exercised  in  Strict 
Accordance  with  the  Provi- 
sions of  the  Mortgage  which 
confer  the  Right. 

The  Right  of  a  Trustee  to  bring 
Suit  for  Possession  is  some- 
times implied. 

370.  When  a  Business  is  "unprofit- 

able "so  as  to  authorize  Trus- 
tee to  enter. 

371.  Trustees  of  First  Mortgage  can- 


not be  ousted  from  Possession 
by  Junior  Mortgagees. 
§  372.   Special  Powers    of  Trustee   not 
available  to  Bondholder  suing 
on  his  own  Behalf. 

373.  Equitable  Jurisdiction  of  Suits 

for  Possession. 

374.  Possession   by   the    Corporation 

under  Scrutiny  of  Court  and 
Parties  to  the  Suit. 

375.  What  Law  governs  in  Suits  for 

Possession. 


§  367.  Generally .1  —  If  the  mortgage  simply  stipulates  that, 
upon  default  in  the  payment  of  interest,  the  trustee  may  take 
possession,  he  may  take  possession  without  bringing  an  action  to 
foreclose,  and,  if  he  be  prevented  from  taking  possession,  may 
have  an  action  to  be  put  in  possession.^ 

But  after  a  receiver  has  been  appointed  for  an  entire  system  of 
railroads,  the  right  of  the  trustee  of  a  divisional  mortgage  upon 
whicli  default  has  been  made  is  not  absolute.  At  one  stage  of 
the  Wabash  litigation  ^  several  divisional  trustees  were  placed  in 
control  of  the  properties  covered  by  their  respective  mortgages, 
but  a  subsequent  application  by  the  trustee  of  another  of  these 
mortgages  to  be  put  in  possession  was  refused.  The  court,  in  its 
discussion  of  the  inexpediency  of  further  disintegrating  the  sys- 
tem, considered  the  rights  and  expectations  of  the  stockholders 
and  all  the  various  classes  of  bondholders.  It  was  pointed  out 
that  the  general  mortgage  bondholders  did  not  purchase  their 
bonds  with  the  simple  expectation  that  they  would  be  paid  out 
of  merely  the  residuum  left  after  paying  the  divisional  mortgages, 

1  As  to  questions  of  conflicting  jurisdic-  Co.  (1893),  52  Minn.  246  ;  s.  c.  53  N.  W. 

tion  in  suits  for  possession,  see  Chap.  XXI.,  Rep.  1151. 
on  jurisdiction.  8  See  Central  Trust  Co.  v.  Wabash,  St. 

»  .Seibert  v.  Minneapolis  &  St.  Louis  R.  L.  &  Pac.  Ry.  Co.  (1885),  23  Fed.  Rep.  693. 


§  368.]  REMEDIES    OF    BONDHOLDERS,  ETC.  387 

but  that  there  was  a  grand  system  to  be  worked  as  a  unit,  and 
that  this  would  malce  a  greater  and  better  security  for  their  bonds. 
As  there  was  a  movement  to  keep  it  together,  and  have  a  decree 
for  the  sale  of  the  entire  property  by  agreement  between  the 
representatives  of  the  majority  of  the  bondholders,  the  petition 
was  declined  until  the  development  of  events  showed  whether 
this  scheme  would  be  carried  out  or  not. 

Default  in  the  principal  is  not  necessary  to  enable  the  trustees 
to  maintain  a  suit  for  possession,  where  the  mortgage  expressly 
gives  the  right  to  enter,  either  upon  the  failure  of  the  company  to 
pay  any  of  the  overdue  coupons,  or  to  pay  the  principal  of  the 
bonds.^ 

The  right  of  the  trustee  to  take  possession  and  control  of  the 
property,  and  carry  on  the  business  for  which  it  is  used,  is  a 
property  right  or  interest  which  survives  the  voluntary  dissolu- 
tion of  the  corporation.^ 

§  368.  The  Trustee's  Right  of  Entry  must  be  exercised  in  Strict  Ac- 
cordance with  the  Provisions  of  the  Mortgage  which  confer  the  Right. 
—  If  they  are  permitted  to  take  possession  after  six  months'  de- 
fault in  interest,  "  on  being  requested  to  do  so  by  the  holders  of 
at  least  $100,000  of  bonds,"  a  request  from  such  bondholders  is  a 
condition  to  any  action  on  the  part  of  the  trustees.^ 

A  provision  that,  "  in  case  default  shall  be  made  in  the  payment 
of  interest,  etc.,  and  such  default  shall  continue  six  months  after 
the  same  has  been  demanded,  the  whole  principal  sum  shall,  at 
the  option  of  a  majority  in  interest  of  the  bonds,  become  forthwith 
due  and  payable  ;  and  in  such  case  it  shall  be  lawful  for  the  trustee 
to  enter  upon  the  property,"  etc.,  must  be  construed  as  meaning 
that  this  extraordinary  power  can  be  exercised  only  when  there 
has  been  both  a  default  in  the  interest  and  also  a  declaration  of 
the  bondholders  that  the  principal  has  become  due.  Especially 
should  this  meaning  be  attributed  to  the  provision  when  another 
section  of  the  deed  contains  directions  as  to  the  powers  and  duties 
of  the  trustee  in  regard  to  foreclosure  for  a  default  in  interest.* 

So  also,  where  the  mortgage  gives  the  right  of  entry  after  a 
month's  default  in  interest,  the  court  will  not  read  into  the  instru- 
ment a  provision  requiring  the  interest  to  be  paid  out  of  profits, 
and  on  this  theory  enforce  specific  performance  of  the  contract, 

1  Macon  &  Anniston  R.  Co.  v.  Georgia  ^  Southern  Pacific  R.  Co.  x\  Doyle 
Railroad  &  Bkg.  Co.  (1879),  63  Ga.  103  ;     (1882),  11  Fed.  Rep.  253,  266. 

s.  c.  1  Am.  &  Eng.  R.  R.  Cas.  378.  *  Union  Trust  Co.  i-.   Missouri,   Kans. 

2  Nelson  v.  Hubbard  (1892),  96  Ala.  &  Te.x.  Ry.  Co,  (1881),  26  Fed.  Rep. 
238  ;  s.  c.  11  So.  Rep.  428  ;  12  Ry.  &  Corp.     485. 

L.  J.  182. 


388  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  XVIII. 

when  the  interest  has  been  actually  paid,  but  out  of  insurance 
money  received  upon  the  destruction  of  the  corporate  plant.^ 

§  369.  The  Right  of  a  Trustee  to  bring  Suit  for  Possession  is 
sometimes  implied.  —  Where  the  mortgage  provides  that  the  com- 
pany, as  long  as  it  is  not  in  default  as  to  the  interest  or  principal 
of  its  bonds,  may  retain  possession,  the  right  of  a  trustee  to  bring 
suit  for  possession  is  implied.  Such  a  provision  embraces  the 
converse  proposition,  that,  if  the  company  does  make  default,  it 
is  not  entitled  to  retain  possession.^ 

§  370.  When  a  Business  is  "unprofitable"  so  as  to  entitle  Trustee 
to  take  Possession.  —  The  business  of  a  corporation  is  not  "  un- 
profitable," within  the  meaning  of  a  provision  in  a  trust  deed, 
that,  if  the  business  is  not  profitable,  the  trustee  may,  upon 
request  of  the  bondholders,  take  possession  of  the  property  where, 
after  making  allowances  for  differences  in  inventory  prices  and 
for  extraordinary  expenses  in  refunding  its  indebtedness,  profit  is 
shown,  although  its  books,  by  reason  of  failure  to  make  such 
allowances,  show  a  loss.^ 

§  371.  Trustees  of  First  Mortgage  cannot  be  ousted  from  Pos- 
session by  Junior  Mortgagees.  —  Bondholders  under  a  second  mort- 
gage have  no  right  to  bring  action  for  possession  against  the 
trustees  of  a  first  mortgage  in  possession  or  one  holding  under 
them.  Their  rights  are  subordinate  to  the  first  mortgage,  and 
they  have  merely  a  right  to  redeem.^ 

§  372.  Special  Po"wrers  conferred  on  Trustee  not  available  to  Bond- 
holder suing  on  his  own  Behalf.^  —  If  a  beneficiary  of  the  trust  deed 
comes  into  court  in  his  own  name,  upon  the  refusal  of  the  trustee 
to  act,  he  is  restricted  to  the  remedies  furnished  by  the  procedure 
of  the  court  appropriate  to  the  end  desired.  He  may,  as  shown 
in  the  succeeding  chapter,  foreclose  for  default  in  interest,  but  he 
is  not  entitled  to  have  the  court  exercise  the  powers  of  sequestra- 
tion and  sale  conferred  on  the  trustee  in  case  of  such  default.^ 

§  373.  Equitable  Jurisdiction  of  Suits  for  Possession.  —  An  action 
of  ejectment  may  be  maintained  by  the  trustee  immediately  after 
default  wherever  tlic  connuon-law  rule  as  to  the  rights  of  a  mort- 
gagee, after  condition  broken,  still  prevails ;  but  not  where  the 

1  Jlichigan  Trust  Co.  v.  Lansing  Lum-  *  'Webb  v.  Vermont  Central  R.  Co. 
ber  Co.   (1895),  103  Mich.  392;  s.  c.  61      (1881),  9  Fed.  Rep.  793. 

N.  W.  Rep.  668.  ^  For  the  special  powers  of  the  trustee, 

2  Dow  i;.  Memy)his&  Little  Rock  R.  Co.     consult  Chap.  XI. 

(1881),  20  Fed.  Hep.  260,  265.  «  McFadden  v.  Mays   Landing  &  Egg 

'  Michigan  Trust  Co.  v.  Lansing  Lum-  Harbor  City  R.  Co.  (1891),  49  N.   J.  Eq. 

ber  Co.  OHOn),  103  Mich.  392;  s.  c.  61  176;  s,  c.  22  Atl.  Rep.  930. 
N.  W.  Rep.  668. 


§  373.]  REMEDIES   OF   BONDHOLDERS,   ETC.  389 

doctrine  that  a  mortgage  is  simply  a  lien  has  been  adopted,  for 
the  legal  title  is  then  in  the  mortgagor.^  The  effect  of  the  usual 
provisions  in  trust  mortgages,  that  the  trustees  may  take  possession 
after  default,  is  to  invest  him,  by  the  express  stipulation  of  the 
parties,  with  the  same  riglit  that  a  mortgagee  possessed  under  the 
rule  of  the  common  law. 

The  view  has  been  taken  that  the  trustee  has  an  adequate 
remedy  for  the  enforcement  of  this  right  by  an  action  of  eject- 
ment for  the  real  estate,  and  action  of  claim  and  delivery  for  the 
personalty .2  But  the  better  opinion  is  that  the  remedy  at  law  is 
not  adequate  in  the  case  of  a  railroad  mortgage.  The  forms  and 
processes  of  law  are  not  flexible  enough  to  transfer  as  an  entirety 
mortgaged  property  of  such  a  complicated  character,  embracing, 
as  it  does,  real,  personal,  and  mixed,  and  a  separation  of  these 
several  kinds  of  property  would  be  repugnant  to  the  presumed 
intentions  of  the  parties  in  entering  into  the  contract.^ 

"  The  nature  of  the  property  with  the  possession  of  which  they 
[the  trustees]  seek  to  be  invested  renders  it  impossible  to  find  a 
remedy  in  a  single  suit  at  law.  Unless  resort  be  had  to  equity, 
there  must  be  a  multiplicity  of  actions  if  the  property  extends 
over  more  than  one  county,  and  resistance  is  made  to  their  claim 
of  possession,  besides  such  other  proceedings  as  may  be  necessary 
to  obtain  control  of  the  franchise  of  tlie  corporation.  In  addition 
to  this,  the  trust  is  to  be  regulated  after  possession  is  taken.  To 
control  all  this  property,  to  enforce  all  these  obligations,  and  to 
preserve  the  rights  of  all  the  parties  interested,  it  is  only  when 
exercising  equitable  powers  that  a  court  can  afford  a  complete 
remedy."  *  Such  a  suit  may  be  regarded  as  one  for  the  specific 
performance  of  the  contract,^  or  as  an  application  to  the  court  to 
exercise  its  general  powers  for  the  administration  of  the  trust.^ 

1  Dow  V.  Memphis  &  Little  Rock  R.  Co.  *  Shaw  v.  Norfolk  County  R.  Co. 
(1884),  20  Fed.  Eep.  260,   265  ;  s.  c.  17     (1855),  5  Gray,  162. 

Am.  &  Eng.  R.  R.  Cas.  324,  decided  with  ^  ilcLane  v.  Placerville  &  Sacramento 

reference  to  the  law  of  Arkansas.  Valley  R.  Co.   (1885),  66  Cal.  606  ;  s.  c. 

2  Rice  V.  St.  Paul  &  Pacific  R.  Co.  26  Am.  &  Eng.  R.  R.  Cas.  404  ;  Shepley 
(1878),  24  Minn.  464.  v.  Atlantic  &  St.   Lawrence  River  R.  Co. 

3  Dow  V.  I^Iemphis  &  Little  Rock  R.  Co.  (1868),  55  Me.  395  ;  Sacramento  &  Placer- 
(1884),  20  Fed.  Rep.  260,  265;  s.  c.  17  ville  R.  Co.  v.  Superior  Court  (1880),  55 
Am.  &  Eng.  R.  R.  Gas.  324,  where  the  Cal.  453  ;  Dow  v.  Memphis  &  Little  Rock 
court  thought  it  beyond  question  that  an  R.  Co.  (1884),  20  Fed.  Rep.  260,  265; 
action  of  claim  and  delivery  for  non-  s.  c.  17  Am.  &  Eng.  R.  R.  Cas.  324. 
delivery  of  property  could  not  he  an  ade-  ^  Shaw  v.  Norfolk  County  R.  Co. 
quate  remedy  against  a  mortgagor  which  (1855),  5  Gray  (Mass.),  162.  In  that  case 
was  insolvent.  This  ruling  is  in  direct  the  court,  in  considering  the  question  of 
antagonism  to  the  Minnesota  case  cited.  the  propriety  of  a  suit  in  equity,  observed 


390  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  XVIII. 

§  374.  Possession  by  the  Corporation  under  Scrutiny  of  Court  and 
Parties  to  the  Suit.  —  In  the  case  of  Chesapeake  &  Ohio  Canal  Co. 
the  mortgage  provided  that  the  corporation  should  retain  pos- 
session of  the  canal  so  long  as  it  should  comply  with  the  agree- 
ments in  the  mortgage ;  and  if  it  should  fail  to  comply  with  these 
agreements  from  any  cause,  except  a  deficiency  of  revenue  arising 
from  a  failure  of  business,  without  fault  on  its  part,  the  default  to 
be  made  to  appear  by  the  trustees,  —  then  the  trustees  might 
demand,  and  should  receive,  possession,  and  should  appropriate 
the  tolls  and  revenues.  On  a  bill  for  the  appointment  of  a 
receiver,  the  court  failed  to  find  from  the  evidence  that  the  bond- 
holders were  not  paid  because  of  mismanagement.  The  State  of 
Maryland,  as  the  owner  of  a  majority  of  valueless  stock  of  the  cor- 
poration, appointed  the  managers.  But  it  appeared  to  the  court 
equitable  that  the  bondholders  should  be  afforded  some  convenient 
method  of  scrutinizing  the  receipts  and  expenditures  of  the  canal 
company.  The  court  retained  the  bill,  and  decreed  that  the  com- 
pany file  with  the  court  quarterly  reports  for  the  information  and 
protection  of  the  bondholders.  The  court  dealt  with  the  corpora- 
tion as  a  trustee.^  This  case  does  not  conflict  with  that  class  of 
cases  which  hold  that  the  mortgagor  has  uncontrolled  powers  of 
earnings  while  not  in  default,  but  it  gives  a  right  of  inspection 
and  scrutiny  of  accounts  of  a  company  to  bondholders. 

Analogous  to  this  is  the  effect  of  the  commencement  of  a  suit 
for  possession.  In  such  case,  from  the  time  of  the  bringing  of  the 
suit  the  company  itself  is  to  be  treated  in  aH  respects  as  a  receiver 
of  the  property,  holding  for  the  benefit  of  whomsoever  in  the  end  it 
should  be  found  to  concern,  and  liable  to  account  accordingly .^  In 
this  last  case,  pending  the  appointment  of  a  receiv-er  the  defendant 
was  ordered  to  hold  the  property  subject  to  the  order  of  the  court. 

§  375.  What  Law^  governs  in  Suits  for  Possession.  —  The  law  of 
the  State  where  the  railroad  is  situated  furnishes  the  rule  for 
determining  the  rights  of  the  mortgagees  under  the  mortgage, 
unless  that  rule  can  be  and  has  been  changed  by  the  contract  of 
the  parties.^ 

that,  on  the  discharge  of  the  duties  imposed  of  proceeding  to  procure  for  that  purpose 

upon  the  trustees  by  the  contract,   "  the  the     intervention     and     exercise     of    its 

possession,  management,  and  control  of  the  authority." 

estates  and  interests  conveyed  to  them  may  i  Stewart  r.  Chesapeake  &  Ohio  Canal 

become  indispensable,  and  presumably  do  Co.  (1881),  5  Fed.  Rep.  149,  157. 

become  so,  when  the  circumstances  arise  2  ])f,vv  v.  Memi)his  R.   Co.    (1887),  124 

which  entitle  them  to  jio.ssession.     For  the  U.  S.  6.''>.'). 

due  enforcement   of  such    a  trust    ample  8  j)ow  r.    Mempliis   R.  Co.  (1884),  20 

l)owcr  is  found  in  a  court  of  equity,  and  a  Fed.  Re]).  2f)0  ;   Southern  Pacific  R.  Co.  v. 

bill  for  possession  is  an  aj)propriate  course  Doyle  (1882),  11  Fed.  Rep.  253. 


CHAP.  XIX,]  REMEDIES   OP   BONDHOLDERS,   ETC. 


391 


CHAPTER  XIX. 


FORECLOSURE   AND   SALE. 


Art.  I.  —  In  General.  '    §  390. 

§  376.  Right  to  foreclose  on  Default 
in  Paj'ment  of  Interest  inher- 
ent in  Mortgage  Contract. 

377.  Provisions  negativing  the  Right  391. 

to  foreclose  and  sell. 

378.  Mortgagee  not  required  to  resort  392. 

to  Sinking  Fund  for  Payment, 
when. 

379.  Improper  Motives  of  Complainant  393. 

no  Ground  for  denying  Relief. 

380.  Right  of  Prior  Mortgagee  of  Part 

of  Property  to  foreclose  pend-  394. 

ing  Suit   to    foreclose    Mort- 
gage on  whole. 

381.  Matters  not  considered  in  Fore-  395. 

closure  Suits. 

382.  Right  to  file  a  Bill  ceases  when 

the  Company  is  dissolved.  Art.  IV. 

Art.  II. —  Remedy  of  Foreclosure  cu- 
mulative UPON  Special 
Remedies  provided  by  the 
Mortgage.  §  396. 

§  383.    General  Rule. 

384.  Application  of  Rule  where  Trus- 

tee   is   precluded  from  taking 
Possession    until    the    Default  397. 

has     continued     a     Specified 
Period.  398. 

385.  Application  of  Rule  where  a  Re- 

quest from  the  Bondholder  is  399. 

a  Prerequisite  to  Entry  hy  the 
Trustees. 

Art.  III. —  When  the  Default  is  com-    Art.  V. 
plete  for  Purposes  of  Suit. 
§386.    Generally. 

387.  Right     to     foreclose,     how     far 

affected     by     Special     Agree-         §  400. 
ments.  401. 

388.  Words  of  Bonds  controlling  as  to 

whether  Default  has  occurred.  402. 

389.  What     amounts    to    a    Default  403. 

where    Bondholders     are     r 
ceiving  the  Income. 


Defaults  in  the  Payment  of  In- 
terest on  Divisional  Bonds  not 
available  in  a  Suit  to  fore- 
close a  Consolidated  Mortgage. 

What  is  a  Sufficient  Demand, 
where  that  is  required. 

Presentation  of  Coupons  at  Place 
designated  for  Payment  not  a 
Condition  Precedent  to  Suit. 

Waiver  of  the  Right  to  have 
Instalments  of  Interest  paid  at 
a  Particular  Place. 

No  Relief  in  Equity  against  Con- 
sequences of  Default  without 
Excuse. 

Benefit  of  Alternative  Agree- 
ment not  available  after  De- 
fault. 

—  Powers  of  Trustees  and 
Bondholders  respectively 
in  Regard  to  commencing 
Foreclosure  Suits. 

Power  of  Trustee  to  foreclose 
considered  with  Respect  to 
Provisions  for  a  Request  from 
the  Bondholders. 

Bondholder  estopped  by  Decree, 
though  no  Request  made. 

Default  may  be  taken  Advantage 
of  by  a  Single  Bondholder. 

Majority  of  Bondholders  may 
sometimes  prevent  Foreclos- 
ure. 

-Effect  of  Provisions  accel- 
erating the  Maturity  of 
the  Debt  on  Default  in 
the  Payment  of  Interest. 

Generally. 

Default  when  complete  so  as  to 
render  Principal  due. 

Rights  of  Minority  Bondholders. 

Acceleration  of  Maturity  pre- 
vented by  Words  of  Statute 
authorizing  Issue  of  Bonds. 


392 


RAILWAY    BONDS    AND    MORTGAGES. 


[chap.  XIX. 


Article  I.  —  In  General. 

S  376.  Right  to  foreclose  on  Default  in  Payment  of  Interest 
inherent  to  the  Mortgage  Contract.  —  111  the  absence  of  any  specific 
provision  to  tlie  contrary  in  the  mortgage,  the  right  to  foreclose 
accrues  as  soon  as  the  interest  is  in  default,  although  the  prin- 
cipal may  be  only  payable  at  the  end  of  a  fixed  period.^ 

The  foundation  of  this  rule  is  that  the  interest  is  not  a  mere 
incident  of  the  debt,  but  a  part  of  the  debt  itself,  and  therefore 
no  less  secured  by  the  property  subject  to  the  lien  than  is  the 
principal  itself.  The  rights  of  the  parties  are  accordingly  deter- 
mined by  the  principle  that  whenever  a  debt  is  payable  in  instal- 
ments, a  mortgage  securing  that  debt  may  be  foreclosed  whenever 
one  of  the  instalments  is  in  default.^ 

It  is  usual  for  railroad  mortgages  to  contain  express  provisions 
to  the  effect  that  the  lien  is  created  to  secure  the  payment  of  the 
interest  as  well  as  the  principal  of  the  bonds,  and  that  a  default 
in  the  payment  of  the  interest  alone  will  entitle  the  beneficiaries 
to  have  the  lien  enforced  by  certain  specified  proceedings.  But 
the  right  to  set  the  law  in  motion  for  the  enforcement  of  the  lien 
by  a  foreclosure  suit  exists  apart  from  any  such  stipulation  as  to 
the  employment  of  certain  remedies,  —  a  doctrine  thus  clearly 
and  emphatically  laid  down  by  the  Supreme  Court  of  the  United 


1  Edwards  v.  Martin,  25  L.  J.  Ch.  N.  S. 
284,  following  a  dictum  of  Sir  Edward 
Sugden  in  Barrowes  v.  Molloy,  2  Jones  & 
Lat.  521. 

2  We.st  Brancli  Bauky.  Chester  (1849), 
11  Pa.  St.  282,  citing  Gladwin  v.  Hitch- 
inan,  2  Vern.  135.  See  also  Goodman  ct  al. 
Trustees,  etc.  v.  Cincinnati  &  Chicago 
R.  Co.  (1858),  2  Disn.  (Ohio),  176,  where 
the  court  remarked  that  the  intere.st  "  may 
grow  out  of  and  be  dependent  on  the  prin- 
cipal debt,  yet,  when  once  due,  it  must 
draw  after  it  the  benefit  of  the  security 
given  for  its  payment ;  not  by  its  ultimate 
discharge  wlien  the  principal  shall  become 
due,  but  its  prom  [it  and  certain  liquidation 
at  the  several  times  at  which  it  was  agreed 
to  be  paid."  To  the  same  effect  see 
Farmers'  Loan  &  Trust  Co.  v.  Oregon  &,  C 
Ily.  Co.  (1885),  24  Fed.  Kep.  407  ;  Cleve 
land  V.  Booth  (1890),  43  Minn.  16  ;  s.  o 
44  N.  W.  Rep.  670  ;  Penna.  Co.  for  Ins 
on  Lives  and  Granting  Annuities  v.  Piiila 


delphia  &  Reading  R.  Co.  (1895),  69  Fed. 
Rep.  482. 

In  Swasey  v.  North  Carolina  R.  Co. 
(1874),  1  Hughes,  17;  s.  c.  reported  in  71 
N.  C.  571,  corporate  stock  had  tieen  pledged 
for  the  "redemption  "  of  certain  "  certifi- 
cates of  debt,"  and  the  certificates  bound 
the  debtor  for  the  payment  of  the  "  sum 
therein  mentioned  and  other  interest 
thereon."  Held,  that  the  stock  was  bound 
for  the  payinent  of  the  interest  itself,  and 
'that  a  foreclosure  might  be  decreed  on  de- 
fault of  any  instalment  thereof. 

A  debentui'e  in  the  usual  English  form, 
charging  all  the  property  of  the  company, 
both  present  and  future,  including  its  nn- 
called  capital,  confers  upon  the  holder, 
iTi  the  event  of  the  debenture  becoming 
inmiediately  payable  in  consequence  of 
a  winding  up,  the  ordinary  mortgagee's 
remedy  by  foreclosure  against  tlic  uncalled 
capital,  as  well  as  the  other  ])roperty  com- 
jirisrd  in  the  security.  Sadler  v.  Worley 
(18'Jl),  L.  R.  2  Ch.  i70. 


§  376.]  FORECLOSURE  AND  SALE.  393 

States :  "  Inasmuch  as  by  the  terms  of  the  first  article  (of  the 
mortgage)  the  conveyance  is  declared  to  be  for  the  purpose  of 
securing  the  payment  of  the  interest  as  well  as  the  })rincipal  of 
the  bonds,  and  by  the  fourth  article  the  mortgagor's  right  of  pos- 
session terminates  upon  a  default  in  the  payment  of  interest  as 
well  as  principal  on  any  of  the  bonds,  we  are  of  opinion  that,  inde- 
pendently of  the  provisions  of  the  other  articles,  the  trustees,  or, 
on  their  failure  to  do  so,  any  bondholder,  on  the  non-payment  of 
any  instalment  of  interest  on  any  bond,  might  file  a  bill  for  the 
enforcement  of  the  security  by  the  foreclosure  of  tlie  mortgage 
and  sale  of  the  mortgaged  property.  This  right  belongs  to  each 
bondholder  separately,  and  its  exercise  is  not  dependent  upon  the 
co-operation  or  consent  of  any  others,  or  of  the  trustees.  It  is 
properly  and  strictly  enforceable  in  the  name  of  the  latter,  but  if 
necessary  may  be  prosecuted  without,  or  even  against,  them.  It 
follows  from  the  nature  of  the  security,  and  arises  upon  its  face, 
unless  restrained  by  its  terms."  ^ 

A  practical  consideration  which  militates  strongly  against  a 
different  construction  of  the  mortgage  contract  is,  that,  if  resort 
could  not  be  had  to  foreclosure  and  sale  of  the  property  for  default 
in  the  payment  of  interest,  the  company  would  be  enabled  to  hold 
the  money  of  its  bondholders  for  a  long  period  of  years,  and  that  if 
the  bondholders'  remedy  were  thus  suspended  (possibly  for  the  life- 
time of  a  generation),  no  company  could  be  so  bold  as  to  ask,  nor 
any  capitalist  so  foolish  as  to  grant,  a  loan  for  railroad  purposes.^ 

An  agreement  of  certain  bondholders  of  a  railroad  company 
operating  its  road  at  a  loss,  and  owing  a  large  floating  indebted- 
ness, with  a  lessee  of  the  road,  unknown  to  the  company  or  the 
trustee  of  the  mortgage  securing  the  bonds,  that  they  would  not 
seek  to  enforce  the  payment  of  interest  on  the  bonds  for  ten 
years,  which  further  has  been  soon  repudiated  by  some  of  the 
parties  to  it,  cannot  be  interposed  by  a  bondholder  to  prevent  a 
foreclosure  of  the  mortgage  for  default  in  payment  of  the  interest 
in  an  action  brought  by  the  trustee. ^ 

1  Chicago,   Danville,   &  Vincennes  R.  by  subsequent   incumbrancer,   Sutherland 

Co.  V.  Fosdick  (1882),  106  U.  S.  47.     See  etal.  v.  Lake  Superior  Ship  Canal,  Railroad, 

article  oa  "Foreclosure  of  Railroad  Mort-  &  Iron  Co.  et  al.  (18/4),  9  N.  B.  R.  298; 

gages,"  by  Lisle,  20  Am.   L.    Rev.   867.  s.  c.  1  Cent.  L.  J.  127;  23  Fed.  Cas.  459, 

See   note    on    request    that   trustee    fore-  Case  No.  13,643. 

close    mortgage,    by   Adelbert   Hamilton,  2  Wilmer  v.  Atlanta  &  Richmond  Air 

23    Am.   L.   Reg.    N.  S.    49.     See   as   to  Line  Ry.  Co.  (1875),  2  Woods,  447. 
foreclosure  by  bondholder.  Stern  v.  Wis-  »  Farmers'  Loan  &  Trust  Co.  v.  Rocka- 

consin  Cent.  R.  Co.'  et  al.  (1879),  8  Rep.  way  Valley  R.   Co.  et  al.  (1895),  69  Fed. 

488  ;  s.  c.   22  Fed.   Cas.  1310,   Case  No.  Rep.  9. 
13,378.     See  as  to  foreclosure  of  mortgage 


394:  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  XIX. 

The  right  to  foreclose  for  interest  heing  inherent  in  the  con- 
tract, the  mere  omission  to  insert  a  provision  in  the  mortgage 
that  the  principal  is  to  become  due  upon  a  default  in  the  payment 
of  interest  will  not  prevent  a  resort  to  this  remedy.^ 

For  the  same  reason  a  resolution  of  the  board  of  directors 
directing  an  issue  of  bonds  and  a  mortgage  to  secure  them,  pay- 
able in  twenty-five  years,  with  semi-annual  payments  of  interest, 
authorizes  the  insertion  of  a  provision  that,  "  in  case  of  default  in 
the  payment  of  interest,  the  whole  principal  and  interest  shall  be 
due."  These  words,  it  was  declared,  were  necessary  to  render  the 
bonds  marketable,  and  added  nothing  which  the  law  itself  would 
not  grant.2 

§  377.  Provisions  -which  negative  the  Right  of  the  Trustees  to 
treat  a  Corporate  Trust  Deed  as  a  Mortgage  and  foreclose  it.  — 
These  are  occasionally  found  in  such  instruments.  This  con- 
struction has  been  placed  on  a  deed  securing  bonds  issued  to 
raise  money  to  discharge  existing  liens  on  tracts  of  unimproved 
land,  and  render  them  available  for  sale,  where  it  was  apparent 
from  the  general  term  of  the  instrument  that  the  essence  of  the 
plan  contemplated  wlien  the  bonds  were  issued  was  the  general 
discharge  of  the  debt  as  the  land  was  improved  and  sold  off  for 
building  lots,  and  that  the  plan  was  to  remain  the  same  whether 
the  companies  or  the  trustees  carried  it  out.  Special  stress  was 
laid  by  the  court  on  the  points  that  the  deed  fixed  no  limit  to  the 
mortgagor's  right  to  redeem ;  that  the  trustees,  upon  entry  for 
default,  were  to  manage  and  dispose  of  the  property  "  as  agents  of 
the  mortgagor,"  —  a  provision  evidently  referring  to  a  possession 
of  a  different  character  from  that  stipulated  for  in  ordinary  mort- 
gages ;  and  that  the  trustees,  after  applying  surplus  proceeds  of 
sales  to  the  payment  of  the  bonds,  were  to  restore  the  residue  and 
all  the  property  remaining  in  their  possession  to  the  mortgagor.^ 

§  378.  Mortgagee  not  required  to  resort  to  Sinking  Fund  for  Pay- 
ment, when.  —  The  fact  that  the  act  authorizing  a  corporation  to 
issue  bonds  also  provides  for  a  sinking  fund  for  their  redemption 
to  be  created  out  of  tlio  rents  of  certain  buildings  which  it  is  pro- 
posed to  erect  on  the  land  covered  by  the  mortgage  securing  the 
bonds,  does  not  preclude  a  bondholder  from  foreclosing  the  mort- 
gage when  the  bonds  fall  due.* 

1  Bardstown  &  Louisville  R.  Co.  v.  '  Shepard  v.  Richardson  (1887),  145 
Metcalfe  (18G2),  4  Mete.  (Ky.)  199.  Mass.  32  ;  s.  c.  11  N.  E.  Kep.  738. 

2  CoH  V.  New  Jersey  Midland  Ry.  Co.  *  Commonwealth  v.  Louisville  Trust 
(1879),  31  N.  J.  E'l.  105.  Co.    (1894),    26    S.    W.    Rep.    582,    not 

officially  reporteii. 


§§  379,  380.]  FORECLOSURE   AND   SALE.  395 

§  379.  Improper  Motives  of  Complainant  no  Ground  for  denying 
Relief. — Tliat  the  plaintiff  is  actuated  by  pei'sonal  or  improper 
motives  in  bringing  a  foreclosure  suit  is,  as  a  general  rule,  no 
ground  for  denying  him  the  relief  he  is  legally  entitled  to.  The 
sale  will  not  be  delayed  merely  because  it  appears  that  he  is 
acting  in  the  interest  of  a  rival  company,  and  that  his  object 
is  to  bring  the  mortgaged  property  to  a  speedy  sale  upon  a  de- 
pressed market,  and  thus  enable  that  company  to  acquire  it  at 
a  low  price,^  nor  because  the  object  of  the  bondholders  seeking 
foreclosure  is  to  obtain  ultimate  control  of  the  property.^ 

But  an  important  exception  to  this  rule  exists  where  the  holders 
of  the  bonds  who  are  pressing  for  foreclosure  are  also  holders  of 
a  majority  of  the  stock  of  the  mortgagor  company,  and  the  pro- 
ceedings are  for  the  purpose  of  obtaining  an  undue  advantage 
over  the  minority  stockholders.  It  is  therefore  a  good  defence  to 
an  action  for  foreclosure  that  the  bonds  held  by  the  plaintiff's 
cestuis  que  trust  were  acquired  by  them,  together  with  a  majority 
of  the  mortgagor  company's  stock,  in  pursuance  of  a  scheme  to 
throw  the  company  into  insolvency  by  misusing  the  power  to  con- 
trol its  affairs,  which  they  obtained  by  their  purchase  of  the  stock, 
and  then  enforced  the  mortgage  lien  under  circumstances  which 
will  enable  them  to  purchase  the  property  at  less  than  its  market 
value.  Such  conduct  is  inconsistent  with  the  duty  which  majority 
stockholders  owe  to  the  minority.^ 

§  380.  Right  of  Prior  Mortgagee  of  Part  of  Property  to  foreclose 
pending  Suit  to  foreclose  Mortgage  on  Entire  Property.  —  The  con- 
solidation of  the  mortgagor  company  with  another,  and  the  exe- 
cution of  mortgages  by  the  consolidated  company,  one  covering 
its  entire  property,  and  the  other  the  property  not  embraced  in 
the  first  mortgage,  does  not  affect  the  right  of  a  bondholder 
secured  by  the  first  mortgage  to  enforce  his  security  as  respects 
that  part  which  it  embraces.  He  cannot  be  delayed  in  the  fore- 
closure of  his  mortgage  and  compelled  to  abide  the  sale  of  the 
entire  property  in  a  suit  instituted  by  the  trustee  of  one  of  the 
subsequent  mortgages.  The  mere  fact  that  some  of  the  principal 
bondholders  secured  by  the  first  mortgage  have  interests  antago- 
nistic to  the  portion  of  the  property  belonging  to  the  consolidated 
company  which  is  not  embraced  in  that  mortgage  does  not  con- 

1  Tolerr.  East  Tennessee,  V.  &  G.  Ky.  enworth  v.  Chicago,  R.  I.  &  P-  R-  Co. 
Co.  (1894),  67  Fed.  Rep.  168.  (1885),  25  Fed.  Rep.  219,  229. 

2  Farmers'  Loan  &  Trust  Co.  v.  Green  3  Farmers'  Loan  &  Trust  Co.  v.  Xew 
Bay  &  Minnesota  R.  Co.  (1881),  6  Fed.  York  &  Northern  Ry.  Co.  (X.  Y.  Ct.  of 
Rep.  100, 110.     Compare  County  of  Leav-  App.,  1896),  44  N.  E.  Rep.  1043. 


396  RAILWAY    BONDS    AND    MORTGAGES.  [CHAP.  XIX. 

stitute  anv  equitable  reason  for  refusing  to  allow  the  mortgage  to 
be  foreclosed.^ 

§  381.  Matters  -which  will  not  be  considered  in  Foreclosure  Suits. 
—  A  claim  of  title  paramount  to  that  of  the  mortgagor  cannot  be 
tried  in  a  foreclosure  suit,  unless  the  jurisdiction  of  the  courts  is 
aided  in  this  respect  by  some  statutory  provision. ^ 

The  Code  of  Washington  (§§  143,  150)  has  not  changed  the 
rule  that  a  claim  of  prior  and  paramount  adverse  title  cannot  be 
litigated  in  a  foreclosure  suit.^ 

The  question  of  the  fairness  and  equity  of  reorganization  plans 
will  not  be  considered  upon  an  application  by  stockholders  of  a  rail- 
road company  to  interpose  a  defence  to  foreclosure  of  a  mortgage, 
since  any  person  is  entitled  to  purchase  at  a  foreclosure  sale, 
and  if  the  stockholders  believe  the  property  mortgaged  exceeds  in 
value  the  debts  upon  it,  they  may  purchase  it  themselves.* 

A  judgment  creditor  of  a  mortgagor  corporation  cannot,  in  a 
suit  to  foreclose  the  mortgage,  assert  that  there  was  no  resolution 
of  the  stockholders  for  its  issuance,  or  that  it  was  not  recorded.^ 

§  382.  The  Right  to  file  a  Bill  of  Foreclosure  in  an  Original  Proceed- 
ing ceases  -when  the  Corporation  is  dissolved.  —  The  claims  evidenced 
by  the  trust  deed  and  the  bonds  can  be  asserted  only  in  the  disso- 
lution proceeding,  after  it  has  been  instituted ;  and  if  an  original 
bill  is  filed  by  the  trustee  in  the  court  where  that  proceeding  is 
pending,  it  should  be  treated  on  the  footing  of  a  claim  presented 
therein,  and  dealt  with  accordingly.^ 

Article  II.  —  Remedy  of  Foreclosure  cumulative  upon 
Special  Remedies  provided  by  the  Mortgage. 

§  383.  General  Rule.  —  It  is  well  settled  that  the  special  powers 
conferred  upon  the  trustees  by  the  provisions  of  an  ordinary  rail- 
road mortgage,  for  the  purpose  of  enabling  them  to  enforce  the 
security,  in  case  of  a  default  in  the  payment  of  principal  or  interest, 
are  merely  cumulative  to  the  remedy  by  means  of  foreclosure.'^ 

1  Olyphant  v.  St.  Louis  Ore  &  Steel  ■*  Farmers'  Loan  &  Trust  Co.  v.  Toledo, 
Co.  (1885),  23  Fed.  Rep.  465.  A.   A.   &  N.   M.  R.  Co.    (1895),  67   Fed. 

2  It  is  believed  that  the  Practiee  Act  of    Rep.  49. 

Connecticut  admits  of  the  trial  of  sucli  a  ^  Farmers'  Loan  &  Trust  Co.  v.  Chicago 

claim.     See  DeWolf  v.  A.  &  W.   Sprague  &  N.  P.  R.  Co.  (1895),  68  Fed.  Rep.  412. 
Manufacturing  Co.  (1881),  49  Conn.  282  ;  ^  Nelson  v.   Hubbard  (1892),   96   Ala. 

Farmers'  Loan  &  Trust  Co.  v.  San  Diego  2.38  ;    .s.  c.  11  So.  Rep.   428  ;    12  Ry.  & 

Street  Car  Co.  (1889),  40  Fed.  Rep.  105.  Corp.  L.  J.  182. 

'  r'alifornia  Safe  Dejiosit  &  Trust  Co.  ''  McP'adden  v.  May's  I^anding  and  Egg 

V.   Cheney  Klectric  Light,    Tel.    &  Power  Harbor  City  H.  Co.  (1891),  49  N.  J.  Eq. 

Co.  (1895),  12  Wash.  138  ;    s.  c.  40  I'ac.  170  ;  s.  c.  22  Atl.  Rej..  9:52  (citing  a  large 

Rep.  732.  number    of    cases);    McAllister   v.    Plant 


383.] 


FORECLOSURE   AND   SALE. 


597 


Especially  should  the  remedy  by  entry  and  sale  be  regarded  as 
cumulative  when  the  laws  of  the  State  in  which  the  railroad  is 
situated  forbid  sales  under  a  power  in  a  trust  deed  by  proceedings 
out  of  court.     The  remedy  in  this  case  would  be  of  no  value. ^ 

In  the  case  of  the  trustees  there  is  an  additional  reason  why 
the  mere  fact  that  they  are  invested  with  these  special  powers 
should  not  preclude  them  from  a  resort  to  ordinary  equitable 
remedies.  They  are  holders  of  the  legal  estate  in  the  moi'tgage 
for  the  benefit  of  the  bondholders,  and  a  trustee  can  always  come 
into  a  court  of  equity  for  aid  or  instruction  in  conserving  his 
trust. ^ 

Sometimes  the  mortgage  itself  recognizes  by  its  terms  the  prin- 
ciple illustrated  in  the  cases  already  cited  in  this  section  by  an 
express  declaration  to  the  effect  that  the  remedies  of  entry  and 
sale  conferred  by  it  are  "  cumulative  to  the  ordinary  remedies  by 
foreclosure,"  ^  or  provides  that  nothing  therein  shall  be  held  or 
construed  to  prevent  or  interfere  with  the  foreclosure  of  the 
instrument  by  any  court  of  competent  jurisdiction.^ 

probable  motives  of  the  parties  in  inserting 
such  a  clause,  evidently  out  of  abundant 
caution,  inasmuch  as  it  merely  embodied 
the  general  rule  on  the  subject,  were 
thus  explained  by  Chief  Justice  Fuller : 
"It  is  easy  to  see  why  taking  possession 
and  selling  without  the  intervention  of  the 
court  should  be  guarded  against,  and  the 
trustee  not  be  required  or  allowed  to  pro- 
ceed in  that  summary  manner  except  on 
the  request  of  a  certain  percentage  of  the 
holders  of  the  bonds.  Such  proceedings 
might  result  in  injury,  which  could  not  be 
predicted  of  those  regulaily  taken  in  a 
court  of  equity.  Arbitrary  procedure  by 
the  trustee  was  not  deemed  desirable  in 
view  of  the  interests  of  both  mortgagor 
and  the  bondholders  as  a  class,  while  each 
would  find  the  protection  to  which  it  might 
be  entitled  at  the  hands  of  the  court."  A 
provision  to  the  effect  that  neither  the 
whole  nor  any  part  of  the  premises  mort- 
gaged shall  be  sold,  under  proceedings 
either  at  law  or  equity,  for  the  recovery  of 
the  principal  or  interest  of  the  bonds,  it 
being  the  intention  of  the  parties  that  the 
mode  of  sale  provided  by  the  mortgage 
shall  be  exclusive  of  all  other.s,  is  not  en- 
forceable, as  it  is  an  attempt  to  provide 
against  a  remedy  in  the  ordinary  course  of 
judicial  proceedings,  and  oust  the  juris- 
diction of  the  courts. 


(1876),  54  Miss.  106  ;  s.  c.  17  Am.  Ry. 
Rep.  389  ;  Central  Trust  Co.  v.  New  York 
City  &  Northern  R.  Co.  (1884),  33  Hun, 
513;  Alexander  v.  Central  Railroad  of 
Iowa  (1874),  3  DiU.  487  ;  First  Nat.  Fire 
Ins.  Co.  V.  Salisbury  (1881),  130  Mass. 
303;  4  Am.  &  Eng.  R.  R.  Cas.  480  ; 
Williamson  v.  New  Albany,  etc.  R.  Co. 
(1857),  1  Biss.  198. 

The  mortgagees  of  a  section  of  a  Cana- 
dian railway  in  the  hands  of  a  receiver, 
appointed  in  a  judgment  creditor's  action, 
were  held  entitled  to  proceed  in  equity  for 
a  sale  of  the  property  immediately  upon 
default,  regardless  of  a  clause  in  the  mort- 
gage providing  for  a  sale  after  the  lapse  of 
a  certain  time.  Allan  v.  The  Manitoba  & 
Northwestern  Ey.  Co.  (1894),  10  Man. 
Rep.  106. 

^  Alexander  v.  Central  Railroad  of 
Iowa  (1874),  3  Dill.  487. 

2  Phinizy  v.  Augusta  &  K.  R.  Co. 
(1893),  56  Fed.  Rep.  273. 

'  See,  for  example,  the  mortgage  under 
review  in  Mercantile  Trust  Co.  v.  Mis- 
souri, K.  &  T.  R.  Co.  (1888),  36  Fed. 
Rep.  221;  s.  c.  36  Am.  &  Eng.  R.  R.  Cas. 
259. 

^  Morgan's  Louisiana  &  Texas  R.  & 
Steamship  Co.  v.  Texas  Central  Ry.  Co. 
(1890),  137  U.  S.  171  ;  s.  c.  11  Sup.  Ct. 
Rep.  61 ;  45  Am.  &  Eng.  R.  R.  Cas.  63.   The 


398  RAILWAY   BONDS   AND    MORTGAGES.  [CHAP.  XIX. 

§  384.  Application  of  Rule  to  Cases  where  a  Trustee  is  precluded 
from  taking  Possession  until  the  Default  has  continued  a  Specified 
Period.  —  Agreeably  to  the  principle  stated  above,  it  has  been 
uniformly  held  by  the  courts  that  the  various  provisions  by  which 
the  action  of  the  trustees  is  i-egulated  in  the  exercise  of  those 
powers  will  not,  in  the  absence  of  an  express  stipulation  to  that 
effect,  be  construed  as  applicable  to  this  concurrent  remedy. ^ 

Thus  where  it  is  stipulated  that  "  until  default  shall  be  made 
in  the  payment  of  interest  for  six  months,  after  written  demand 
for  payment  by  the  trustee,  the  mortgagor  shall  remain  in  posses- 
sion, and  control  the  property,"  but  that  "  after  such  default  the 
trustee  may  take  possession,"  it  is  only  the  right  to  take  posses- 
sion that  is  limited,  and  the  trustee  may  foreclose  immediately 
upon  default.^ 

Similarly  a  provision  authorizing  entry  and  sale  by  the  trustee 
upon  the  expiration  of  twelve  months  after  the  default  of  the 
company  in  paying  the  principal  and  interest,  does  not  prevent 
the  trustee  from  bringing  an  action  to  foreclose  immediately  upon 
default  in  the  payment  of  interest.^ 

Nor  is  the  trustee  precluded  from  foreclosing  before  the  default 
thus  continued  six  months,  although  the  mortgage  provides  that 
"  until  default  the  mortgagor  shall  be  permitted  to  remain  in  pos- 
session," and  that  "  in  case  of  default  in  the  payment  of  interest 
for  six  months  it  shall  be  the  duty  of  the  trustee  to  take  steps  to 
enforce  the  rights  of  the  bondholders."  * 

Nor,  it  seems,  is  the  right  of  the  trustee  to  foreclose  immediately 
upon  default  in  the  payment  of  interest  affected  by  the  fact  that 
the  mortgage  provides  that,  in  case  th«3  mortgagors  "  fail  to  pay 
the  interest  on  any  of  the  said  bonds  at  any  time  when  the  same 
may  become  due  and  payable  according  to  the  terms  thereof,  and 
shall  continue  in  default  for  six  months  after  such  payment  has 
been  demanded,  .  .  .  then  and  thereupon  the  principal  of  all  the 
bonds  hereby  secured  shall  become  immediately  due  and  payable, 
provided,  etc.,  and  that  in  such  case  .  .  .  the  trustee  .  .  .  may 
take,  with  or  without  entry  and  foreclosure,  actual  possession  of  said 
road,"  and  there  is  no  express  provision  in  the  deed  for  immediate 

1  See  generally  on  this  subject  an  *  Meirantile  Tiust  Co.  v.  Chicago,  P. 
article  in  16  Centr.  L.  J.  247.  &  St.  L.  R.  Co.  (1893),  61  Fed.  Rep.  372. 

2  Farmers'  Loan  &  Trust  Co.  v.  Winona  Compare  Farmers'  Loan  &  Trust  Co.  v. 
&  St.  L.  K.  Co.  (1893),  59  Fed.  Rep.  9.^7.  Nova  Scotia  Ky.  Co.  (189i),  24  Nov.  Scot. 

'  Central  Trust  Co.  ;;.  New  York  City  542,  where  the  law  of  the  Province  made 

k  Northern  R.  Co.  (1884),  33  Hun,  513  ;  the  wliole  principal  due  upon  default,  and 

compare    iMcLane  i;.  PIncerville    &  Sacra-  it  was  held  that  a  provision  such  ns  that  in 

mento  Valley  R.  t'o.  (1885),  66  Cal.  606  ;  the  text  was  no  obstacle  to  an  immediate 

26  Am.  &  Eng.  R.  R.  Cus.  404.  foreclosure. 


§§  385,  386.]  FORECLOSURE   AND   SALE.  399 

foreclosure  upon  such  default.  Such  a  provision  merely  relates  to 
the  manner  in  which  the  principal  shall  be  made  due.^ 

§  385.  Application  of  Rule  to  Cases  w^here  a  Request  from  Bond- 
holders is  a  Prerequisite  to  Entry  by  Trustees.  —  The  right  of  fore- 
closure for  interest,  whether  by  the  trustee  acting  in  behalf  of  one 
or  more  bondholders  acting  in  behalf  of  the  whole  class,  is  not 
affected  by  a  provision  that  the  trustee  cannot,  without  the  re- 
quest of  a  certain  percentage  of  bondholders,  take  possession  of 
the  road,2  or  declare  the  principal  due,  and  foreclose  thereon  ;  ^  nor 
by  a  provision  that  until  default  the  mortgagor  shall  remain  in 
possession,  and  that,  on  default  of  the  principal  and  interest  on 
any  bond,  and  on  request  of  the  holders  of  one-half  in  amount  of 
the  bonds,  the  trustee  shall  sell  the  property  and  apply  the  pro- 
ceeds to  the  payment  of  the  bonds.^ 

The  same  conclusion  has  been  reached  where  a  trust  deed 
hypothecating  stock  provided  that  after  the  continuance  of  a  de- 
fault for  six  months  the  trustee  might,  and  upon  the  demand  of 
a  majority  in  amount  of  the  bondholders  should,  declare  the  prin- 
cipal due,  and  that  in  either  of  such  cases  might,  and  upon  request 
of  a  like  majority  should,  proceed  to  sell  the  shares,  and  also 
reserved  to  the  majority  the  right  to  revoke  the  declaration  of  the 
maturity  of  the  principal  and  put  a  stop  to  the  proceedings.  In 
spite  of  the  powers  thus  conferred  on  the  majority,  the  trustee 
may,  at  the  instance  of  the  minority,  foreclose  the  trust  deed  in 
their  behalf.^ 

Article  III.  —  When  the  Default  is  complete  for  Purposes 

OF  Suit. 

§386.  Generally.  —  "Default"  means  "something  wrongful, 
some  omission  to  do  that  which  ought  to  have  been  done  by  one 

1  Central  Trust  Co.  v.  Texas  &  St.  Louis  1   Biss.  198  ;  Guaranty  Trust  &  Safe  De- 

K.  Co.  (1885),  23  Fed.  Rep.  846.  posit  Co.  v.  Green  Cove  Springs  &  M.  R. 

"  Phinizy    v.  Augusta    &    K.    R.    Co.  Co.  (1890),  139  U.  S.  137  ;  s.  c.  11  Sup. 

(1893),  56  Fed.  Rep.  273  ;  Fanners'  Loan  Ct.  Rep.  512;  45  Am.  &  Eng.  R.  R.  Cas. 

&   Trust   Co.    V.    Chicago,    etc.    R.    Co.,  689  ;    Credit  Co.  v.  Arkansas  Central  R. 

27    Fed.   Rep.    152  ;    s.  p.   Alexander    v.  Co.  (1882),  15  Fed.  Rep.  46 ;  Mercantile 

Central  Railroad  of  Iowa  (1874),  3  Dill.  Trust  Co.  v.   Missouri,  K.   &   T.    R.    Co. 

487  ;  Central  Trust  Co.  v.  Texas  &  St.  L.  (1888),  36  Fed.  Rep.  221. 

R.  Co.  (1885),  23  Fed.  Rep.  846  ;  Dow  v.  8  Farmers'  Loan  &  Trust  Co.  v.  Chicago 

Memphis  &  Little  Rock  R.  Co.  (1884),  20  &  A.   R.  Co.   (1886),    27  Fed.  Rep.    146, 

Fed.   Rep.    260  ;    Eaton  &   Hamilton   R.  152. 

Co.  V.  Hunt  (1863),  20  Ind.   457;  Penn.  *  First  National  Fire  Ins.  Co.  v.  Salis- 

Co.   for  Ins.  of  Lives  and  Granting  An-  bury  (1881),  130  Mass.  303  ;  s.  c.  4  Am. 

nuities  v.  Philadelphia  &  Reading  R.  Co.  &  Eng.  R.  R.  Cas.  480. 

(C.  C.  E.  D.  Pa.),  36  W.  N.  C.  534  ;  Wil-  5  Toler  v.  East  Tennessee,  V.  &  G.  R. 

liamson  v.  New  Albany,  etc.R.  Co.  (1857),  Co.  (1894),  67  Fed.  Rep.  168. 


400  EAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  XIX, 

of  the  parties,  and  this  cannot  be  the  case  when  the  omission  to 
make  payment  has  the  concurrence  of  the  other  party."  Hence, 
if  the  mortgagee  assents  to  a  request  made  by  the  mortgagor  that 
the  payment  of  an  instalment  of  interest  shall  stand  over  till  a 
certain  day,  there  can  be  no  such  "  default "  as  will  justify  the 
foreclosure  of  the  mortgage  on  that  ground  until  the  stipulated 
day  arrives,  or,  supposing  the  promise  of  the  mortgagee  to  have 
been  made  without  consideration,  until  he  revokes  the  license  to 
extend  the  time,  and  makes  a  fresh  demand  for  payment  of  the 
instalment. 1 

§  387.  Right  to  foreclose,  how  far  affected  by  Special  Agreements. 
—  The  right  to  foreclose  for  interest  may  be  suspended  by  an 
absolute  covenant  on  the  part  of  the  mortgagee  that  the  principal 
shall  not  be  called  in  during  a  specified  period,  or  until  the  hap- 
pening of  a  certain  event.^ 

But  a  mere  agreement  on  the  part  of  the  bondholders  to  consent 
to  the  company's  paying  only  half  interest  for  an  indefinite  time, 
understood  not  to  exceed  a  certain  period,  cannot  be  construed  as 
binding  the  bondholders  to  wait  until  the  end  of  that  period 
before  instituting  proceedings  to  enforce  their  lien.  The  only 
restriction  which  such  an  agreement  puts  upon  their  action  is  that 
they  cannot  terminate  the  plan  thus  entered  upon  without  reason- 
able or  fair  notice  to  the  company .^ 

Nor  do  the  bondholders  forego  their  right  to  sell  the  road 
for  default  in  payment  in  interest  merely  by  entering  into  a 
contract  whereby  a  person,  in  consideration  of  his  advancing 
sufficient  money  to  pay  the  floating  debts,  is  given  a  lien  on  the 
road  for  the  amount  prior  to  that  of  the  mortgage,  and  invested 
with  the  control  and  management  of  the  property  for  a  period 
of  three  years.  Such  a  contract  raises  no  implication  of  a 
promise  by  the  bondholders  to  extend  the  time  for  payment 
of  interest,  and  leaves  the  rights  and  obligations  existing 
between  them  and  the  company  precisely  what  they  were 
before  it  was  executed.^ 

§  888.  Words  of  Bonds  controlling  as  to  whether  Default  has 
occurred.  —  The  bonds  being  the  principal  thing,  containing  the 

^  Albert  v.  Grosvenor  Investment  Co.  concluding   from   an   examination  of  the 

(18fJ7),  L.  R.  3  Q.  B.  123.  evidence  in  the  case,  which  was  very  vo- 

2  liurrowos  v.  MoUoy,  2  Jones  &   Lef.  luminous,     that    the     bondholders     were 

521,  per  Hugden,  L.  C.  equitably  estopi)ed  to  foreclose  the  mort- 

8  Union  Trust  ''o.  v.   St.  Louis,  Iron  gage  until  the  end  of  the  stipulated  period, 

Mountain,  &  Southern  R.   Co.    (1878),   5  provided  one-half  of  the  interest  was  pnid. 

Dill.  1,  citing  Albert  v.  Grosvenor  Invest-  *  South  St.  Louis  R.  Co.  v.  Plate  (1887), 

ment   Co.,  sujtra.     Treat,    J.,   dissented,  92  Mo.  614  ;  s.  c.  5  S.  W.  Rep.  199. 


§§  389-392.]  FORECLOSURE   AND    SALE.  401 

obligation  of  the  parties,  and  the  mortgage  a  mere  security  for 
the  performance  of  that  obligation,  the  terms  of  the  bonds  are 
controlling  in  regard  to  the  question  whether  demand  is  or  is 
not  necessary  to  render  the  default  complete.^  (But  see  Chap. 
II.,  ante.) 

§  389.  What  amounts  to  a  Default  where  Bondholder  is  receiving  the 
Income  of  the  Mortgaged  Property.  —  Where  the  holder  of  the  bonds 
sued  upon  is  a  railroad  company  which  has  leased  the  mortgaged 
road,  and,  in  place  of  paying  rent,  has  agreed  to  a))ply  the  net 
earnings  to  the  payment  of  the  interest  coupons,  the  complainant 
must,  in  order  to  establish  a  default,  show  that  such  earnings 
have  been  insufficient  to  pay  the  coupons.^ 

§  390.  Defaults  in  the  Payment  of  Interest  on  Divisional  Bonds  are 
not  available  in  a  Suit  to  foreclose  a  Consolidated  Mortgage.  —  This 
is  true  even  if  the  complainant  has  paid  the  divisional  bondhold- 
ers, so  as  to  become  subrogated  to  their  rights.  Such  rights  are 
limited  to  the  separate  divisions  of  the  road,  and  must  be  asserted 
against  the  specific  property  mortgaged.^ 

§  391.  "What  is  a  Sufficient  Demand,  where  that  is  required  before 
bringing  Suit.  — The  opiuioii  has  been  expressed  that  a  paper 
addressed  to  a  railroad  company,  which,  after  reciting  that 
payment  of  certain  interest  coupons  had  been  demanded,  and 
refused,  and  that  the  holder  will  look  to  the  company  for  pay- 
ment thereof,  is  a  sufficient  compliance  with  an  article  of  the 
mortgage  to  the  effect  that  there  shall  be  a  "  demand  made  in 
writing ; "    but  the  case  was  decided  on  another  point.^ 

§  392.  Presentation  of  Coupons  at  Place  designated  for  Payment  of 
Interest  when  not  a  Condition  Precedent  to  Suit  thereon.  —  Generally 
a  suit  may  be  brought  on  any  commercial  paper  payable  at  a 
particular  place,  without  demand  at  that  place.^ 

This  rule  is  applicable  to  a  suit  to  enforce  overdue  coupons 
although  the  bond  promises  to  pay  tlie  principal  and  "  interest 

1  Railroad  Co.  v.  Sprague  (1880),  103  receipts  from  the  leased  road  by  itself, 
U.  S.  756,  761.  lu  this  case  the  mortgage  and  had  no  right  to  pro-rate  them  with 
declared  that  the  principal  sum  became  the  receipts  from  its  own  road  upon  the 
due  after  a  six  months'  default  in  the  pay-  entire  mileage. 

ment  of  interest,  whether  it  had  been  de-  ^  Union  Trust  Co.   v.  St.   Louis,  Iron 

manded  or  not,  while  the  bonds  declared  Mountain,  &  Southern  R.   Co.   (1875),  5 

this   result    would   follow   if  the   default  Dill.  1. 

continued  for  that  space  of  time  after  de-  *  Pennsylvania  Co.    for   Ins.  of  Lives 

mand  of  payment.  and  Granting   Annuities   v.   Philadelphia 

2  Chamberlain  v.  Connecticut  Central  &  Reading  R.  Co.  (1895),  69  Fed.  Rep. 
R.  Co.  (1889),  54  Conn.  472;  s.  c.  9  Atl.  482. 

Rep.  244,  where  it  was  also  held  that,  in  ^  AVallace    v.    McConnell     (1839),     13 

accounting  for  the  receipts,  the  lessee  was  Pet.  136  ;  Montgomery  v.  Elliott  (1844), 
bound  to  account  for  and  apply  the  net     6  Ala.  701. 

26 


402  RAILWAY   BONDS   AND    MORTGAGES.  [CHAP.  XIX. 

at  the  rate  of  ten  per  cent  per  annum,  payable  semi-annually  on 
the  first  days  of  January  and  July  in  each  year,  on  presentation  of 
the  respective  coupons  hereto  attached,  both  principal  and  interest 
being  payable  at  the  financial  office  of  said  company  in  the  city 
of  New  York.  It  is  no  objection  to  holding  the  default  to  be 
complete  without  such  "  presentation "  that  the  bonds  also 
declare  that,  after  a  continuance  of  a  default  for  six  months, 
the  principal  shall  become  due.  A  coupon-holder  cannot,  by 
a  mere  failure  to  present  his  coupon  for  payment  when  due,' 
accelerate  the  maturity  of  the  principal  under  this  provision  ; 
for  the  claim  that  the  principal  of  the  bonds  had  become  due 
by  reason  of  default  in  the  payment  of  interest  would  be  con- 
clusively answered  by  an  averment  of  the  company  that  it  had 
funds  at  the  place  designated  for  payment  sufficient  to  pay  the 
coupons  if  they  had  been  presented.^ 

§  393.  "Waiver  of  the  Right  to  have  Instalments  of  Interest  paid  at  a 
Certain  Place. — Where  the  mortgage  stipulates  that,  upon  the 
continuance  of  a  default  for  sixty  days,  the  whole  principal  is 
to  become  due  and  payable  at  the  mortgagee's  election,  the 
mortgagee  must,  if  he  knows  that  the  mortgagor  has  an  instal- 
ment ready  at  the  usual  place  of  payment,  and  requires  payment 
at  the  place  designated  in  the  mortgage,  so  notify  the  mortgagor; 
and  if  he  fails  to  do  so,  and  his  agent  at  the  usual  place  of  pay- 
ment refuses  to  receive  payment  except  on  certain  conditions,  he 
waives  the  right  to  payment  elsewhere,  and  cannot,  on  default 
thereof,  treat  the  whole  debt  as  due.^ 

S  394.  No  Relief  in  Equity  against  Consequences  of  Default  ■without 
Excuse.  —  A  mortgagor  upon  whose  unexcused  failure  to  pay  an 
instalment  of  interest  the  principal  sum  has  been  declared  due, 
pursuant  to  a  provision  in  the  mortgage,  cannot  be  relieved  in 
equity  from  foreclosure  for  the  principal  upon  payment  of  inter- 
est and  costs,^ 

8  395.  Benefit  of  Alternative  Agreement  as  to  Payment  in  Scrip  not 
available  after  Default.  —  When  the  mortgage  simply  authorizes 
the  trustee  to  sell  the  property  in  case  of  default  as  to  the 
principal  sum  at  maturity  of  the  debt,  and  apply  the  proceeds 
to  satisfy  the  amount  due,  the  right  to  foreclose  becomes  abso- 
lute immediately  upon  a  default  in  the  payment  of  the  interest, 
and  the  company  cannot  afterwards  avail  itself  of  a  stipulation, 

1  Waninr  v.  Rising  Fawn  Iron  Co.  Mills  Tlaster  Co.  (1889),  37  Fed.  Rep. 
(1878),  3  Woods,  i>\\.  286. 

^  Union    Mut.   Life  Ins.  Co.  v.  Union  ^  "Warwick  Iron  Co.  v.  Morton  (1891), 

148  Pa.  72  ;  s.  c.  23  Atl.  Rep.  1065. 


§  396.]  FORECLOSURE  AND  SALE.  403 

whereby  the  company  has  the  option  of  paying  the  interest  in 
scrip  in  case  the  net  earnings  should  prove  insuflicient  to  meet 
the  same.  The  fact  that  the  mortgagee  made  no  demand  for  the 
payment  of  the  interest  on  the  day  when  it  was  due  is  no  bar  to 
a  foreclosure  suit  under  such  cii'cumstances,  for  the  company 
should  then  have  paid  in  money  or  scrip,  or  shown  itself  pre- 
pared to  do  so.i 

Article  IV.  —  Powers  of  Trustees  and  Bondholders  respec- 
tively IN  Regard  to  commencing  Foreclosure  Suits. 

S  396.  Po'wrer  of  Trustee  to  foreclose  considered  with  Respect  to 
Request  from  the  Bondholders.  —  (a)  Request  from  Bondholders^ 
ivhen  necessary.  —  The  power  of  the  trustees  to  take  the  initiative 
in  foreclosure  proceedings  for  the  enforcement  of  the  lien  is  often 
restricted  by  some  provision  requiring  them  to  procure  the  consent 
of  all  or  a  part  of  the  bondholders  before  they  act  in  their  behalf. 
Such  consent  is  then  an  indispensable  prerequisite  to  the  validity 
of  a  decree  of  foreclosure.^ 

Thus  a  provision  that,  after  the  principal  of  the  bonds  has 
been  declared  by  the  trustees  to  have  become  due,  by  reason  of 
a  continuance  in  the  default  of  the  interest  for  a  given  period, 
they  shall,  "  upon  the  written  request  of  the  holders  of  a  ma- 
jority of  the  said  bonds  then  outstanding,  proceed  to  collect  both 
principal  and  interest,  by  foreclosure  and  sale  of  the  property 
or  otherwise,  as  therein  provided,"  does  not  entitle  the  trustees, 
at  their  option,  to  file  a  bill  for  foreclosure.  The  office  of  this 
clause  in  reference  to  the  written  request  of  a  majority  of  the 
bondholders  is  not  merely  to  make  the  obligation  of  the  trustees 
imperative,  instead  of  optional,  but  it  is  to  be  construed  as 
securing  to  such  majority  the  right  to  control  the  proceedings 
of  the  trustees.  Under  the  former  supposition  the  provisions 
as  to  a  request  by  the  majority  would  be  nugatory,  inasmuch 
as  the  debt  having  become  fully  due,  by  the  declaration  of  the 
trustees,  for  all  the  purposes  of  the  mortgage,  it  would  be  in 
the  power  of  a  single  bondholder  to  proceed  for  himself  and  his 
associates  directly  for  the  same  object,  and  to  procure  the  same 
relief.^ 

1  Marlory.  Texas  &  Pac.  R.  Co.  (1884),  ^  Chicago,  Danville,  &  Vincennes  R, 
21  Fed.  Rep.  383.  Co.  v.  Fosdick  (1882),  106  U.  S.  47  ;  s.  c. 

2  Chicago,  Danville,  &  Vincennes  R.  12  Am.  &  Eng.  R.  R.  Cas.  367,  AVaite  and 
Co.  V.  Fosdick  (1882),  106  U.  S.  47 ;  s.  c.  Harlan,  JJ.,  dissenting,  who  thought  that, 
12  Am.  &  Eng.  R.  R.  Cas.  367.  though    the  trustees    might  possibly   be 


404  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  XIX. 

(b)  Request  from  Bondholders,  when  not  necessary.  —  On  the 
other  hand,  no  request  from  the  bondholders  is  necessary  to 
entitle  the  trustee  to  begin  suit  when  the  mortgage  expressly 
provides  that,  upon  the  continuance  of  the  default  for  a  specihc 
period,  tlie  principal  shall  immediately  become  due  and  payable, 
although  the  article  containing  this  provision  also  states  that 
the  trustee,  upon  the  request  of  the  holders  of  75  per  cent,  of 
the  outstanding  bonds,  may  take  possession  of  and  operate  the 
road,  and  that,  upon  a  like  request,  it  shall  be  the  trustee's  duty 
to  foreclose  the  mortgage,  and,  after  advertisement,  sell  the 
property  at  public  auction  to  the  highest  bidder  for  cash.  Es- 
pecially must  this  be  regarded  as  the  true  construction  of  the 
provision  when  the  mortgage  contains  in  another  place  a  clause 
whereby  it  is  stipulated  that  nothing  therein  shall  be  construed  to 
prevent  or  interfere  with  the  foreclosure  of  the  instrument,  the 
appointment  of  a  receiver,  or  any  other  act  or  proceeding,  appro- 
priate in  such  cases,  in  any  court  of  competent  jurisdiction.  Such 
a  clause,  although  not  imparting  any  right  which  does  not  exist 
without  it,  serves  to  show  that  the  restrictive  provisions  as  to 
a  request  by  the  bondliolders  are  not  intended  to  apply  to  fore- 
closure by  bill  in  equity,  but  merely  to  the  cumulative  remedy 
specified.  The  reason  for  the  distinction  is  obvious.  The  sum- 
mary proceedings  of  taking  possession  and  selling  may  result  in 
injury  which  cannot  be  predicated  of  proceedings  regularly  taken 
in  a  court  of  equity.  In  the  former  case,  arbitrary  action  on  the 
part  of  the  trustee  may  be  deemed  undesirable  in  view  of  the 
interests  of  the  mortgagor  and  of  the  bondholders  as  a  class. 
In  the  latter,  each  will  certainly  find  the  protection  to  which  it 
may  be  entitled  at  the  hands  of  the  court.^ 

restrained  from  going  on  with  a  suit,  if  the    presentation    and    default   upon    the 

the  majority  of  the  bondholders  should  in-  coupons  was  full  and  was  not  disputed, 

terfere  in  an  ap[)ropriatft  way,  yet  when  The  mortgages  specifically  provided  that, 

they  all  came  in  and  availed  themselves  of  upon    such    default   continuing   for  sixty 

what  had  been  done  by  the  trustees,  the  days  after  demand,  the  principal  of  all  the 

corporation  itself  was   in   no   position  to  bonds  should  become  immediately  due  and 

defend    because  a   request  had   not   been  payable.     The   Texas   Company  and   the 

formally  made  in  advance.     (See  p.  80  of  ]\Iorgan  Company  both  admitted  that  the 

oiiinion.)  ])nncipal   had  become  due   and  payable. 

1  Morgan's  La.  &  Texas  Railroad  &  The  instruments  did  not  require  a  written 
Steamship  Co.  v.  Texas  Central  R.  Co.  recjuest  for  the  declaration  by  the  trustee 
(1891),  137  U.  S.  171  ;  s.  c.  11  Sup.  Ct.  that  the  principal  was  due,  or  such  a  dec- 
liep.  61  ;  4.5  Am.  &  Eng.  R.  R.  Gas.  63,  laration  and  notification  to  the  defaulting 
distinguishing  Cliicago,  Danville,  &  Vin-  company,  in  order  to  make  the  principal 
cennes  R.  Co.  v.  Fosdick,  supra,  as  fol-  mature.  That  was  a  consequence  of  a  do- 
lows  : —  fault  continuing  sixty  days  after  demand. 

"In    the    case    at    bar    the    proof    of  Nor  was  there  any  restriction   upon  the 


§§  397,  398.]        FORECLOSURE  AND  SALE.  405 

§  397.  Bondholder  estopped  by  Decree,  though  no  Request  made. 
—  Even  if  a  trustee  is  not  entitled  to  foreclose  without  the  re(|uest 
of  the  holders  of  a  certain  percentage  of  the  bonds,  a  bondholder 
is  estopped  to  complain  of  a  decree  rendered  in  a  suit  brought  by 
the  trustee  if,  with  a  full  knowledge  of  all  the  facts,  he  })rovc8 
before  the  master  bonds  of  a  value  exceeding  that  percentage.^ 

§  398.  Default  may  be  taken  Advantage  of  by  a  Single  Bondholder, 
unless  the  Mortgage  provides  otherwise.^  — This  rule  is  based  uj)on 
the  simple  principle  that  the  failure  to  pay  even  one  of  the  instal- 
ments of  interest  is  a  breach  of  the  conditions  of  the  trust  deed, 
the  declared  purpose  of  w^hich  is  to  secure  the  payment  of  the 
principal  as  well  as  the  interest.'^ 

The  right  of  a  coupon-holder  to  foreclose  for  default  in  the  pay- 
ment of  interest  is  not  affected  by  a  provision  in  the  mortgage 
that,  if  the  interest  shall  remain  unpaid  for  a  given  period,  the 
principal  shall  become  due,  and  that  the  trustees  "  may,  and  upon 
the  written  request  of  a  majority  in  amount  of  the  bonds  shall, 
.  .  .  Avithin  a  reasonable  time  proceed  to  foreclose  the  mortgage." 
Such  a  clause  is  operative  as  a  restriction  upon  the  coupon-holder's 
right  to  bring  suit,  only  when  it  is  sought  to  take  advantage  of  the 
default  as  advancing  the  date  when  the  principal  becomes  due.* 

The  reasons  for  not  denying  to  individual  bondholders  the  right 
to  foreclose  are  still  stronger  where  the  mortgage  expressly  provides 
that  they  may  not  levy  upon  any  part  of  the  mortgaged  premises.^ 

This  right  of  the  individual  bondholder  is  not  however  carried 
to  the  extent  of  allowing  him  to  obtain  a  decree  for  his  exclusive 
benefit.  He  is  bound  to  act  for  all  standing  in  a  similar  position, 
and  not  only  to  permit  other  bondholders  to  intervene,  but  to  see 
that  their  rights  are  protected  in  the  final  decree.^ 

power  to  proceed  by  bill  in  equity,  but,  on  ^  Fanners'  Loan  &  Trust  Co.  v.  Chicago 

the  contrary,  any  intention  to  impose  such  &  A.  Ry.  Co.  (18S6),  27  Fed.   Rep.  152  ; 

a  restriction  was  disowned."  Pennsylvania  Co.  for  Ins.  on   Lives   and 

As  to   the   reasons   here   assigned    for  Granting    Annuities    v.     Philadelphia    & 

placing  such  special  limitation  upon  the  Reading  R.  Co.  (1S95),  69  Fed.  Rep.  482. 

power  of  the  trustee  to  resort  to  tlie  sum-  *  Beekman  v.  Hudson   River  &  West 

mary   remedies  given   by   the   mortgage,  Shore  R.  Co.  (1888),  35  Fed.  Rep.  3  ;  s.  c. 

compare   the   remarks  of  Brewer,    J.,   in  4  Ry.  &  Corp.  L.  J.  220  ;  compare  Penu- 

Mercantile  Trust  Co.  v.  Missouri,  K.  &  T.  sylvania  Co.  for  Ins.  on  Lives  and  Granting 

R.  Co.  (1888),  36  Fed.  Rep.  221 ;  36  Am.  Annuities  v.   Philadelphia  &  Reading  R. 

&  Eng.  R.  R.  Cas.  259.  Co.  (1895),  69  Fed.  Rep.  482. 

1  Credit  Co.  v.  Arkansas  Central  R.  ^  Pennsylvania  Co.  for  Ins.  on  Lives 
Co.  (1882),  15  Fed.  Rep.  46.  and  Granting  Annuities  v.  Philadelphia  &. 

2  Chicago,  Danville,  &  Vincennes  R.  Reading  R.  Co.  (1895),  69  Fed.  Rep.  482, 
Co.  V.  Fosdick  (1882),  106  U.  S.  47  ;  s.  c.  6  ^^.^  Orleans  &  Pacific  Ry.  Co.  v. 
12  Am.  k  Eng.  R.  R.  Cas.  267,  from  which  Parker  (1891),  143  U.  S.  42  ;  s.  c.  12  Sup. 
a  quotatioH  was  made,  supra.  Ct.  Rep.  364. 


406  EAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  XIX. 

The  right  of  an  individual  bondholder  to  begin  suit  is  some- 
times circumscribed  by  the  provisions  of  the  mortgage.  A  stipula- 
tion therein  that  no  proceedings  shall  be  taken  by  any  bondholder 
secured  thereby  to  foreclose  independently  of  the  trustee,  until 
after  the  refusal  of  the  trustee  to  comply  with  a  requisition  first 
made  upon  him  by  a  certain  percentage  of  the  bondholders,  is 
reasonable  and  valid.  It  is  not  the  purpose  and  effect  of  such  a 
stipulation  to  divest  the  bondholders  of  their  rights  to  judicial 
remedies,  or  to  oust  the  courts  of  their  jurisdiction,  but  it  is 
merely  the  imposition  of  certain  conditions  upon  themselves  in 
respect  to  the  exercise  of  that  right.^  In  this  connection  compare 
the  "  debenture-holder's  action  "  in  England. 

So  a  provision  in  a  mortgage  that  "  no  suit,  action,  or  proceed- 
insr  for  its  foreclosure  or  for  the  execution  of  the  trusts  or  other 
remedy,  shall  be  brought  or  instituted  except  by  the  trustee 
after  notice  upon  default,  upon  request  in  writing  of  one-fifth 
in  value  of  the  holders  of  the  bonds  and  the  offer  of  indemnity 
against  costs,"  is  binding  on  the  bondholders  in  the  absence  of 
fraud  or  mismanagement  on  the  part  of  the  company .^ 

§  399.  A  Majority  of  the  Bondholders  may  sometimes  prevent  a 
Foreclosure  for  Interest  at  the  Instance  of  some  of  their  Co-bond- 
holders. —  Thus  it  has  been  held  that  where  the  mortgage  secures 
bonds  to  the  amount  of  $1,500,000,  which  had  several  years  to 
run,  and  were  above  par  in  the  market,  and  it  appeared  that  the 
foreclosure  suit  was  begun  in  behalf  of  holders  of  only  $79,000 
worth  of  the  bonds,  and  was  instituted  for  the  purpose  of  re- 
organizing the  company,  and  compelling  the  bondholders  to 
take  the  sums  due  to  them  or  accept  a  lower  rate  of  inter- 
est, those  bondholders  who  did  not  wish  to  foreclose  should  be 
allowed  to  purchase  the  bonds  of  those  who  did  wish  to  fore- 
close, and  stop  the  proceedings  upon  payment  of  all  costs  and 
expenses.^ 

So  a  single  holder  of  bonds,  providing  that  the  principal  shall 
become  due  upon  default  in  the  payment  of  interest,  cannot  recover 
such  principal  upon  default  in  the  payment  of  interest,  where  the 
scheme  of  payment  provided  in  the  mortgage  shows  that  the  in- 
tention was  that  the  bondholders  should  look  to  the  mortgaged 

1  Seibert  v.  Minneapolis  &   St.   Louis         ^  McGeorge  u.  Big  Stone  Gap  Improve- 

Ry.  Co.  et  al.  (Grigges,  Intervpiier,  189'?),  ment  Co.  (1893).  57  Fi'd.  Rep.  262. 
62  Minn.  148  ;  s.  c.  53  N.  W.  Rep.  1134  ;  «  Tillinchast  v.  Troy  &  Iio>;ton  R.  Co. 

57  Am.  &  Eiig.  R.  R.  Gas.  20!)  ;  Guilford  (1888),  48  Ilun,  420 ;  s.  c.  1  N.  Y.  Suppl. 

V.  MinnfapoliH,   S.   Ste.   M.  &  A.  Ry.  Co.  243. 
(1892),  48  Minn.  5fiO  ;  s.  c.  [>l  N.  W.  Rep. 
658. 


400.] 


FORECLOSURE   AND   SALE. 


407 


property  for  repayment,  and  tliat  foreclosure  should  rest  in  the 
discretion  of  the  majority  of  the  bondholders.^ 

Article  V.  —  Effect  op  Provisions  accelerating  the  Maturity 
OF  THE  Debt  upon  Default  in  Payment  op  Interest. 

§  400.  Generally.  —  A  common  provision  in  mortgages  is  that, 
on  the  continuance  of  a  default  in  the  payment  of  interest  for  a 
specified  period,  the  principal  shall  become  due  either  absolutely 
or  at  the  option  of  the  trustees.  Whether  this  right  to  accelerate 
the  time  of  payment  exists  is  a  question  which  must  be  decided  by 
the  circumstances  existing  when  it  was  made.  It  cannot  be  sup- 
ported by  subsequent  occurrences.^ 

The  right  must  also  be  granted  in  express  terms,  for  the  court 
cannot  engraft  a  clause  for  that  purpose  on  the  contract.^ 

Thus,  if  the  principal  is  to  become  due  at  the  election  of  the 
trustees,  it  must  be  shown  that  they  have  exercised  their  right  of 
election.* 


1  Batchelder  v.  Council  Grove  Water 
Co.  (Superior  Ct.  N.  ¥.,  1891),  38  N.  Y. 
St.  Repr.  529  ;  s.  c.  14  N.  Y.  Suppl.  306. 

2  Chicago,  Danville,  &  Vincennes  R. 
Co.  V.  Fosdick  (1882),  106  U.  S.  47. 

3  McFadden  v.  ilays  Landing  &  Egg 
Harbor  City  R.  Co.  (1891),  49  N.  J.  Eq. 
176 ;  s.  c.  22  Atl.  Rep.  932,  where  it  was 
held  that  the  right  of  a  bondholder  to 
demand  the  discharge  of  the  principal 
after  a  default  in  the  interest  could  not  be 
inferred  from  a  clause  in  the  mortgage 
empowering  the  trustee,  after  such  a  de- 
fault had  continued  for  a  stated  time,  to 
take  possession  of  the  mortgaged  property 
and  apply  the  proceeds  to  the  payment  of 
interest  and  principal.  See  also  Chicago, 
Danville,  &  Vincennes  R.  Co.  v.  Fosdick, 
106  U.  S.  47,  where  it  was  denied  that  a 
provision  whereby,  in  the  event  of  a  fore- 
closure and  sale  for  non-payment  of  inter- 
est, whether  on  one  or  more  coupons,  the 
property  is  to  be  sold  as  an  entirety,  and 
free  of  the  incumbrances  of  the  mortgage, 
so  as  to  pass  all  the  title,  both  of  mort- 
gagor and  mortgagee,  and  the  proceeds  of 
the  sale  are  to  be  applied,  after  payment 
of  overdue  interest,  to  the  ]iayment  of  the 
principal  of  the  debt,  though  not  yet  due, 
had  the  effect  of  making  the  whole  debt 
due  before  the  stipulated  day  of  payment. 

Nor  will  a  power  to  declare  the  principal 


due  be  inferred  from  provisions  to  the 
effect  that  (1)  the  trustee,  when  in  jiosses- 
sion,  may  apply  the  residue  of  income  on 
the  principal  of  outstanding  bonds  ;  (2) 
that  he  may  cause  the  property  to  be  sold 
as  an  entirety  ;  and  (3)  that,  if  he  is  pro- 
ceeding to  sell  the  property  for  default  in 
interest,  the  mortgagor,  at  any  time  before 
sale  is  made,  may  pay  all  interest  then  in 
arrear,  costs,  expenses,  disbursements,  and 
reasonable  compensation,  and  that  there- 
upon the  trustee  shall  discontinue  the 
proceeding  and  surrender  the  possession. 
Grape  Creek  Coal  Co.  v.  Farmers'  Loan  & 
Trust  Co.  (1894),  63  Fed.  Rep.  891  ;  s.  c. 
12  C.  C.  A.  350  ;  citing  Chicago,  Danville, 
&  Vincennes  R.  Co.  v.  Fosdick,  supra. 

The  word  "foreclosure"  itself,  in  a  re- 
strictive provision,  must  be  construed  with 
reference  to  the  context.  Thus,  where  the 
mortgage  provides  that  "  foreclosure  shall 
not  take  place  until  ninety  days  after  pub- 
lication of  the  commencement  of  proceed- 
ings to  that  end  shall  have  been  made," 
such  notice  applies  to  the  foreclosure  itself, 
not  to  the  bringing  of  the  suit  for  foreclos- 
ure. Hodder  v.  Kentucky  &  Great  Eastern 
Ry.  Co.  (1881),  17  Fed.  Rep.  793.  And 
the  provisions  of  a  clattse  giving  the  power 
must  be  strictly  followed. 

*  Randolph  v.  Middleton  (1875),  26 
N.  J.  Eq.  543. 


408  EAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  XIX. 

§  401.  Default  v/hen  complete  so  as  to  render  Principal  due.  — 
A  provision  in  a  bond  that,  "  in  case  of  the  non-payment  of  any 
coupon,  ...  if  such  default  shall  continue  for  six  months  after 
maturity  and  demand  of  payment,  the  principal  of  the  bond  shall 
become  immediately  due  and  collectible,"  has  the  effect  of  con- 
stituting a  period  of  contract  grace  distinct  from  the  period  of 
commercial  grace,  —  not  an  additional  period,  but  another  ;  not  one 
to  be  tacked  on  to  the  period  of  commercial  grace,  but  one  to  be 
substituted  therefor ;  and,  like  days  of  commercial  grace,  to  be 
computed  from  the  day  of  payment  named  in  the  promise  to  pay. 
The  right  to  foreclose  is  complete  when  the  period  of  contract 
grace  expires.  Time  being  of  the  essence  of  the  contract,  a  court 
of  equity  will  not  relieve  the  party  interested  in  preventing  the 
maturity  of  the  bonds  from  the  consequences  of  failure  to  make 
payment,  or  tender  of  payment,  of  the  interest  before  the  end  of 
the  six  months,  especially  if  there  has  been  a  systematic  post- 
ponement of  the  payment  of  several  previous  instalments  of  interest 
to  the  very  end  of  the  period  .^ 

Where  the  payment  of  the  principal  of  a  bond  secured  by  a 
mortgage  is  postponed  for  several  years  conditioned  upon  the 
payment  of  the  interest  semi-annually,  and  in  default  of  the  pay- 
ment of  the  interest  for  thirty  days  the  principal  shall  become 
due  at  the  option  of  the  mortgagee,  such  mortgagee  will  be  entitled 
to  a  decree  foreclosing  the  mortgage,  and  declaring  the  whole 
amount  of  principal  and  interest  due  upon  default  in  any  of  the 
payments  of  interest,  according  to  the  condition  in  case  of  no  re- 
sponsibility for  such  defaults  upon  the  part  of  the  mortgagee,  not- 
withstanding he  waived  one  previous  default  by  accepting  the 
interest,  the  non-payment  of  whicli  had  occasioned  such  default.^ 

Under  a  trust  deed  providing  that,  on  default  "  after  demand  " 
for  a  period  of  six  months,  the  trustee  may  sell  the  property,  and 
that,  "  in  the  event  of  any  default  in  the  payment  of  interest  for  a 
period  of  six  months,  the  whole  principal  shall  become  due,  there 
is  no  default  except  upon  refusal  to  pay  after  a  demand  has  been 
made;  and  such  default  must  continue  for  tlie  period  named  be- 
fore an  action  can  be  commenced  to  foreclose  the  mortgage."  The 
word  "  default,"  as  used  in  the  second  provision,  is  deemed  to  have 
the  same  meaning  as  in  the  first  provision,  viz.,  a  default  after 
demand.^ 

1  Alabama  &  Georf^a  Mff)f.  Co.  v.  137.  See,  on  tliis  point,  Baldwin  Invest- 
Robinson  (1893),  fjB  Fed.  Rep.  690  ;  s.  c.  nient  Co.  v.  Bailey  ct  al.  (1895),  45  Neb. 
6  C.  C.  A.  79  ;  13  U.  S.  Apj).  359.  580. 

2  Post  w.  Industrial  Land  Development  3  Potomac  Mfg.  Co.  v.  Evans  (1888), 
Co.  ct  al.    (N.  J.  E.I.,  1896),  31  Atl.  Rep.  81  Va.  717  ;  s.  c.  6  S.  E.  2. 


§§  402,  403.]        FORECLOSURE  AND  SALE.  409 

§  402.  Rights  of  Minority  Bondholders  under  Provisions  as  to 
Acceleration  of  Maturity  of  Debt.^  —  Where  it  is  sti{)ulated  that 
the-  bonds  are  not  to  mature  for  twenty  years,  and  the  mortgage 
also  contains  a  provision  that  bonds  may  be  considered  due  by 
any  bondholder  on  default  of  interest  for  a  specified  period,  and 
that  the  mortgage  may  then  be  foreclosed,  each  bondholder  takes 
his  bonds  subject  to  this  right  of  his  co-bondholders,  and  cannot, 
by  electing  not  to  have  his  own  bonds  become  due,  obstruct  the 
action  of  the  majority,  who  desire  to  foreclose  the  mortgage  and 
carry  out  a  scheme  of  reorganization  sanctioned  by  the  legislature.^ 

§  403.  Acceleration  of  Maturity  prevented  by  Words  of  Statute 
authorizing  Issue  of  Bonds.  —  The  words  of  tlie  statute  authoriz- 
ing the  issue  of  the  bonds  may  be  such  that  the  maturity  of 
the  debt  cannot  be  accelerated  even  by  an  express  provision  in  the 
mortgage,  as  where  it  is  declared  that  the  bonds  are  "  not  to 
mature  at  an  earlier  period  than  thirty  years."  Such  a  declara- 
tion "  differs  widely  from  a  mere  direction  as  to  the  length  of 
time  the  bonds  should  run,  or  the  period  when  they  should  be 
made  payable,"  and  is  to  be  construed  as  an  express  enactment 
that  they  shall  not  mature  earlier.^ 

1  As  to  the  rights  of  majority  and  holders  might  mature  before  that  time  was 
minority  bondholders  generally,  see  Chap,  in  reference  to  the  co-bondholders.  And 
II.,  supra.  while  it  would  impair  the  obligation  of  a 

2  Gates  V.  Boston  &  New  York  Air  Line  contract,  if  such  existed,  so  far  as  the  cor- 
R.  Co.  (188/)),  53  Conn.  333,  347  ;  s.  c.  5  poration  is  concerned,  to  change  the  time 
Atl.  Rep.  695.  The  court  said  :  "When  it  of  maturity,  it  does  not  have  that  effect 
was  provided  in  the  bonds  and  mortgage  when  the  co-bondholders  proceed  upon 
that  the  bonds  were  payable  in  twenty  their  common  and  undisputed  right  to 
j'ears  from  date,  it  was  also  provided  by  the  cause  the  bonds  to  mature,  and  by  foreclos- 
bond,  the  mortgage,  and  the  law  [under  ure  to  discharge  the  bonds  by  taking  the 
which  the  mortgage  was  executed],  that,  property  in  a  legal  way." 

under  certain  circumstances,  at  the  option  ^  Howell    v.    "Western    Railroad     Co. 

of  the  bondholders  and  the  trustee,    the  (1876),  94  U.  S.  463. 
bonds  should  mature  and  the  mortgage  be  Some  statutory  provisions  relating   to 

foreclosed  before  that  time,  thus  preventing  foreclosure:    Kansas,  G.  L.  1889,  §§  1248 

the  contemplated  running  for  twenty  years,  and   1276;    Maine,    R.    S.    1893,    ch.   51, 

The  provision  that  the  bond   should  con-  §  91  ;    New  Jersey,   Supp.   Rev.  1877   to 

tinue  for  twenty  years  an  outstanding  sub-  1886,  p.  845  ;  New  York,  Banks  &  Bros., 

sisting  security,  if  any  existed,  was  with  R.  S.,  9th  ed.,  p.  1005  ;  North  Dakota, 

reference  to  the  corporation.    The  provision  Code  1895,  §  2947,  subs.  11. 
that  the  bonds  by  the  action  of  the  bond- 


410  EAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  XX. 


CHAPTER   XX. 

REMEDIES   OF   BONDHOLDERS.  —  STRICT   FORECLOSURE. 

§  404.    Generally. 
405.    Remedy  not  generally  applicable  in  the  Case  of  Railroad  Mortgages. 

§  404.  Generally.  —  A  decree  for  strict  foreclosure  provides  for 
payment  by  a  day  named,  or,  in  default  thereof,  that  the  con- 
veyance shall  become  absolute  and  the  equity  of  redemption 
foreclosed  and  barred.  To  what  extent  the  remedy  of  strict  fore- 
closure may  be  pursued  is  now  very  generally  regulated  by  statute. 
Where  it  is  allowed,  it  is  confined  to  a  very  limited  class  of 
cases,^  and  these  perhaps  occur  less  frequently  where  railroad 
mortgages  are  in  question  than  any  others. 

Where  the  requisites  of  a  valid  strict  foreclosure  are  a  matter 
of  statutory  regulation,  the  directions  of  the  enactment  must  be 
strictly  complied  with.  Thus,  if  it  is  provided  that  foreclosure 
shall  be  by  peaceable  entry,  one  year's  possession,  and  publica- 
tion of  notice,  actual  notice  is  not  sufficient,  but  the  notice  must 
be  actually  published.^ 

§  405.  Remedy  not  generally  suitable  in  the  Case  of  Railroad  Mort- 
gages. —  The  great  objection  to  granting  a  strict  foreclosure  of 
a  railroad  mortgage  is,  that  it  must  commonly  result  in  making 
a  large  number  of  persons  virtual  co-tenants  of  the  property,  and 
probably  lead  to  a  renewal  of  the  very  troubles  which  have  led 
to  the  institution  of  the  foreclosure  proceedings. 

In  Ketchum  v.  Duncan^  the  co,urt  said:  "That  a  sale  was 
properly  directed  here  rather  than  a  strict  foroclosure  is  quite 
evident.  It  was  the  object  of  all  the  consolidated  bills  to  procure 
a  sale,  and  if  there  was  not  assent  by  all  parties,  there  was  at 
least  no  ol^jection  to  it.  A  strict  foreclosure  would  not  have 
converted   the   property  into   money.      It   would,   in   fact,   have 

1  A   useful  summary  of  cases  will  be  ~  Aslmclot  R.  Co.  v.  Elliot  (1873),  52 

fimml  in  the  note  appended  to  Clark  v.     N.  II.  387. 
Koyljurn,  75   U.  S.  318,  in  tlie  Lavvycns'  »  96  U.  8.  659,  671  (1877). 

Co-ojierative    Edition    (Bk.    19,    p.    354). 
See  further  in  2  Mo.  West.  Jurist,  643. 


§  405.]  REMEDIES   OP   BONDHOLDERS,    ETC.  411 

required  the  creditors  to  advance  more  funds  to  pay  the  costs 
and  expenses.  This  no  bondholder  could  justly  require  from  his 
associates.  Besides,  a  strict  foreclosure  could  not  be  a  winding 
up  of  the  matter.  It  would  leave  an  undivided  beneficial  interest 
in  an  unmanageable  property  in  the  hands  of  a  large  number  of 
persons,  who  are  very  likely  to  disagree  in  regard  to  its  use." 
It  was  then  shown  that  the  same  objections  were  applicable  to 
a  purchase  by  the  trustee,  the  opinion  of  the  court  being  sunnned 
up  til  us  :  "  It  is  too  plain  for  any  further  comment  that  neither 
a  strict  foreclosure,  nor  a  purchase  by  a  trustee  to  buy,  would 
have  been  for  the  interest  of  any  bondholder." 

So  also  in  Sage  v.  Central  R.  Co.,^  although  the  specific  relief 
asked  for  was  a  strict  foreclosure,  a  decree  for  a  sale  was  held 
to  be  unquestionably  appropriate  under  the  prayer  for  general 
relief,  and  the  reasons  for  making  such  a  decree  in  the  given  case 
were  thus  explained :  "  A  strict  foreclosure  was  undesirable 
for  all  parties.  Not  only  would  it  have  cut  off  entirely  the  bond- 
holders secured  by  the  second  and  third  mortgages,  whose  in- 
terests were  before  the  court,  and  which  it  was  bound  to  protect 
as  far  as  possible,  but  it  would  have  made  a  large  number  of 
bondholders  under  the  first  mortgage  practically  tenants  in 
common  of  the  railroad  property.  The  inconveniences  of  such 
a  result  are  obvious  enough.  A  sale  therefore  was  for  the  in- 
terest of  all,  and  to  that  no  one  objected.  Indeed  it  was  con- 
templated as  possible  in  each  of  the  three  mortgages.  Tlie 
bondholders,  through  their  trustee,  had  made  arrangements  in 
view  of  such  a  contingency.  They  had  agreed  what  should  be 
the  effect  and  consequence  of  a  judicial  sale."  It  was  therefore 
held  that,  as  the  deed  of  trust  containing  this  agreement  had 
been  made  part  of  the  bill,  it  was  not  going  outside  of  the  case 
to  enforce  it. 

1  99  U.  S.  334  (1878). 


412 


RAILWAY   BONDS   AND   MORTGAGES. 


[chap.  XXI. 


CHAPTER  XXI. 


JURISDICTION. 


Art.  T.— How  FAR  THE  Prior  Control  of 
THE  Subject-matter  invests 
A  Court  with  Exclusive 
Jurisdiction,  and  Jurisdic- 
tion generally. 
§  406.  The  General  Rule  as  to  the  Con- 
trol of  Litigatioa  by  Courts  of 
Concurrent  Jurisdiction. 

407.    Application  of  General  Rule  to 
Process  from  Different  Courts. 

40S.    Possession  of  Receivers  not   in- 
terfered with. 

409.  Jurisdiction  of  Court  exclusive 

as  to  Proceedings  taken  to  set 
aside  Decrees  or  Judgments 
rendered  by  it. 

410.  Exclusiveness  of  Jurisdiction  in 

Respect  to  the  Subject-matter 
of  Foreclosure  Suits. 

411.  Suit  in  Co-ordinate  Court  permis- 

sible where  Possession  of  First 
Court  is  not  interfered  with. 

412.  Second    Court   may   pass    upon 

Questions  not  raised  in  First 
Suit. 

413.  Jurisdiction   as   to   Decrees   ob- 

tained by  Fraud  in  other 
Courts. 

414.  Citizenship  of  Parties  to  Ancil- 

lary Proceedings  is  not  ma- 
terial. 

415.  Exclusiveness     of    Jurisdiction, 

how  far  affected  bj'  Territorial 
Limits. 


417. 
418. 


419. 


§  416.  Rule  that  Equity  acts  in  Per- 
sonam applied  so  as  to  give 
Extra-territorial  Jurisdiction. 

When  Jurisdiction  attaches. 

Jurisdiction  not  lost  by  Dismissal 
of  Bill  on  Demurrer. 

What  Possession  is  necessary  to 
give  a  Court  Control  of  the  lies 
as  against  a  Co-ordinate  Tri- 
bunal. 
420.  Who  may  assert  the  Exclusive- 
ness of  the  Jurisdiction  of  the 
Court  which  first  obtains 
Control. 

Procedure  and  Practice. 

-To  what  Extent  the  Pen- 
dency of  a  Suit  in  one 
Court  is  a  Bar  to  a  Suit 
in  another. 

Introductory. 

Suit  not  barred  by  Pendency  of 
Suit  in  Foreign  Jurisdiction. 

Plea  of  Lis  Pendens  not  sus- 
tainable unless  there  is  an 
Identity  between  the  two 
Suits. 

Second  Suit  not  barred  if  Parties 
are  different. 

Prior    Suit    not    barred    where 
Different  Relief  is  asked  for. 
427.   Second  Suit  allowed  to  proceed, 
because  best  calculated  to  lead 
to  Decision  on  Merits. 


421. 
Art.  II. 


§422. 
423. 

424. 


425. 


426. 


Article  I.  —  IIow  far  the  prior  Control  op  the  Subject- 
matter  INVESTS  A  Court  with  Exclusive  Jurisdiction  of  a 
Suit,  and  Jurisdiction  generally.^ 

§  400.  The  General  Rule  as  to  Control  of  Litigation  by  Courts  of 
Concurrent  Jurisdiction.  —  It  is  stated  in  its  most  comprehensive 

1  On  jurisdiction  to  hear  appeal,  see  on  jurisdiction  to  decree  sale  of  property  in 
Chap.  X.XXVIII.  ;  on  binding  effct  of  de-  another  State,  see  Chop.  XXXV.  (sales)  ; 
crees  and  judgments,  sec  Chap.  XXXlII.  ;     as  to  the  exclusive  jurisdiction  of  courts 


§  406.]  JURISDICTION.  413 

form  by  Justice  Grier  in  the  following  passage  of  his  opinion  in 
Peck  V.  Jcnness ;  ^  "  It  is  a  doctrine  of  law  too  long  establislied 
to  require  a  citation  of  authorities,  tliat,  where  a  court  has  juris- 
diction, it  has  a  right  to  decide  every  question  which  occurs  in 
the  cause,  and  whether  its  decision  be  correct  or  otherwise,  its  judg- 
ment, till  reversed,  is  regarded  as  binding  in  every  other  court ; 
and  that  where  the  jurisdiction  of  a  court,  and  tlie  right  of  a 
plaintiff  to  prosecute  his  suit  in  it,  have  once  attached,  that  right 
cannot  be  arrested  or  taken  away  by  proceedings  in  another  court." 

The  rule  is,  therefore,  universally  applied  that,  in  all  cases  in 
which  the  jurisdiction  of  Federal  and  State  courts  is  concurrent, 
neither  can  impede  or  arrest  any  action  which  that  otlier  may 
take  within  the  limits  of  its  jurisdiction.^ 

This  rule  prevails  even  though  there  are  irregularities  and  defect 
in  the  proceedings  of  the  sister  court  which  render  them  void.^ 

AVhere  a  citizen  of  another  State  brings  an  action  in  a  federal 
court  in  the  State  of  which  a  railroad  company  is  a  citizen 
against  such  company  to  enforce  an  express  lien  upon  the  accrued 
earnings  and  income,  without  seeking  to  disturb  the  prior  liens, 
and  in  advance  of  an  application  for  foreclosure  of  a  mortgage, 
the  court  will  have  jurisdiction  to  take  possession  of  the  property 
of  the  company  and  appoint  a  receiver  for  the  same.* 

And  the  court,  having  acquired  jurisdiction  of  the  property  and 
appointed  receivers  with  the  express  consent  of  the  railroad  com- 
pany, does  not  lose  jurisdiction  when  other  persons  interested 
therein  come  in  and  are  made  parties,  even  though  some  of  them 
be  citizens  of  the  same  State  with  those  whose  interests  in  tlie 
same  property  are  adverse  to  the  interveners ;  for  when  property 
is  in  the  actual  possession  of  the  federal  court  this  draws  to  it 
the  right  to  decide  upon  conflicting  claims  as  to  its  ultimate  pos- 
session and  control.^ 

appointing  a  receiver,  see  Chap.    XXVI.;  '  Lewis  v.  The  Ship  Orpheus  (1858), 

on  the  extra-territorial  jurisdiction  of  re-  3  Ware,  143. 

ceivers,   see  Chap.  XXVI.  *  Park  v.  New  York,  Lake  Erie,  &  West- 

1  7  How.  612  (1849).  ern  R.  Co.  et  al.  (1895),  70  Fed.  Rep.  641. 

2  Amy  V.  Supervisors  (1870),  11  Wall.  ^  Park  v.  New  York,  Lake  Erie,  & 
136  ;  Freeman  v.  Howe  (1860),  24  How.  Western  R.  Co.  et  al.  (1895),  70  Fed.  Rep. 
450;  Taylor  v.  Carryl  (1857),  20  How.  641,  upon  authority  of  Morgan's  La.  & 
583  ;  Peck  v.  Jenne.ss  (1849),  7  How.  612,  Tex.  Ry.&  Steamship  Co.  v.  Texas  Central 
625  ;  Hagan  v.  Lucas  (1836),  10  Pet.  400;  Ry.  Co.  (1890),  137  U.  S.  171,  201  ;  .s.  c. 
Pullman  v.  Osborne  (1854),  17  How.  471;  11  Sup.  Ct.  Rep.  61;  Freeman  v.  Howe 
Parker  v.  Aldridge  (1881),  8  Fed.  Rep.  (1860),  24  How.  450,  466  ;  In  re  Tyler 
220,  223;  Alabama  &  Chattanooga  R.  Co.  (1893),  149  U.  S.  164,  181;  s.  c.  13  Sup. 
V.  Jones  (1875),  7  N.  B.  R.  169  ;  Brace  v.  Ct.  Rep.  785;  Rouse  v.  Letcher  (1895), 
Manchester  &  Keene  Railroad  (1884),  19  156  U.  S.  49  ;  .s.  c.  15  Sup.  Ct.  Rep.  266  ; 
Fed.  Rep.  342,  344.  The  last  case  cites  a  Central  Trust  Co.  v.  Bridges  (1893),  57 
large  number  of  authorities.  Fed.   Rep.   753  ;    .'■.  c.    6   C.   C.  A.   539  ; 


414  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  XXI. 

And  the  court  may  in  such  a  case  retain  the  jurisdiction  which 
it  has  acquired  to  dispose  of  the  claims  of  all  parties  appearing, 
whatever  their  citizenship.^ 

Nor  will  the  jurisdiction  of  the  court  be  arrested  by  the  fact 
that,  after  the  action  is  begun  by  service  of  summons,  the  defend- 
ant does  not  continue  to  resist  the  demands  of  the  complainant.^ 

Where  there  has  been  a  default  in  interest  on  the  bonds  of  a 
railroad  company  which  has  mortgaged  its  property  lying  in  two 
States,  and  the  required  majority  in  value  of  the  bondholders 
have  requested  the  trustee  to  foreclose,  and  the  trustee  has  brought 
an  action  in  the  State  court  of  one  of  the  States,  which  the  com- 
pany has  had  enjoined  in  that  court,  the  bondholders  may  request 
the  trustee  to  bring  an  action  in  the  other  State,  and  if  he  fails  to 
comply,  may  bring  it  in  their  own  names  for  the  benefit  of  all 
others  interested.  And  where  the  parties  in  interest,  after  the 
filing  of  such  bill,  have  appeared  and  answered,  the  court  will 
have  jurisdiction  to  foreclose  the  mortgage  upon  all  the  property 
in  the  two  States.^ 

§  407.  Application  of  General  Rule  to  Process  from  Different  Courts. 
—  That  property  seized  under  an  execution  by  the  officer  of  one 
court  cannot  be  subjected  to  process  issuing  out  of  another  court 
has  always  been  a  well-recognized  doctrine ;  but  its  precise  scope 
was  perhaps  not  thoroughly  understood  before  the  decision  in 
Freeman  v.  Howe,  which  elicited  a  noteworthy  conflict  of  opinion 
between  two  courts  of  the  very  highest  authority.^ 

In  that  case  a  United  States  marshal  attached  certain  rolling- 
stock  to  satisfy  a  judgment  recovered  upon  the  bonds  of  a  railroad 
company,  and  the  trustees  thereupon  replevied  the  property  in  a 
State  court.  This  action  was  upheld  by  the  Supreme  Court  of 
Massachusetts  on  the  ground  that  the  case  in  which  the  judgment 
had  been  recovered  involved  only  the  question  of  the  contract 
liability  of  the  railroad  company,  and  the  decision  of  such  a  mat- 
ter would  not  be  affected  by  the  possession  of  the  rolling-stock  by 

Farmers' Loan  &  Trust  Co.  r.  Houston  &  IT.    S.    444;    Mnssie   v.   Watts  (1810),   6 

Texas  Central  R.  Co.  (1890),  44  Fed.  Kep.  Cranch,   148;    Brailley  v.   Chester   Valley 

115.  K.   Co.   (1863),   36  Pa.   St.  141  ;  Burnley 

1  Farmers'  Loan  &  Trust  Co.  v.  New  v.  Stevenson  (1873),  24  Ohio  St.  474; 
York,  Lake  Erie,  &  Western  R.  Co.  (ISOf)),  MeElratli  v.  Pittsburg  &  Steuhcnville  R. 
70  Fed.  Rep.  641.  Co.  (1867),  55  Pa.  St.  180,  208. 

2  Park  V.  New  York,  Lnke  Erie,  &  *  24  How.  450;  s.  c.  14  Gray,  566,  .9?/6 
Western  R.  Co.  ct  al.  (1895),  70  Fed.  nam.  Howe  v.  Feeeman  (1860).  In  P>uck 
Rep.  641.  V.  Colbath  (1865),  3  Wall.  334,  it  was  ad- 

8  Woodbury  v.  Allegheny  &  K.  R.  Co.      niitted  that  "tin's  decision  took  the  pro- 
et  al.   (1895),    72    Fed.   Rep.    371,   upon     fession  by  surprise." 
authority  of  Mulh^r  v.   I)(.ws    (1876),  94 


§§  408, 409.]  JURISDICTION.  415 

the  marshal.  That  property,  it  was  argued,  could  not  be  regarded 
as  having  been  made  subject  to  the  jurisdiction  of  the  federal 
court  by  a  process  which  was  merely  a  command  to  the  marshal 
to  seize  the  property  of  the  railroad  company,  and  not  a  warrant 
to  seize  these  particular  cars.  The  question  of  the  ownership  of 
the  cars  was  an  entirely  collateral  question,  which  the  federal 
court  did  not  decide  in  the  action  pending  before  it,  and  if  they 
were  really  the  property  of  the  trustees  under  the  "  after-acquired 
property  "  clause  of  the  mortgage,  they  were  not  taken  in  pursu- 
ance of  the  precept  issued  to  the  marshal.  The  Supreme  Court 
of  the  United  States,  to  which  the  case  was  removed  on  a  writ  of 
error,  declined  to  accept  this  view,  and  held  that  the  interference 
with  the  possession  of  the  marshal  was  entirely  irregular.  The 
question  as  to  which  authority  was  to  prevail  under  the  given  cir- 
cumstances did  not,  as  was  declared,  depend  upon  the  rights  of 
the  respective  parties  to  the  property  seized,  but  upon  the  question 
which  jurisdiction  had  first  attached  by  the  seizure  and  custody 
of  the  property  under  its  process.^ 

The  converse  of  the  rule  applied  in  Freeman  v.  Howe  also  holds, 
and  property  levied  upon  by  the  sheriff  of  a  State  court  cannot  be 
taken  in  execution  by  a  United  States  marshal.^ 

Nor  can  a  federal  court,  at  the  instance  of  the  mortgagees, 
enjoin  a  sheriff  from  selling  the  railroad's  property  under  an 
execution  issued  from  a  State  court.^ 

§  408.  Possession  of  Receiver  not  interfered  w^ith  by  other  Courts. 
—  That  property  lawfully  in  the  hands  of  a  receiver  duly  appointed 
by  a  court  of  competent  jurisdiction  cannot  be  affected  by  litiga- 
tion in  a  co-ordinate  court  follows  directly  from  the  same  prin- 
ciple which  exempts  property  in  the  hands  of  a  sheriff  from 
external  interference.  This  rule  and  its  qualifications  will  be 
discussed  in  a  later  chapter. 

§  409.  Jurisdiction  of  Court  exclusive  as  to  Proceedings  taken  to 
set  aside  or  enforce  Decrees  or  Judgments  rendered  by  it.  —  The  im- 
munity from  interference  to  which  the  court  which  first  obtains 
control  of  the  res  is  entitled  extends  also  to  the  proceedings  taken 
to  enforce  judgments.  Thus,  if  a  mandamus  is  obtained  from  a 
federal  court  to  compel  a  town  to  pay  a  judgment  recovered 
against  it  by  a  holder  of  its  bonds,  issued  to  aid  a  railroad,  the 

1  The  laws  of  Scotland  were  held  to  (1891),  1  Ch.  Div.  536;  affirmed  (1892), 
control   in   determining    the   question   of     1  Ch.  (C.  A. )  219. 

priorities  to  calls  on  stock  held  there,  in  a  ^  Hagan  v.  Lucas  (1836),  10  Pet.  399; 

winding-up  proceeding  in  England.    In  re     Taylor  v.  Carryl  (1857),  20  How.  583. 
Queensland  Mercantile  Agency  Company         ^  Ruggles  v.  Simonton  (1872),  3  Biss. 

325. 


416  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  XXI. 

fact  that  a  State  court  has  issued  an  injunction  prohibiting 
the  payment  of  the  judgment  is  no  excuse  for  disobedience  to 
the  writ/ 

So  also  a  suit  to  set  aside  a  foreclosure  is  so  far  auxiliary  to  the 
original  suit  that  it  can  only  be  instituted  in  the  court  where  the 
decree  was  rendered^  (unless  the  application  is  made  on  the  ground 
of  fraud  ;  see  post). 

This  rule  that  a  suit  to  set  aside  a  foreclosure  decree  on  the 
ground  of  fraud  is  an  ancillary  suit  so  far  as  the  jurisdiction  of 
the  federal  courts  is  concerned  will  prevent  an  appeal  to  the 
Supreme  Court  of  the  United  States  under'  the  act  constituting 
the  Circuit  Court  of  Appeals  in  any  case  in  which  the  jurisdiction 
is  entirely  dependent  upon  the  opposite  parties  to  the  suit  or  con- 
troversy being  aliens  and  citizens  of  the  United  States,  or  citizens 
of  different  States.^ 

A  suit  by  a  judgment  creditor,  brought  for  the  purpose  of  ascer- 
taining the  rank  of  the  lien  which  he  holds,  is  also  so  far  ancillary 
to  a  foreclosure  suit  involving  the  same  property  that  jurisdiction 
to  hear  it  need  not  be  acquired  by  any  fresh  service  of  process 
upon  the  parties  already  in  court.* 

But  a  creditor's  bill  in  aid  of  an  execution  issuing  out  of  a 
State  court  may  be  filed  in  a  federal  court.^ 

§  410.  Exclusiveness  of  Jurisdiction  in  Respect  to  Subject-matter 
of  Foreclosure  Suits.^  —  The  jurisdiction  acquired  by  a  bill  to  fore- 
close a  mortgage  on  the  defendant's  property  extends  to  the  whole 
subject-matter  of  the  litigation,  and  invests  the  court  with  au- 
thority to  hear  and  determine  all  collateral  issues  that  may  be 
involved  in  the  controversy.''' 

Thus  a  bill  which  requires  a  construction  of  the  orders  and 


1  Ei^jgs  V.  Johnson  County  (1867),  6  How.  253,  and  Barber  v.  Barber  (1868), 
Wall.   166,   184  ;    Supervisors  v.  Durrant  21  How.  582,  in  which  a  prior  decree  had 

1869),  9  Wall.  415,  417.  been   rendered    in    another    State.      The 

2  Pacific  R.  Co.  V.  Missouri  Pacific  R.  court  deemed  this  circumstance  of  no  im- 
Co.  (1880),  3  Fed.  Rep.  772.  Such  a  suit,  portance,  referring  to  Ogilvie  v.  Knox  Ins, 
however,  partakes  so  far  of  the  nature  of  Co.  (18.')9),  22  How.  380;  s.  c.  2  Black, 
an  original  bill,  that  the  parties  cannot  be  539,  where  a  bill  tiled  under  these  cir- 
brought  into  court  in  any  other  way  than  cumstances  was  sustained,  though  no 
by  subpfcua.     Ibid.  (piestion     of    jurisdiction     was     actually 

3  Carey  v.  Houston  &   Texas    Central  raised. 

Ry.  Co.  (1896),  161  U.  S.  115.  ''  As  to  cases  in  which  a  receiver  has 

*  Hays  V.  Alexandria  &  Washington  R.  been  a]i]iointed  in  a  foreclosure  suit,  see 

Co.  (1882),  4  Hughes,  331.  Chap.  XXVI.,  post. 

6  Pullan  V.  City  of  New  Albany  (1869),  ^  Kennedy  r.  I.,  C.  &  L.  R.  Co.  (1880), 

4  Biss.  365,  368,  decided  mainly  on  the  3  Fed.  Rep.   97,   105,  following  Davis  v. 

authority  of  Shields  v.  Thomas  (i855),  18  Gray  (1872),  16  Wall.  203. 


§  410.]  JURISDICTION.  417 

decrees  made  in  a  foreclosure  suit  is  properly  brought  in  the  court 
where  that  suit  was  instituted.^ 

So  also  a  decree  of  foreclosure  rendered  in  a  State  court  and 
still  in  full  force  is  a  bar  to  a  suit  in  a  federal  court  by  a  share- 
holder who  seeks,  among  other  things,  the  removal  of  the  trustees. 
The  petitioner  has  an  ami)le  and  complete  remedy  for  his  alleged 
grievances  in  the  State  court,  and  there  is  no  occasion  for  his 
application  to  the  federal  court.'^ 

A  corporation  which  is  the  principal  defendant  in  a  foreclosure 
suit  cannot  invoke  by  suit  another  court  to  restrain  such  action, 
but  is  bound  to  plead  any  facts, —  such,  for  instance,  as  that  the 
bonds  secured  by  the  mortgage  have  been  fraudulently  issued,  or 
without  consideration  by  answer  or  cross-complaint  in  the  fore- 
closure suit.  If  it  should  not  prosecute  its  defence,  or  fails  to 
answer,  its  stockholders  may  intervene,  cause  all  necessary  parties 
to  be  brought  in,  and  show  all  the  facts  which  may  be  essential  to 
a  complete  defence.^ 

So  where  a  State  court  has  decreed  the  foreclosure  of  a  mort- 
gage and  the  sale  has  taken  place,  a  federal  court  will  decline  to 
entertain  a  bill  to  place  the  trustees  in  possession,  altliough  such 
bill  was  filed  before  the  sale,  and  the  sale  when  made  was  de- 
clared to  be  subject  to  the  result  of  the  suit  in  the  federal  court.* 

So  a  federal  court  will  refuse  to  enforce  a  judgment  upon 
the  property  of  a  railroad  company  which  a  State  court  has 
ordered  to  be  sold  in  foreclosure  proceedings  instituted  by  the 
bondholders.^ 

So  where  a  foreclosure  suit  in  a  federal  court  is  compromised, 
and  a  scheme  of  reorganization  adopted  and  ratified  by  a  decree 
of  the  court,  the  trustee  of  the  property  appointed  to  carry  out 
the  scheme  cannot  lawfully  proceed  to  foreclose  in  a  State  court 
the  mortgage  which  was  the  subject  of  the  first  suit.  A  sale  of  the 
property  made  by  the  State  court  under  such  circumstances  is  an 
unauthorized  interference  with  the  control  of  the  federal  court ; 
and  as  the  jurisdiction  of  the  latter  is  not  divested  thereby,  the 
holder  of  a  bond  secured  by  a  subsequent  mortgage  is  entitled  to 
its  interposition  to  protect  his  rights,  and  to  demand  an  account 
from  the  trustees.^ 

1  Minnesota  Co.  v.  St.  Paul  Co.  (1864),  *  Bruce  v.  Manchester  &  Keene  Rail- 
2  "Wall.  609.  road  et  aJ .  (1884),  19  Fed.  Eep.  342. 

2  Graham  v.  Boston,  Hartford,  &  Erie  ^  Fox  v.  Hempfield  Railroad  Co. 
R.  Co.  (1883),  14  Fed.  Rep.  753.  (1870),   2  Abb.   U.  S.   151. 

3  Waymine  ct  al.  v.  San  Francisco  &  ^  Bill  v.  New  Albany,  etc.  R.  Co. 
S.  M.  Ry.  Co.  et  al.  (Cal.),  75  Fed.  Rep.  (1870),  2  Biss.  390  ;  s.  c.  3  Fed.  Cas.  379, 
1086  (1896).  Case  No.  1407. 

27 


418  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  XXI. 

It  is  sometimes  desirable,  for  the  sake  of  simplifying  the  litiga- 
tion, that  a  co-ordinate  court  should  refrain  from  exercising  its 
technical  rights.  Thus  where  there  is  a  general  mortgage  on  a 
composite  system  of  roads  situate  in  different  States,  and  various 
underlying  mortgages  on  the  several  divisions,  it  is  advisable,  for 
the  sake  of  avoiding  unseemly  collisions  and  conflicts  of  courts, 
that  any  suit  instituted  to  foreclose  divisional  mortgages,  after  the 
general  mortgage  is  already  under  foreclosure  in  a  federal  court, 
should  be  carried  on  in  the  federal  courts  of  the  various  districts, 
so  that  if  it  should  be  necessary  to  resort  to  an  appellate  tribunal 
there  will  be  but  one  to  pass  upon  the  matters  in  dispute.^ 

§  411.  Suit  in  Co-ordinate  Court  permissible  vrhere  Possession  of 
First  Court  is  not  interfered  with. — As  the  exclusiveness  of  the 
jurisdiction  of  the  first  court  in  this  class  of  cases  is  predicated  on 
the  ground  that  suits  in  another  court  would  interfere  with  its 
control  of  the  subject-matter  of  the  litigation,  it  necessarily  fol- 
lows that  suits  which  do  not  interfere  with  its  possession  may  be 
prosecuted  elsewhere.  "  To  exclude  other  courts,  the  first  court 
should  be  so  administering  the  property,  by  virtue  of  its  preroga- 
tives and  functions  as  a  court,  as  to  draw  the  control  of  the  prop- 
erty and  its  avails  to  the  court  as  such,  and  to  make  the  decision 
of  questions  respecting  it  necessary  in  order  to  award  it  to  the 
rightful  claimant  and  put  it  out  of  court."  ^ 

The  mere  fact  that  the  effect  of  the  judgment  or  decree  of  one 
court  may  be  to  modify  or  control  the  suit  in  another  court,  and 
to  limit  or  guide  its  decision,  is  no  reason  why  the  two  courts 
should  not  take  jurisdiction  of  different  actions  respecting  or 
growing  out  of  the  same  sul)ject-matter.3 

A  federal  court,  therefore,  will  take  jurisdiction  of  a  case  in- 
volving the  same  subject-matter  as  a  suit  already  before  a  State 
court  of  concurrent  jurisdiction,  if  a  full  disposition  of  the  case 
can  be  made  without  disturbing  the  possession  of  the  latter 
court.* 

Thus  the  pendency  of  a  general  creditor's  bill  in  a  State  court, 
accompanied  by  the  usual  orders  of  injunction,  but  not  by  the 
appointment  of  a  receiver,  will  not  prevent  a  creditor  who  is  not 
a  party  to  the  bill  from  suing  in  a  federal  court  to  recover  the 

1  Central  Trust  Co.  v.  "Wabash,  St.  »  Harrison  Wire  Co.  t'.  Wheeler  (1882), 
Louis,   &  Pac.   Ry.  Co.    (1886),   26   Fed.     11  Fed.  Rep.  206. 

Rep.  74,  77.  *  Andrews  ;;.  Smith  (1881),  5  Fed.  Rep. 

2  Andrews  v.  Smith  (1881),  5  Fed.  833;  s.  c.  19  Blatch.  100;  Logan  v. 
Rep.  833,  per  Wheeler,  D.  J.  Greenlaw  (1882),  12  Fed.  Rep.  10,   18  ; 

Buck  V.  Colbath,  3  Wall.  342. 


§§  412, 413.]  JURISDICTION.  419 

amount  due  on  certain  coupons.  Especially  is  this  the  case  where 
such  creditor  merely  seeks  to  reduce  his  claim  to  judgment,  and 
not  to  subject  the  property  of  the  company  to  its  payment.^ 

So  a  suit  by  a  bondholder  for  foreclosure  and  the  removal  of 
the  trustees  will  not  be  dismissed  by  a  federal  court  for  the  reason 
that  one  of  them  has  been  appointed  receiver  in  a  foreclosure  suit 
in  a  State  court,  though  it  will  do  nothing  to  interfere  with  the 
receiver's  possession.  The  fact  that  the  federal  court  cannot  settle 
the  receiver's  accounts  in  the  suit  before  it  will  not  prevent  it 
from  proceeding  to  a  decree  of  foreclosure.^ 

So  a  foreclosure  suit  may  be  instituted  against  the  mortgagor 
after  the  property  has  been  surrendered  to  the  trustees  in  pursu- 
ance of  the  mortgage,  and  has  not  since  been  in  the  possession  of 
the  mortgagor  or  of  any  one  claiming  under  him  by  any  title  sub- 
sequently acquired.^ 

In  an  action  by  stockholders  or  officers  of  a  corporation  in  one 
State  against  officers  in  possession  disputing  the  right  of  the 
latter  to  hold  their  offices,  the  court  has  no  jurisdiction  to  enjoin 
the  trustee  of  bondholders  from  proceeding  to  foreclose  the  mort- 
gage given  as  security  when  the  terms  of  the  mortgage  justify 
such  foreclosure  in  the  courts  of  the  State  where  the  property 
lies.* 

(The  circumstances  under  which  suits  respecting  property 
which  is  being  administered  by  a  receiver  may  be  entertained  by 
a  co-ordinate  court  are  discussed  in  Chap.  XXYIL,  post.') 

§  412.  Second  Court  may  pass  upon  Questions  not  raised  in  First 
Suit. — A  second  exception  to  the  general  rule  is,  that  a  federal 
court,  although  it  will  not  interfere  with  the  possession  of  a  State 
court,  may  properly  pass  upon  questions  not  raised  in  the  latter, 
even  though  the  parties  and  subject-matter  are  identical  in  the 
second  suit.^ 

Thus  a  federal  court  will  inquire  into  the  nature  of  the  pos- 
session of  the  State  court,  and  if  a  trust  appears,  which  was  not 
involved  in  the  first  suit,  will  assume  the  control  of  it.^ 

S  413.  Jurisdiction  as  to  Decrees  obtained  by  Fraud  in  other 
Courts.  —  A  third  exception  to  the  general  rule  is  recognized  in 
cases  where  a  party  applies  to  a  court  alleging  that  a  decree 

1  Parsons  v.  Greenville  &  Columbia  R.  32  S.  W.  Rep.  599  (1895)  ;  Same  v.  Same 
Co.  (1876),  1  Hughes,  279.  (Ky.),  3.3  S.  W.  Rep.  408  (1895). 

2  Mercantile  Trust  Co.  v.  Lamoille  ^  Alabama  &  Chattanooga  R;  Co.  v. 
Valley  R.  Co.  (1879),  16  Blatch.  324.  Jones  (1875),  7  N.  B.  R.  169. 

8  Brooks  V.   Vermont  Central  R.    Co.  6  Watson   v.    Jones   (1871),    13   Wall. 

(1878),  14  Blatch.  463.  679,  718. 

*  Schmidt  c<aZ.  v.  Mitchell  c^  al.  (Ky.), 


420  RAILWAY   BONDS   AND    MORTGAGES.  [CHAP.  XXI. 

obtained  in  a  court  of  concurrent  jurisdiction  is  tainted  with 
fraud.  This  principle  has  been  formally  stated  in  the  following 
words :  "  Wherever,  in  a  direct  proceeding,  there  are  parties 
before  a  court  other  than  that  in  which  a  decree  has  been  ren- 
dered, and  it  is  charged  that  the  decree  was  fraudulent,  the  court 
can  entertain  jurisdiction,  and,  if  the  fraud  is  proved,  can  prevent 
all  parties  who  are  before  it  from  enforcing,  and,  of  course,  from 
obtaining,  any  advantage  from  a  sale  made  thereunder.  The 
court  acts  upon  the  decree  and  sale  through  the  parties  who  are 
before  it,  not  directly  upon  the  decree  in  the  other  court,  but 
adjudges  that,  notwithstanding  the  decree  the  parties  who  ob- 
tained it,  and  those  before  the  court  who  claim  property  by  virtue 
of  a  sale  under  it,  with  knowledge  of  the  fraud,  shall  not  appro- 
priate to  their  use  the  property  thus  acquired.  To  this  extent  a 
federal  court  can  affect  the  operation  of  a  decree  of  a  State  court, 
and  it  cannot  be  contended  that,  in  such  a  case,  the  federal  court 
has  no  jurisdiction  to  interfere  with,  set  aside,  or  annul  the  decree 
of  the  State  court,  for  the  reason  that  the  latter  belongs  to 
another  sovereignty."  ^ 

A  federal  court  is  not  precluded  from  opening  up  the  decree 
of  a  State  court  for  fraud,  merely  because  the  State  legislature 
has  enacted  that,  if  the  parties  interested  in  the  property  omit, 
after  due  notice  given,  to  present  their  objections  to  the  sale  on 
the  ground  of  informalities  in  the  proceedings,  the  judgment  of 
confirmation  shall  be  conclusive  on  all  the  world.^ 

It  has,  however,  been  held  that  this  power  of  a  federal  court 
to  set  aside  or  revise,  on  the  ground  of  fraud,  a  final  decree  ren- 
dered in  a  State  court  is  limited  to  those  cases  in  which  the  in- 
jured party  has  had  no  opportunity  to  apply  to  the  State  court.^ 

Courts  should  refrain  from  interfering  with  the  decrees  of 
other  courts,  except  when  such  interference  is  plainly  necessary ; 
and  this  rule  is  especially  applicable  where  the  party  applying  to 
the  second  court  for  relief  has  already  sought  the  interposition 
of  the  first  court,  and  that  court  has  passed  on  his  demand 
adversely.* 

§  414.  Citizenship  of  Parties  to  Ancillary  Proceedings  is  not  ma- 
terial.—  If  the  original  suit  was  j)rop('rly  brought  in  a  federal 
court,  the  fact  that  litigation  growing  out  of  and  dependent  upon 

1  Sahlj,'aanl  v.  Kennedy  (1880),  2  Fed.  3  c.niliam  v.  Boston,  Hartford,  &  Erie 
Rep.  295.  R.  Co.  (1883),  14  Fed.  Rep.  7.'3. 

2  Jaekson  v.  Lndelin^'  (1874).  21  ^Vall.  '»  Salilgaard  v.  Kennedy  (1882),  13  Fed. 
610,    construiiif^  tlie   Louisiana  .statute;  in  Rep.  242. 

regard  to  homologating  a  sheriffs  sale. 


§414.] 


JURISDICTION. 


421 


this  suit  is  between  citizens  of  the  same  State  does  not  affect  the 
right  of  the  court  to  have  exclusive  jurisdiction  of  the  ancillary 
proceedings.  Thus,  when  a  federal  court  has  taken  possession 
of  property  on  the  original  bill,  its  jurisdiction  in  passing  upon  a 
cross-bill  filed  for  complete  relief  in  disposing  of  such  property 
does  not  depend  on  the  citizenship  of  the  parties.^ 

The  same  principle  is  applicable  to  bills  filed  on  the  equity  side 
of  federal  courts  to  restrain  or  regulate  judgments  at  law,  and 
thereby  prevent  injustice  or  an  inequitable  advantage  under 
mesne  or  final  process  ;2  to  suits  to  impeach,  on  the  ground  of 
fraud,  a  decree  made  in  a  former  suit ;  ^  to  subsequent  foreclosure 
suits  affecting  the  same  property.* 

So,  also,  where  a  federal  court  has  taken  control  of  a  fore- 
closure suit,  it  may,  without  regard  to  the  citizenship  of  the 
petitioners,  assume  jurisdiction  of  a  suit  to  obtain  a  declaration 
of  what  was  intended  by  the  decrees  and  orders  made  in  the 
former  suit.^ 


1  In  re  Tyler  (1893),  149  U.  S.  164, 
181  ;  s.  c.  13  Sup.  Ct.  Rep.  785  ;  Morgan's 
La.  &  Tex.  R.  &  St.  Ship  Co.  v.  Texas 
Central  R.  Co.  (1890),  137  U.  S.  171,  201 ; 
s.  c.  11  Sup.  Ct.  Rep.  61  ;  First  Nat.  Bk. 
of  Salem  v.  Salem  Capital  Flouring  Mills 
Co.  (1867),  12  Sawy.  485  ;  s.  c.  31  Fed. 
Kep.  580  ;  Railroad  Companies  v.  Cham- 
berlain, 6  Wall.  748. 

2  Krippendorf  v.  Hyde  (1883),  110 
U.  S.  276  ;  Freeman  v.  Howe  (1860),  24 
How.  450.  One  reason  advanced  in  the 
latter  case  (see  above)  for  upholding  the 
validity  of  the  proceedings  in  the  State 
court  was  that,  as  the  parties  were  both 
citizens  of  Massachusetts,  a  different  doc- 
trine would  leave  them  without  remedy. 
This  objection  was  shown  to  be  futile, 
owing  to  the  existence  of  the  rule  stated  in 
the  text. 

8  Foster?;.  Mansfield,  C.  &  L.  M.  R.Co. 
(1888),  36  Fed.  Rep.  627  ;  Osborn  v. 
Michigan  Air  Line  R.  Co.  (1879),  2  Flip. 
503. 

*  Carey  v,  Houston  &  Texas  Central  R. 
Co.  (1892),  52  Fed.  Rep.  671  ;  s.  c.  45 
Fed.  Rep.  438  (1891). 

5  Minnesota  Co.  v.  St.  Paul  Co.  (1864), 
2  Wall.  609. 

In  this  case  the  ancillary  issue  was 
raised  by  what  was  called  a  "  supplemen- 
tal bill"  filed  by  one  of  the  defendants. 
It  was  objected  that  this  was  a  violation 


of  the  rules  of  equity  pleading,  and  that 
the  subject-matter  of  the  suit  and  the  new 
parties  made  by  it  were  such  as  could  not 
properly  be  brought  before  the  court  by  a 
bill  of  that  description.  The  court,  how- 
ever, said  :  "  We  think  that  the  question 
is  not  whether  the  proceeding  is  suj)ple- 
niental  and  ancillary,  or  is  independent 
and  original,  in  the  sense  of  the  rules  of 
equity  pleading,  but  whether  it  is  supple- 
mental and  ancillary,  or  is  to  be  considered 
entirely  new  and  original,  in  the  sense 
which  this  court  has  sanctioned  with  ref- 
erence to  the  line  which  divides  the  juris- 
diction of  the  federal  court  from  that  of 
the  State  courts.  No  one,  for  instance, 
would  hesitate  to  say  that,  according  to 
the  English  chancery  practice,  a  bill  to 
enjoin  a  judgment  at  law  is  an  original  bill 
in  the  chancery  sense  of  the  word.  Yet 
this  court  has  decided  many  times  that, 
when  a  bill  is  filed  in  the  Circuit  Court  to 
enjoin  a  judgment  of  that  court,  it  is  not 
to  be  considered  as  an  original  bill,  but  as 
a  continuation  of  the  proceeding  at  law  ; 
so  much  so  that  the  court  will  proceed  in 
the  injunction  suit  without  actual  service 
of  subpoena  on  the  defendant,  and  though 
he  be  a  citizen  of  another  State,  if  he 
were  a  party  to  the  judgment  at  law. 
The  case  before  us  is  analogous.  An  un- 
just advantage  has  been  obtained  by  one 
party  over  another  by   a   perversion  and 


422  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  XXI. 

In  an  ancillary  suit  a  federal  court  has  power  to  bring  in,  by 
compulsory  process,  any  person  claiming  an  interest  in  the  prop- 
erty wliose  presence  is  necessary  to  the  relief  sought  by  the 
complainants,  although  such  person  does  not  himself  seek  the 
establishment  of  his  interest  in  the  suit,  and  his  citizenship  is 
such  that  it  would  defeat  the  jurisdiction  of  the  court  if  the  pro- 
ceeding were  an  original  one.^ 

§  415.  Exclusiveness  of  Jurisdiction,  how  far  affected  by  Terri- 
torial Limits.  —  After  a  federal  court  in  any  one  of  the  several 
districts  over  which  a  mortgaged  railroad  extends  acquires  juris- 
diction of  the  property  by  the  institution  of  a  foreclosure  suit, 
subsequent  proceedings  in  another  of  the  districts  to  subject  the 
property  for  a  different  claim  cannot  oust  the  first  court  of  its 
jurisdiction  to  proceed  to  a  sale.^ 

If,  however,  it  is  a  question  of  the  jurisdiction  of  a  State  court 
over  that  part  of  a  railroad  which  lies  in  another  State,  the  exclu- 
siveness  of  its  control  of  litigation  affecting  that  part  depends 
upon  whether  the  legislature  of  the  latter  State  has  assented  to 
its  exercising  jurisdiction  beyond  the  limits  of  the  sovereignty 
from  whom  it  derives  its  powers.  Thus,  although  the  consolida- 
tion of  two  railroad  companies  in  adjoining  States  may  have 
resulted  in  extinguishing  tlie  existence  of  one  of  the  companies, 
the  courts  of  the  State  to  which  the  other  company  belongs  are 
not  necessarily  invested  with  authority  to  entertain  a  jurisdiction 
in  rem,  as  respects  the  property  of  the  extinct  company,  unless 
the  legislature  has  expressly  so  declared.  The  power  of  those 
courts  to  decree  a  sale  of  the  property  of  the  extinct  company 
cannot  be  inferred  merely  from  the  fact  that  the  consolidated 
company  has  been  authorized  to  exercise  its  franchises  within  the 
limits  of  the  other  State.^ 

§  416.  Rule  that  Equity  acts  in  Personam  applied  so  as  to  give 
Extra-territorial  Jurisdiction.  —  The  rule  that  equity  acts  primarily 
in  personam  and  not  merely  in  rem  is  applied  for  the  purpose  of 
enabling  a  court  of  chancery  to  entertain  jurisdiction  of  a  bill 
for  the  foreclosure  of  a  mortgage  on  property  which  lies  outside 
as  well  as  within  the  State  where  the  suit  is  brought.* 

ahuse  of  the  orders  of  the  court,  and  the  ^  Conipton    v.  Jesup   (1895),   68   Fed. 

party  injured  comes  now  to  the  same  court  Rej).  263. 

to  have  tliis  aVnise  corrected,  and  to  carry  ^  Bhickburn  ?'.  Selma,  Marian,  &  Mem- 

into  effect  the  real  intention  and  decree  of  phis  R.  Co.  (1879),  2  Flip.  525. 

the   court,  and    that   while  the    property  ^  Eaton  &  Hamilton  R.  Oo.  v.   Hunt 

which    is   the   subject   of  contest   is  still  ct  al.  (1863),  20  Ind.  457. 

witliin  the  control  of  the  court  and  sulyect  *  Mead   v.  New    York,   TToaisatonic,  & 

to  its  order."  Northern  R.  Co.   (1877),   45  Conn.   199; 

a.  c.  17  Am.  Ry.  Rep.  367. 


§§  417,  418.]  JURISDICTION.  423 

A  sale  of  a  railroad  as  an  entirety  may  be  decreed  not  only  in 
the  court  in  which  the  original  foreclosure  suit  was  brought,  but 
also  in  any  of  the  other  courts  in  which  ancillary  suits  have  been 
instituted.-' 

In  such  a  case  the  court  may  require  the  defendant  to  execute 
to  the  receiver  assignments  of  that  part  of  the  property  which 
lies  outside  its  territorial  jurisdiction.^ 

A  federal  court  of  one  of  the  States  through  which  a  railroad 
runs,  liaving  acquired  jurisdiction  of  the  subject-matter  in  an 
action  of  bondholders  to  foreclose  the  mortgage  given  by  the  rail- 
road company  upon  all  of  its  property  in  all  the  States,  will  not 
be  ousted  of  its  jurisdiction  by  a  suit  having  been  brought  by  the 
trustee  in  the  State  court  of  one  of  the  other  States  for  fore- 
closure on  the  property  in  that  State.^ 

§  417.  When  Jurisdiction  attaches.  —  The  rule  as  generally 
stated  is  that  priority  of  jurisdiction  is  acquired  by  bringing  of 
suit,  the  suit  being  for  this  purpose  deemed  to  be  brought  when 
process  is  served,^  and  not  when  the  petition  and  summons  have 
merely  been  filed.^ 

If  a  case  is  removed  to  a  federal  court,  its  jurisdiction  will 
relate  back  to  the  time  of  the  original  service  of  process.^ 

Where  a  suit  to  foreclose  a  trust  mortgage  executed  by  two 
corporations  chartered  in  different  States  to  secure  bonds  issued 
by  them  jointly  is  instituted  in  the  district  in  which  one  of  them 
is  I'esident,  and  the  resident  corporation  is  served  with  process, 
while  the  non-resident  one  enters  its  appearance  and  answers 
jointly  with  the  other,  the  decree  rendered  in  the  suit  will  be 
binding  upon  both.'^ 

§  418.  Jurisdiction  not  lost  by  Dismissal  of  Bill  on  Demurrer.  — 
After  the  dismissal  of  a  bill  on  demurrer  the  jurisdiction  of  the 
court  is  not  lost,  as  the  case  may  be  restored  at  any  time  before 
the  end  of  the  term.     A  second  court,  therefore,  cannot,  by  taking 

1  MuUer  v.  Dows  (1876),  94  U.  S.  444  ;  ^  Woodbury  et  al.  v.  Allegheny  & 
Fanners'  Loan  &  Trust  Co.  v.  Chicago  &  K.  R.  Co.  et  al.  (1895),  72  Fed.  Rep. 
A.  Ry.  Co.  (1886),  27  Fed.  Rep.  146.  371. 

2  Union  Trust  Co.  v.  Olmsted  (1886),  *  Owens  v.  Ohio  Central  R.  Co.  (1884), 
102  N.  Y.  729  ;  s.  c.  7  N.  E.  Rep.  822  ;  20  Fed.  Rep.  10,  13  ;  Union  Mut.  Life 
26  Am.  &  Eng.  R.  R.  Cas.  61  ;  Northern  Ins.  Co.  v.  University  of  Chicago  (1881), 
lud.  R.  Co.  V.  Michigan  Central  R.  Co.  6  Fed.  Rep.  443  ;  Chittenden  v.  Brewster 
(1853),    15    How.    233,    243  ;    Wilmer  v.  (1864),  2  Wall.  191,  197. 

Atlanta  &  Richmond  Air  Line,  etc.  R.  Co.  &  Bell  v.  Ohio  Life  &  Trust  Co.  (1858), 

(1874),  2  Woods,  409  (citing  several  cases  1  Biss.  260. 

as  to  extra-territorial  jurisdiction  obtained  ^  Owens  v.  Ohio  Central  R.  Co.  (1884), 

by  acting   in   personam)  ;    Rothschild    v.  20  Fed.  Rep.  10. 

Rochester,  etc.  R.  Co.  (Penn.  Comm.  PI.,  "^  Wilmer  v.  Atlanta  &  Richmond  Air 

1887),  1  Ry.  &  Corp.  L.  J.  321.  Line  R.  Co.  (1875),  2  Woods,  447. 


424 


RAILWAY   BONDS    AND   MORTGAGES. 


[chap.  XXI. 


jurisdiction  of  the  case  during  the  interval  between  such  dis- 
missal and  restoration,  oust  the  first  from  its  control  of  the 
proceedings.! 

§  419.  What  Possession  is  necessary  to  give  a  Court  Control  of  the 
Res  as  against  a  Co-ordinate  Tribunal.  —  This  is  a  question  wllich  the 
authorities  leave  in  an  embarrassing  state  of  uncertainty.  Some 
judges  have  held  that  the  constructive  possession  which  is  obtained 
by  commencing  an  action  of  which  possession  of  the  res  is  a  neces- 
sary incident  will  prevail  against  an  actual  seizure  under  a  later 
service  of  process.  Other  judges  take  the  contrary  view,  not 
merely  when  the  proceedings  are  not,  technically  speaking,  in  rem, 
but  also  when  they  are  at  least  in  the  nature  of  such  proceedings, 
—  as,  for  example,  to  charge  property  with  a  lien.  To  formulate 
a  general  rule  under  these  circumstances  is  out  of  the  question, 
and  it  is  deemed  sufficient  to  exhibit  the  actual  result  of  the  cases 
in  the  subjoined  note.^ 


1  Union  Trust  Co.  v.  Rockford,  R.  I.  & 
St.  Louis  R.  Co.  (1874),  6  Biss.  197. 

2  In  Union  Trust  Co.  v.  Rockford,  R.  L 
&  St.  L.  R.  Co.  (1874),  6  Bis.s.  197,  Judge 
Blodgett  iised  the  following  language  : 
"  It  wil]  hardlj'  be  necessary  to  cite  au- 
thorities to  show  that  it  is,  and  has  long 
been,  the  settled  rule  of  law  in  all  cases  jf 
conflict  of  jurisdiction  that  the  court 
which  first  takes  cognizance  of  the  contro- 
versy is  entitled  to  retain  jurisdiction  to 
the  end  of  the  litigation,  and  incidentally 
to  take  possession  of  or  control  the  res, 
the  suliject-niatter  of  the  dispute,  to  the 
exclusion  of  all  interference  from  other 
courts  of  co-ordinate  jurisdiction.  The 
proper  application  of  this  rule  does  not 
require  that  the  court  shall  also  first  take 
by  its  ofiicers  ])Ossession  of  the  thing  in 
controversy,  if  tangible  and  susceptible  of 
seizure,  for  such  a  trifle  would  only  lead 
to  unseemly  haste  on  the  part  of  officers  to 
get  the  manual  possession  of  the  property  ; 
and,  while  the  court  first  appealed  to  was 
investigating  the  riglits  of  the  respective 
parties,  another  court,  -acting  with  more 
haste,  might  by  a  seizure  of  the  property 
make  the  first  suit  wholly  unavailable. 
To  avoid  such  a  result,  the  broad  rule  is 
laid  down  tliat  the  court  first  invoked  will 
not  be  interfered  with  by  another  court 
while  the  jurisdiction  is  retained."  In 
another  case  decided  about  tlu!  same  time 
(Wiliner  v.  Atlanta  &  Rirjnnond  Air  Line 


R.  Co.  (1874),  2  Woods,  409),  Judge 
Woods  considered  that,  after  service  on 
the  railroad  company  of  a  subpoena  and  a 
restraining  order,  enjoining  it  from  deliver- 
ing possession  of  the  trust  property  to  any 
one  except  a  receiver  appointed  by  the 
federal  Circuit  Court,  possession  taken  by 
a  State  court  under  color  of  process  served 
in  a  suit  subsequently  commenced  was  a 
contempt  of  the  jurisdiction  of  the  Cir- 
cuit Court,  even  though  the  State  court 
first  obtained  actual  possession  of  the 
property.  The  jurisdiction  of  a  court  was 
declared  not  to  be  dependent  on  actual 
seizure  of  the  property.  Constructive 
possession  was  obtained  by  the  subpoena 
and  the  restraining  order,  and  the  prop- 
erty was  thereafter  mi  gre.mio  legis.  The 
receiver  appointed  by  Judge  Woods  being 
unable  to  obtain  possession  of  the  ])art  of 
the  property  situated  in  Georgia,  owing  to 
the  fact  that  one  of  the  State  courts  had 
appointed  a  receiver  and  taken  actual 
possession  in  a  suit  subsequently  com- 
menced, applied  for  a  writ  of  assistance. 
The  application  was  heard  by  Circuit  Jus- 
tice Bradley  and  District  Judge  Erskine, 
and  denied.  The  learned  circuit  justice 
said  that  the  test  was  not  which  action 
was  first  commenced,  nor  which  cause  of 
action  had  priority,  but  which  court  first 
acquired  jurisdiction  over  the  projjerty. 
If  the  State  court  had  power  to  take 
l>ossossion   when  it  did  so,   and   did  not 


§  420.] 


JURISDICTION. 


425 


§  420.  Who  may  assert  the  Exclusiveness  of  the  Jurisdiction  of  the 
Court  which  first  acquires  Control.  —  It  is  only  by  tllOSG  who  arc 
clotlicd  with  the  authority  of  the  first  court  to  assert  the  priority 

ley  as  to  the  effect  of  the  service  of  process 
in  proceedings  in  rem  and  proceedings  in 
personam  seems  to  be  ignored  in  a  late  case 
in  the  Circuit  Court  of  Appeals,  Compton 
V.  Jesup  (1895),  68  Fed.  liep.  263.  There 
it  was  held  that  a  proceeding  in  a  State 
court  by  the  holder  of  an  equipment  bond 
to  subject  a  portion  of  a  railroad  system  to 
his  lien,  although  it  might  be  a  proceeding 
in  rem,  did  not  involve  the  actual  seizure 
of  the  property,  and  therefore  did  not  pre- 
vent a  federal  court  from  taking  possession 
of  the  property  in  a  suit  to  foreclose  all 
the  liens  on  the  entire  property.  The 
court  lays  down  the  broad  rule  that 
"mere  constructive  possession  is  not 
enough  to  exclude  the  possession  of  an- 
other court,"  thus  putting  into  formal 
words  the  principle  upon  which  Justice 
Bradley's  opinion  was  founded.  But  this 
theory  is  opposed  to  the  opinion  of  the 
Supreme  Court  of  the  United  States  in 
Buck  V.  Colbath  (1865),  3  Wall.  334, 
where  the  sufficiency  of  constructive  pos. 
session  is  recognized,  to  say  nothing  of 
the  opinions  of  Judges  Blodgett  and 
Woods,  referred  to  above.  Unfortunately 
the  Supreme  Court  of  the  United  States 
has  not,  so  far  as  we  have  been  able  to  as- 
certain, stated  precisely  what  it  under- 
stands by  "constructive"  possession,  the 
use  of  the  term  being  merely  obiter  in  the 
case  just  cited.  The  principle  laid  down 
by  that  court  in  the  late  case  of  Heidritter 
V.  Elizabeth  Oil  Cloth  Co.  (1884),  112  U.  S. 
294  ;  s.  c.  5  Sup.  Ct.  Rep.  135,  that  when 
the  object  of  the  action  requires  the  con- 
trol and  dominion  of  the  property  involved 
in  the  litigation,  that  court  which  first 
acquires  possession,  or  that  dominion  ivhich 
is  equivalent  to  possession,  draws  to  itself 
the  exclusive  right  to  dispose  of  it  for  the 
purpose  of  its  jurisdiction,  is  expressed 
in  terms  too  vague  to  indicate  precisely 
what  view  would  be  adopted  by  the  most 
authoritative  tribunal  in  the  country,  if 
the  question  under  discussion  were  to 
come  before  it.  The  case  in  question  was 
one  of  actual  possession,  and  its  relevancy 
therefore  lies  principally  in  the  fact  that, 
although  the  theory  of  Justice  Bradley  and 


invade  the  possession  or  jurisdiction  of 
the  federal  court,  the  possession  of  the 
former  would  not  be  interfered  with. 
That  the  State  court  had  such  power  was 
the  conclusion  ariived  at.  "Service  of 
process,"  it  was  said,  gives  jurisdiction 
over  the  person.  Seizure  gives  jurisdic- 
tion over  the  property  ;  and  until  it  is 
seized,  no  matter  when  the  suit  was  com- 
menced, the  court  does  not  have  jurisdic- 
tion. ...  A  bill  to  foreclose  is  a  personal 
pro(;eeding,  although  it  has  reference  to  a 
S]iecific  thing.  Its  object  is  to  put  an  end 
to  an  existing  eijuity,  and  to  procure  a 
sale  of  the  mortgaged  premises.  Posses- 
sion may  be  taken  in  the  course  of  the 
proceedings,  but,  until  it  is  taken,  can  it 
be  said  that  the  property  is  sacred  from 
the  touch  of  other  persons  or  courts  ? " 
Virtually,  therefore,  the  doctrine  of  the 
learned  justice  is  that  there  is  no  such 
thing  as  constructive  possession  of  the  res, 
at  least  in  a  personal  proceeding.  The 
authority  of  this  ruling,  however,  is  very 
seriously  impaired  by  the  fact  that  it 
seems  to  be  based  mainly  on  the  hypothe- 
sis that  foreclosure  is  a  proceeding  in  per- 
sonam only  for  all  intents  and  purposes,  a 
position  which  is  by  no  means  beyond  dis- 
pute. In  Day  v.  Micou  (1873),  18  Wall. 
156,  160,  it  was  laid  down  that  proceed- 
ings to  foreclose  a  mortgage  are  quasi 
proceedings,  in  rem  at  least.  In  Guaranty 
Trust  &  Safe  Deposit  Co.  v.  Green  Cove 
Springs  &  Melrose  R.  Co.  (1891),  139 
U.  S.  137  ;  s.  c.  11  Sup.  Ct.  Rep.  512,  the 
same  court  was  confronted  with  an  argu- 
ment of  counsel  based  on  the  assumption 
that  a  proceeding  to  foreclose  a  trust  deed 
was  a  proceeding  iv  rem,  and  though  it 
declined  to  accept  the  inferences  sought  to 
be  drawn  from  that  assumption,  it  did  not 
cast  any  doubt  on  the  assumption  itself. 
And  such  seems  to  be  the  more  general 
view  which  the  courts  take  of  a  foreclosure 
suit,  at  all  events  where,  as  is  commonly 
the  case,  an  order  of  sale  is  asked  for.  See 
Waples  Proceedings  in  Rem,  §§  607  c<  seq., 
where  it  is  pointed  out  that  such  a  suit  is 
one  of  a  dual  aspect. 

The  distinction  drawn  by  Justice  Brad- 


426 


RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  XXI. 


and  exclusiveness  of  its  jurisdiction  that  an  objection  to  the  juris- 
diction of  the  second  court,  founded  on  possession  and  control  of 
the  subject-matter,  can  be  raised.^ 

§  421.  Procedure  aud  Practice.  —  Objections  to  the  jurisdiction 
of  a  court  must  be  addressed  to  the  court  itself,  and  cannot  be 
raised  in  a  co-ordinate  court.^ 

Such  objections  must  be  submitted  by  a  plea  in  abatement.  A 
demurrer  for  want  of  equity  or  an  answer  is  a  voluntary  appear- 
ance, although  the  demurrer  may  also  seek  to  aver  a  want  of 
jurisdiction.^ 

It  is  too  late  to  raise  such  objections  after  the  defendant's  an- 
swer is  filed,  whether  replication  is  put  in  or  not,*  and  still  more 
is  this  true  after  a  trial  on  the  merits.^ 


the  Court  of  Appeals  that  the  constructive 
possession  which  is  obtained  by  service  of 
process  is  not,  as  against  actual  possession, 
enough  to  invest  a  court  with  exclusive 
control  of  the  res  may  be  correct,  this 
principle  does  not  hold  with  all  kinds  of 
constructive  possession. 

The  case  of  Union  Trust  Co.  v.  Rock- 
ford,  R.  I.  &  St.  L.  R.  Co.  (1874),  supra, 
was  approved  in  Owens  v.  Ohio  Central 
R.  Co.(  1884),  20  Fed.  Eep.  13,  but  the 
ruling  of  Justice  Bradley  apparently  was 
not  brought  to  the  attention  of  the  court. 
That  ruling  has,  however,  been  expressly 
disapproved  iu  May  v.  Printup,  59  Ga. 
128. 

As  bearing  upon  the  question,  it  may 
also  be  noted  that  in  a  recent  case  in  Ten- 
nessee also  the  court  denied  that  an  attach- 
ment on  railroad  property,  after  the  court 
has  taken  charge  of  it  in  insolvency  pro- 
ceedings, gives  any  lien,  though  the  re- 
ceiver has  not  yet  taken  actual  manual 
cajition  of  it.  McDonald  v.  Charleston, 
C.  &  C.  R.  Co.  (1893),  93  Tenn.  281  ;  s.  c. 
24  S.  W.  252. 

Whatever  may  be  tlie  projjer  technical 
designation  of  a  foreclosure  suit,  tiiere 
would  seem  to  be  two  unanswerable  rea- 
sons why  the  view  .set  forth  in  the  passage 
cited  at  the  beginning  of  this  note  should 
prevail.  The  first  is  the  one  forcibly 
stated  by  Judge  IJlodgett.  The  second  is 
that  it  is  a  liiglily  anomalous  position  to 
maintain  that  a  suit  in  which  the  court 
cannot  give;  effect  to  its  decrees  witliout 
the  j)ossession  of  tlie  res,  and  in  which  the 


commencement  of  the  proceedings  is  un- 
doubtedly intended  to  operate  as  a  notifi- 
cation to  all  the  world  that  the  court  has 
assumed  the  control  of  the  subject-matter, 
should  be  endered  virtually  nugatory  be- 
cause another  court  and  another  litigant 
have  used  somewhat  more  physical  activ- 
ity. If  comity  between  courts  is  to  have 
any  practical  results  at  all,  it  should  cer- 
tainly be  an  obstacle  to  interference  in 
such  a  case.  The  only  consideration 
which  can  justify  co-ordinate  tribunals  in 
undertaking  to  nullify  the  action  of  each 
other  is  that  the  cause  of  abstract  justice 
will  thereby  be  subserved.  In  the  absence 
of  such  a  reason,  we  think,  all  the  subse- 
quent litigation  should  be  conducted  in 
the  court  which,  in  a  liberal  sense  of  the 
phrase,  first  acquires  possession  of  the 
res. 

1  Forrest's  Exrs.  v.  Luddington  (1880), 
68  Ala.  1 ;  s.  c.  12  Am.  &  Eng.  R.  R.  Cas. 
330. 

2  Freeman  v.  Howe  (1860),  24  How. 
450  ;  Alabama  &  Chattanooga  R.  Co.  v. 
Jones  (1872),  7  N.  B.  R.  145. 

3  Blackburn  v.  Selma,  M.  &  M.  R.  Co. 
(1879),  2  Flip.  525  ;  s.  c.  3  Fed.  Cas.  526, 
Case  No.  1467.  See,  however,  Dan.  Ch. 
PI.  555,  where  it  is  said  that  a  demurrer 
may  in  some  cases  be  a  proper  way  of  ob- 
jecting to  the  jurisdiction. 

*  Turner  v.  Indianapolis,  B.  &  W.  R. 
Co.  (1878),  8  Biss.  380;  s.  c.  26  Fed. 
Cas.  367,  Case  No.  14,259. 

6  Gilman  v.  Perkins  (1881),  7  Fed. 
Rep.  887. 


§  422.]  JURISDICTION.  427 

Where  attachments  have  been  levied  on  the  property  of  a  foreign 
corporation,  and  a  receiver  is  afterwards  appointed  in  the  State 
where  the  corporation  was  organized,  he  cannot  plead  to  or  defend 
the  attachment  suits  without  first  applying  to  the  courts  where 
they  are  pending,  and  becoming  a  party  thereto.^ 

Article  II.  —  To  what  Extent  the  Pendency  op  a  Suit  in 
ONE  Court  is  a  Bar  to  a  Suit  in  another. 

§  422.  Introductory.  —  It  has  been  shown  above  that  between 
courts  of  concurrent  jurisdiction  the  rule  is  applicable,  and  that 
the  one  which  has  first  obtained  jurisdiction  in  a  given  case  must 
retain  it  exclusively  until  it  is  finally  disposed  of.  Different 
principles  prevail  where  the  mere  pendency  of  a  prior  suit  is  set 
up  to  defeat  a  second  one.  "  It  is  the  interference  with  the  pos- 
session of  another  court  which  would  ensue  that  prevents  taking 
jurisdiction  in  one  class  of  cases,  and  the  pendency  of  the  same 
Identical  controversy  in  another  court  of  concurrent  jurisdiction 
that  prevents  it  in  the  other."  ^ 

A  court  of  equity,  having  jurisdiction  of  the  subject-matter  in  a 
foreclosure  suit  on  a  second  mortgage  to  which  the  trustee  of  a 
first  mortgage  is  a  party  defendant,  with  all  others  interested, 
will  not  allow^  the  filing  of  an  independent  bill  to  foreclose  the  first 
mortgage,  asking  no  special  relief  against  parties  in  interest,  in- 
asmuch as  there  can  be  a  decree  relating  to  and  adjusting  the 
rights  of  all  the  other  parties  in  the  action  of  the  trustee  of  the 
second  mortgage.^ 

A  full  discussion  of  the  numerous  decisions  on  this  subject 
would  of  course  be  out  of  place  in  this  volume.  The  reader  will 
find  ample  materials  for  investigation  by  referring  to  the  authori- 
ties cited  in  Bennett  on  Lis  Pendens,  §§  343  et  seq.,  and  in  the 
note  to  Cook  v.  Burley,  11  Wall.  659,  in  the  Lawyer's  Co-opera- 
tive edition.  See  also  the  list  of  cases  cited  in  the  opinions  in 
Lathan  v.  Chaffee  (1881),  7  Fed.  Rep.  520,  and  Stanton  v.  Embrey 
(1877),  93  U.  S.  548,  554.  It  will  be  sufficient  to  state  the  gen- 
eral doctrine  and  the  exceptions  thereto,  citing  as  authorities  only 
cases  involving  corporate  securities,  and  such  others  as  may  be 
necessary  for  the  sake  of  clearness. 

1  South  Carolina  R.  Co.  v.  People's  Pac.  R.  Co.  et  al.  (1895),  70  Fed.  Rep. 
Sav.  Institution  (1879),  64  Ga.  18  ;  s.  c.  528.  See  Morgan's  La.  &  Tex.  R.  &  St. 
12  Am.  &  Eng.  R.  R.  Cas.  432.  Sliip  Co.  v.  Texas  Central  Ry.  Co.  (1890), 

2  Andrews  v.  Smith  (1881),  5  Fed.  137  U.  S.  171,  201  ;  s.  c.  11  Sup.  Ct. 
Rep.  833,  per  Wheeler,  D.  J.  Rep.  61. 

3  Mercantile  Trust  Co.  v.  Atlantic  & 


428  RAILWAY   BONDS    AND   MORTGAGES.  [CHAP.  XXI. 

5  423.  S^i*^  "ot  barred  by  Pendency  of  a  Prior  Suit  in  a  Foreign 
Jurisdiction.  —  It  is  well  settled  that  the  plea  of  the  pendency  of  a 
suit  in  a  foreign  jurisdiction  will  not  abate  a  suit  in  a  domestic 
tribunal,  though  the  prior  suit  is  for  the  same  cause  of  action,  and 
between  the  same  parties.^ 

For  the  purposes  of  this  rule  the  different  States  in  the  Union 
are  considered  to  be  foreign  to  each  otlier.^ 

And  the  same  relation  midoubtedlj  prevails  between  State 
courts  and  federal  courts  not  exercising  jurisdiction  over  the  same 
territory.^ 

But  whether  the  pendency  of  a  suit  in  a  federal  court  in  a  given 
district  be  successfully  pleaded  to  the  further  prosecution  of  a  like 
suit  in  a  State  court  in  the  same  district  is  a  question  as  to  which 
there  has  been  some  conflict  of  opinion.  It  has  been  said  to  be 
now  well  settled  that  this  is  not  a  good  plea.^ 

§  424.  Plea  of  Lis  Pendens  not  sustainable,  unless  there  is  an  Iden- 
tity between  the  two  Suits.  —  Whether  the  courts  in  which  the 
two  suits  are  brought  are  foreign  to  each  other  in  the  sense  that 
they  exercise  jurisdiction  over  a  different  territory,  or  only  foreign 
in  the  sense  that  they  derive  their  powers  from  different  sover- 
eignties, as  is  the  case  with  the  Federal  and  State  courts,  a  second 
suit  will  in  no  event  be  abated  because  a  prior  one  dealing  with 
the  same  subject-matter  is  pending,  unless  the  cases  are  the  same. 

There  must  be  the  same  parties,  or  at  least  such  as  represent 
the  same  interest,  there  must  be  the  same  rights  asserted  and  the 
same  relief  prayed  for.  This  relief  must  be  founded  in  the  same 
facts,  and  the  title  or  essential  basis  of  the  relief  sought  must  be 
the  same.  The  identity  in  these  particulars  should  be  such  that 
if  the  pending  case  had  already  been  disposed  of,  it  could  be 

1  Insurance  Co.  ?».  Brune's  Assignee  Dwight  v.  Central  Vermont  R.  Co.  (1881), 
(1877),  96  U.  S.  588;  Stanton  v.  Enibrey  9  Fed.  Rep.  785,  modifying  his  former 
(1877),  93  U.  S.  548  ;  Eaton  &  Ham-  opinion,  as  stated  in  Mercantile  Trnst  Co. 
iitou  R.  Co.  V.  Hunt  (1863),  20  Ind.  v.  Lamoille  Valley  R.  Co.  (1879),  16 
457;  South  T'arolina  R.  Co.  v.  People's  Blatch.  324,  and  Andrews  r.  Smith  (1881), 
Sav.  Ins.  (1879),  64  Ga.  18  ;  s.  c.  12  Am.  5  Fed.  Rep.  833,  and  relying  on  the  au- 
&  Riig.  K.  R.  Cas.  432.  thority  of  Gordon  v.  Gilfoil,  99  U.  S.  168, 

2  Bennett  on  Lis  Pendens,  §  348  and  and  Latham  v.  Chaffee  (1881),  7  Fed.  Rep. 
cases  cited.  520. 

8  Stanton  v.  P^inbrey  (1877),  93  U.  S.  Mr.  liennett,  in  his  treatise  on  Lis  Pen- 

548  ;    Bennett  on   Lis   Pendens,    §§   379,  dens  (§§  381,  382),  lays  down  a  contrary 

380  ;  Forrest's  Exrs.  ?;.  Luddington  (1880),  rule  on  the  authority  of  Smith  v.  Atlantic 

68  Ala.  1  ;  h.  c.  12  Am.  &  Eng.  R.  R.  Cas.  Mut.   Fire  Ins.   Co.    (1850),  22  (2   Fost.) 

330;  South   Carolina  R.    Co.   v.   People's  N.    H.   21  ;  but  although  there  is  some 

Sav.  Institution  (1879),  64  Ga.  18  ;  s.  c,  lack  of  distinctness  in  the  language  of  the 

12  Am.  &  Kng.  R.  K.  ''as.  432.  courts,  the  doctrine  of  the  later  cases  is 

*  Rule  so  stated  by  Judge  Wheeler  in  ojiposed  to  this  view. 


§  425.]  JURISDICTION.  429 

pleaded    in  bar  as  a   former  adjudication    of   the   same   matter 
between  the   same   parties.^ 

§  425.  Second  Suit  not  barred  if  Parties  are  different.  —  If  the  par- 
ties in  the  second  suit  are  different  from  those  in  the  first,  the 
court  ap])lied  to  will  not  abate  the  suit  merely  because  a  co-ordinate 
court  has  already  assumed  jurisdiction  of  the  subject-matter.^ 

Thus  a  suit  for  an  accounting  in  a  federal  court  between  the 
bondholders  and  their  trustees  will  not  be  abated  for  the  reason 
that  there  is  pending  in  a  State  court  a  similar  suit  in  regard  to 
the  same  subject-matter,  and  for  the  same  relief,  between  the 
trustees  and  other  persons.^ 

So  where  a  railroad  company  is  sued  by  a  few  minority  stock- 
holders who  ask  for  a  receiver,  the  suit  being  opposed  by  tbe  great 
majority  of  the  stockholders,  the  court  may  properly  entertain  a 
petition  of  the  bondholders  for  foreclosure,  and  the  appointment 
of  a  receiver  of  their  own  selection.  Bondholders  whose  interest 
is  not  being  paid  cannot  be  stayed  in  proceedings  to  enforce  their 
lien  until  a  battle  between  the  stockholders  is  fought  out,  nor  can 
they  be  compelled  to  obtain  their  relief  by  intervening  in  the 
stockholders'  suit.* 

Although  the  trustees  represent  the  bondholders  for  most  pur- 
poses in  respect  to  litigation  for  the  enforcement  of  the  securities, 
the  bondholders  are  not  deemed  to  be  parties  to  a  foreclosure  suit, 
brought  by  the  trustees  in  a  State  court,  in  such  a  sense  that  they 
are  debarred  from  seeking  the  same  remedy  in  their  own  names 
in  a  federal  court.  Therefore,  in  the  absence  of  some  restriction 
in  the  deed  of  trust  upon  the  right  of  coupon-holders,  with  the 
assent  of  a  majority  of  bondholders,  to  foreclose  for  default  in  in- 
terest, one  of  those  coupon-holders  may  maintain  a  suit  for  such 
default  in  a  federal  court,  though  a  suit  for  the  same  purpose  has 
been  instituted  by  the  trustees  in  the  State  court.^ 

A  fortiori,  where  the  character  of  the  trust  is  such  that  a  fore- 
closure suit  cannot  be  instituted  by  the  trustees  without  joining 
some  of  the  bondholders,  and  some  of  them  have  been  accordingly 
made  parties  in  a  suit  brought  in  a  State  court,  the  pendency  of 

1  Watson  t'.  Jones  (1871),  13  Wall.  *  Pennsylvania  Company  for  Insurance 
679  ;  Hay  v.  Alexandria  &  Washington  on  Lives  and  Granting  Annuities  v.  Jack- 
R.  Co.  (1882),  4  Hughes,  331.  See  also  sonville,  J.  &  K.  W.  R.  Co.  (American 
the  cases  reviewed  in  Latham  v.  Chaffee  Construction  Co.,  Intervener),  (1893),  C. 
(1881),  7  Fed.  Rep.  520.  C.  A.  55  Fed.  Rep.  131. 

2  Shelby  v.  Bacon  (1850),  10  How.  ^  Mercantile  Trust  Co.  v.  Lamoille 
56.  Valley    R.   Co.    (1879),    16  Blatch.   324; 

3  Andiews  v.  Smith  (1881),  5  Fed.  Rep.  Beekman  v.  Hudson  River  West  Shore 
833.  R.  Co.  (1888),  35  Fed.  Rep.  3. 


430  RAILWAY    BONDS    AND    MORTGAGES.  [CHAP.  XXI. 

that  suit  will  be  no  bar  to  another  suit  in  a  federal  court  for  the 
foreclosure  of  the  mortgage  and  the  removal  of  the  trustees.  The 
trustees  under  such  circumstances  do  not  represent  the  entire  body 
of  the  bondholders. 1 

§  426.  Prior  Suit  not  a  Bar  Tvhere  Different  Relief  is  asked  for. — 
If  the  relief  asked  in  the  second  suit  is  materially  different  from 
or  more  comprehensive  and  extended  than  that  asked  in  the  first, 
the  pendency  of  the  first  suit  is  not  a  bar  to  the  second  lien  in  the 
same  court.^ 

Thus,  a  party  having  notes  secured  by  a  mortgage  may,  unless 
restrained  by  statute,  sue  in  a  court  of  chancery  to  foreclose  his 
mortgage,  and  in  a  court  of  law  to  recover  a  judgment  on  his  notes, 
and  in  another  court  of  law,  in  an  action  of  ejectment  for  posses- 
sion of  the  land.^ 

A  suit  in  a  State  court  which  is  essentially  one  for  foreclosure 
is  not  a  bar  to  another  in  a  federal  court  in  the  same  district,  the 
object  of  which  is  to  maintain  the  riglit  to  the  road  independently 
of  the  right  to  redeem.* 

What  is  essentially  a  general  creditors'  bill  is  not  barred  in  a 
federal  court  by  a  pending  suit  of  any  less  scope  in  a  State  court, 
and  therefore  not  by  a  suit  which  does  not  aim  at  marshalling  all 
the  creditors  and  their  claims,  and  ascertaining  all  liens  and  their 
priorities.^ 

The  trustee  of  a  first  mortgage  upon  a  portion  of  the  road  can- 
not plead  the  pendency  of  a  foreclosure  suit  brought  by  him  in  a 
federal  court  in  bar  of  a  foreclosure  suit  in  a  State  court  against 
him  and  others,  by  trustees  of  a  subsequent  mortgage  covering  the 
entire  property  of  the  mortgagor.^ 

A  suit  filed  by  a  contractor  to  have  a  judgment  for  the  sum 
due  to  him  for  building  parts  of  the  road  declared  a  first  lien 
thereon,  and  also  for  an  accounting  and  for  foreclosure  of  certain 
trust  mortgages  executed  by  the  company,  is  not  a  bar  to  a  sub- 
set picnt  suit  by  the  trustee  to  foreclose  the  same  mortgages.  Here, 
although  the  original  complaint  has  asked  for  foreclosure,  no  such 
i-elief  can  be  given  unless  on  the  application  of  the  trustees  or  the 
bondholders  whom  he  represents.'^ 

^  Brooks  V.    Vermont  Central  R.  Co.  *  Dwight  v.    Central  Vermont  R.  Co. 

(1878),  14  Blatch.  463.  (1881),  9  Fed.  Rep.  785. 

^  Mas.sachusctts  M;it.    Life  Ins.  Co.  v.  ^  Hay  v.  Ale.xandria  &  Washington  R. 

Cliicago  &  A.  R.  Co.  (1882),  13  Fed.  Rep.  Co.  (1882),  4  Hughes,  331. 
857,  860.  6  Meyer  v.   Johnston  (1875),    53  Ala. 

8  Buck  V.  Colhatli  (1865),  3  Wall.  334.  237  ;  s.  c.  15  Am.  Ry.  Rep.  467. 
See  cha[)ter  on  remedies.  ''  American  Loan  &  Trust  Co.  v.   East 

&  West  R.  Co.  (1889),  37  Fed.  Rep.  242. 


§  427.]  JURISDICTION.  431 

So  a  bill  filed  in  behalf  of  the  holder  of  certain  corporation 
bonds  secured  by  a  trust  mortgage,  alleging  the  refusal  of  the 
trustee  to  proceed  under  the  mortgage  according  to  its  provisions, 
and  a  misappropriation  by  tlic  defendant  of  the  tolls  and  revenues 
mortgaged,  will  not  be  dismissed  because  a  bill  to  which  such 
trustees  were  made  parties  had  been  previously  filed  in  the  State 
court  to  define  the  priorities  of  the  various  lien  creditors  of  the 
corporation.^ 

The  converse  of  this  principle  also  holds  good.  Thus  the  prior 
jurisdiction  acquired  by  the  pendency  of  a  former  action  in  which 
an  injunction  and  receivership  arc  sought  will  exclude  the  inter- 
ference of  the  court  in  another  suit  of  which  the  principal  object 
is  the  same  original  remedies. ^ 

§  427.  Second  Suit  allowed  to  proceed  sometimes.  —  The  fact 
that  the  later  suit  is  best  calculated  to  lead  to  a  decision  on  the 
merits  is  sometimes  a  sufficient  reason  for  allowing  it  to  proceed, 
in  spite  of  the  fact  that  the  earlier  suit  is  for  the  same  cause  of 
action  and  comprehends  the  same  parties.^ 

Where  a  trustee  for  bondholders  is  attempting  to  foreclose  a 
mortgage  upon  bonds  and  subject  the  property  thereto,  which  are 
not  valid  debts  against  a  corporation,  such  action  would  be  in 
hostility  to  a  holder  of  valid  bonds  ;  and  in  such  a  case  the  remedy 
by  foreclosure  is  not  exclusive  in  the  trustee,  but  may  be  pursued 
by  the  holder  beneficially  interested  in  the  bonds.* 

A  decree  of  foreclosure  which  declares  all  the  bonds  due  where 
it  appears  in  the  case  of  some  of  the  bonds  the  bondholders  had 
accepted  interest  after  the  limit  of  time  in  which  a  default  in 
interest  entitled  them  to  declare  the  principal  of  their  bonds  due 
had  expired,  and  thereby  waived  the  default,  will  be  reversed.^ 

1  Stewart  v.  Chesapeake  &  Ohio  Canal  not   defeat   a   suit    brought    many   years 

Co.  (1880),  1  Fed.  Eep.  361.  afterwards  by  the  trustees  under  the  first 

'■^  Young  V.    Rollins  (1881),  85   N.    C.  mortgage    to    enforce    their    security    as 

485;  s,   c.    12  Am.   &  Eng.   R.   R.   Cas.  against  the  second-mortgage  interest.    The 

455.  circumstances  that  many  of  the  parties  to 

^  Cheever  v.  Rutland  &  Burlington  R.  the  former  suit  were  dead,  that  the  former 

Co.  (1869),  4  Am.  Ry.  Rep.  291.     There  decree  was  dormant,  and  that  it  was  re- 

the  trustees  under  three  successive  mort-  pudiated  by  the  second-mortgage  interests 

gages  of  the  property  of  a  railway  cor-  as  a  fraud  upon  them,  rendered  proper  an 

poiation  filed  a  bill  in  equity  against  the  original    bill    setting    forth   the   original 

corporation    to   settle   and   establish   the  cause  of  action,  as  well  as  the  suit  and 

powers  and  duties  of  each  other  and  to-  decree  therein. 

wards  the  corporation  in  respect  to  the  *  Farmers'  &  Mechanics'  Nat.  Bank  v. 
title,  possession,  and  control  of  the  prop-  Waco  Electric  Ry.  &  Light  Co.  (Tex.  Civ. 
erty,  and  a  decree  was  made  in  accordance  App.).  36  S.  W.  Rep.  131  (1896). 
with  the  prayer  of  the  bill,  but  was  never  ^  Ala.  &  Ga.  Manufg.  Co,  et  al.  v.  Rob- 
completely  executed.  Held,  that  the  fact  inson,  56  Fed.  Rep.  690  ;  s.  C.  6  C.  C.  A. 
that  this  suit  was  technically  pending  did  80,  13  U.  S.  App.  359  (1893). 


432 


RAILWAY   BONDS   AND   MOETGAGES.  [CHAP.  XXII. 


CHAPTER   XXII. 


CITIZENSHIP   AND    REMOVAL   OF   CAUSES. 


Art.  I.  - 

§428. 

429. 

430. 

431. 

Art.  II. 
§432. 

433. 

434. 
435. 
436. 
437. 

438. 

439. 


-  Citizenship  of  Corporations. 
Introductory. 

Corporation  i.s  Citizen  of  State 
where  it  was  organized. 

Citizenship  of  Corporations  doing 
Business  in  Foreign  States. 

Corporation  snable  in  Sister 
State. 

—  Removal  of  Causes. 
Right  of  Removal  must  exist  at 

the  Commencement  of  tlie  Suit. 

Right  not  affected  by  State 
Legislation. 

What  is  a  "  Controversy." 

Removal  by  Consent. 

Who  may  remove  a  Cause. 

Amount  involved  in  Suit. 

Removal  when  there  are  Several 
Parties  on  either  side. 

Arrangement  of  Parties  accord- 
ing to  their  Real  Interests. 


§  440. 


441. 

442. 
443. 

444. 
445. 
446. 

447. 
448. 

449. 
450. 

451. 
452. 


Introduction  of  New  Party  in- 
effectual to  divest  Jurisdic- 
tion. 

Rule  where  a  State  is  Party  to 
the  Suit. 

Separable  Controversies. 

What  does  not  aifeet  the  Right 
to  remove. 

Removal  takes  the  Whole  Cause. 

What  bars  the  Plight  of  Eenioval. 

When  the  Petition  and  Bond 
must  be  filed. 

Contents  of  Application. 

Formal  Requisite  of  Record  and 
Petition. 

Bringing  up  the  Record. 

Irregularities  in  the  Removal  do 
not  vitiate  it. 

Waiver  of  Objections  to  Removal. 

Requisites  of  Removal  Bonds. 


Article  I.  —  Citizenship  of  Corporations.^ 

§  428.  Introductory.  —  Questions  relating  to  the  citizenship  of 
corporations  frequently  arise  in  suits  upon  railroad  securities.  A 
short  review  of  some  of  the  decisions  in  such  suits  will  therefore 
be  useful  to  the  practitioner  in  connection  with  the  other  subjects 
treated  in  this  book. 

§  429.  A  Corporation  is  for  Jurisdictional  Purposes  a  Citizen  of 
the  State  under  whose  Laws  it  was  organized.  —  The  theory  is  that 
althougli  a  corporation  cannot  be  a  citizen  of  any  State  in  the 
sense  in  which  the  word  is  used  in  the  United  States  Constitution, 
and  a  suit  against  a  corporation  in  a  federal  court  is  regarded  as 
a  suit  against  its  stockholders,  it  is  conclusively  presumed,  by  a 
legal  fiction,  that  all  the  stockholders  are  citizens  of  the  State 
which  created  the  corporation."'^ 

1  a  useful  article  on  this  subject  will  R.  Co.  v.  Letson  (1844),  2  How.  497  ; 
be  founil  in  13  Centr.  L.  J.  482.  .Marshall  v.  Baltimore  &  Ohio  R.  Co.  (1853), 

2  Louisville,  Cincinnati,  &  Charleston     16  How.  314  ;  Railway  Co.   v.   Whitton 


§  430.]  CITIZENSHIP    AND    REMOVAL    OF    CAUSES.  433 

From  this  doctrine  it  follows  that,  although  two  or  more  rail- 
road companies  in  different  States  may  unite  under  the  laws  of 
those  States  for  the  purpose  of  forming  a  single  consolidated  com- 
pany, the  existence  of  the  constituent  corporations  still  continues, 
so  far  as  the  jurisdiction  of  the  Federal  and  State  courts  is  con- 
cerned. In  other  words,  the  consolidated  company  is,  for  the 
|)urposes  of  suits  instituted  against  it  in  any  one  of  the  States, 
deemed  to  be  a  citizen  of  such  State.  Hence  a  company  thus 
formed  cannot  remove  a  cause  to  the  federal  courts  if  sued  in  one 
of  the  States  by  a  citizen  of  that  State ;  ^  and  if  a  citizen  of  one 
of  the  States  sues  it  in  another  of  those  States,  the  suit  may  be 
removed  to  a  federal  court.^ 

Though  a  corporation  of  one  State  be  incorporated  by  the  legis- 
lature of  another  as  a  corporation  of  the  latter,  it  continues  a 
citizen  of  the  State  of  its  original  corporation,  so  as  to  give  juris- 
diction to  a  federal  court  as  between  citizens  of  different  States  in 
an  action  by  it ;  for  instance,  to  cancel  a  guaranty  of  bonds  in  the 
hands  of  a  citizen  of  the  second  State  incorporating  it.^ 

The  effect  of  the  doctrine  that  a  corporation  is  a  citizen  of  the 
State  where  it  was  organized,  and  of  the  rule  that  the  federal 
courts  have  jurisdiction  only  of  suits  between  citizens  of  different 
States,  is  that,  on  a  bill  of  foreclosure  by  citizens  of  one  State 
against  a  railroad  corporation  of  another  State,  in  the  United  States 
court,  for  the  latter  State,  bondholders  who  are  citizens  of  the 
State  where  the  suit  is  brought  cannot  be  made  co-plaintiffs.* 

§  430.  Citizenship  of  Corporations  carrying  on  Business  in  States 
other  than  that  in  which  they  were  organized.  —  If  a  foreign  corpo- 
ration is  carrying  on  business  in  a  sister  State,  the  question 
whether  it  is  a  citizen  of  that  State  so  as  to  render  it  incapable 
of  removing  a  suit  brought  against  it  from  the  State  courts  to  the 
federal  courts  is  one  of  legislative  intent.     If  the  rights  conferred 


(1871),  13  Wall.  270  ;  Ohio  &  Mississippi  ^  Louisville  Trust  Co.  et  al.  v.  Louis- 

K.  Co.  V.  Wheeler  (1861),   1  Black,   286;  ville,  N.  A.  &  C.  K.  Co.  (1896),  75  Fed. 

Mnller   v.    Dows  (1876),  94   U.   S.   444;  Rep.  433,   upon   authority  of  Nashua  & 

Myers   v.    Dorr    (1870),    13    Blatch.    22;  Lowell  R.   Corp.   v.    Boston  &  Lowell  R. 

Baltimore  &  Ohio  R.  Co.  v.  Cary  (1876),  Corp.    (1890),    136  U.   S.   356  ;    s.  c.    10 

28  Ohio  St.    208  ;    Union   Trust   Co.    v.  Sup.    Ct.    Rep.    1004  ;   Newport   &   Cin- 

Roohester  &  Pittsburg  R.   Co.  (1886),  29  cinnati  Bridge  Co.  v.  Woolley  (1880),  78 

Fed.  Rep.  609.  Ky.   523  ;  St.  Louis  &  San  Francisco  R. 

1  Johnson  v.    Philadelphia,   Wilming-  Co.  v.  James  (1896),  161  U.  S.  545  ;  s.  c. 

ton,  &  Baltimore  R.   Co.  (1881),   9  Fed.  16  Sup.  Ct.  Rep.  621. 
Rep.  6.  *  Jackson  &  Sharp  Mfg.  Co.  v.  Burling- 

-  Railway    Co.    v.    Whitton's    Admr.  ton  &  Lamoille  R.  Co.  (1887),  24  Blatch. 

(1871),   13  Wall.   270;   Muller  v.   Dows  194  ;  s.  c.  29  Fed.  Rep.  474. 
(1876),  94  U.  S.  444. 

28 


434 


RAILWAY    BONDS    AND    MORTGAGES.  [CHAP.  XXII. 


amount  to  a  mere  license  to  do  business  in  the  State,  it  retains  its 
jurisdictional  privileges  as  a  foreign  corporation,  and  may  remove 
a  suit  brought  against  it,^  Nor  does  a  statute  permitting  a  for- 
eign corporation  to  extend  its  road  into  a  State,  and  conferring 
upon  it,  for  the  purpose  of  enabling  it  to  operate  that  extension, 
such  powers  as  have  been  conferred  upon  it  by  the  State  where  it 
was  created,  make  it  a  corporation  of  the  second  State.^  Nor 
docs  a  corporation,  by  merely  leasing,  possessing,  and  operating 
in  another  State  the  property  of  a  corporation  chartered  in  that 
State,  become  a  citizen  thereof.'^  Nor  will  the  intent  to  create  a 
new  corporation  be  presumed  from  an  act,  for  instance,  which 
grants  in  Tennessee  to  a  specific  company,  "  incorporated  by  the 
legislature  of  Kentucky,"  a  right  of  way,  and  invests  it  with  all 
the  rights,  powers,  and  privileges,  and  subjects  it  to  all  the  re- 
strictions and  liabilities,  prescribed  in  its  original  charter.  This 
conclusion  will  not  be  rebutted  by  the  fact  that  the  statute  con- 
tains other  sections  which  are  in  form  designed  to  make  altera- 
tions in  and  additions  to  that  charter,  provided  their  actual  effect 
is  merely  to  lay  down  the  conditions  upon  which  the  corporation 
is  to  be  allowed  to  exercise  its  powers.^ 


1  Kailroad  Co.  v.  Harris  (1870),  12 
Wall.  65.  In  this  case  the  Baltimore  & 
Ohio  R.  Co.,  a  corporation  chartered  in 
Maryland,  was  granted  the  right  to  extend 
its  road  into  Virginia  by  an  act  which 
granted  to  the  company  in  Virginia  the 
same  rights  and  privileges,  and  subjected 
it  to  the  same  pains,  penalties,  and  obliga- 
tions, as  had  been  gi-anted  and  imposed 
by  the  original  JMaryland  enactment,  and 
reserved  to  the  State  of  Virginia  and  her 
citizens  the  same  rights,  privileges,  and 
immunities  as  had  been  reserved  to  the 
State  of  Maryland  and  her  citizens.  The 
court  said:  "The  permission  was  broad 
and  comprehensive  in  its  scope,  but  it  was 
a  license  and  nothing  more.  It  was  given 
to  the  Maryland  corporation  as  such,  and 
that  body  was  the  same,  in  all  its  elements 
and  in  its  identity,  afterwards  as  before. 
In  its  name,  locality,  capital  stock,  the 
election  and  power  of  its  officers,  in  the 
moile  of  declaring  ilividends,  and  doing  all 
its  business,  its  unity  was  unchanged. 
Only  tlio  s[)here  of  its  ojwrations  was  en- 
larged." The  rulings  in  Bait,  k  Ohio  R. 
Co.  V.  Gallahue's  Admrs.  (18.^)5),  12  Gratt. 
C.'j.',  fi.'S  ;  fioshorn  v.  Sujici-visors  (186.'j), 
1   W.   \'a.  ?,m  ;  and  I.'.iilroad  Co.  i-.  Super- 


visors (1869),  3  W.  Va.  319,  were  con- 
curred with  as  to  the  point  that  this  cor- 
poration was  suable  in  Virginia  and  West 
Virginia,  that  position  not  being  at  all 
inconsistent  with  the  right  of  removing 
the  suit  after  its  commencement.  Railroad 
Co.  V.  Harris  was  followed  in  Railroad  Co. 
V.  Koontz  (1881),  104  U.  S.  5  ;  Goodlett  y, 
Louisville  &  Nashville  R.  Co.  (1887),  122 
U.  S.  391  ;  County  Court  v.  Baltimore  & 
Ohio  R.  Co.  (1888),  35  Fed.  Rep.  161. 

2  Pennsylvania  R.  Co.  v.  St.  Louis, 
Alton,  &  T.  H.  R.  Co.  (1886),  118  U.  S. 
290. 

3  Bait.  &  Ohio  R.  Co.  v.  Gary  (1876), 
28  Ohio,  208  ;  .'5.  c.  14  Am.  Ry.  Rep.  97 ; 
Williams  v.  Missouri,  K.  &  T.  R.  Co. 
(1875),  3  Dill.  267  ;  Lathrop  v.  Union 
Pac.  R.  Co.  (1873),  1  Macarthur  (D.  C.) 
234.  Comi)are  South  Carolina  R.  Co.  v. 
People's  Savings  Ins.  (1879),  64  Ga.  18, 
where  it  was  held  that  a  mere  permission 
to  extend  a  road  into  a  State  does  not 
change  the  status  of  the  company  as  a 
foreign  corporation,  so  as  to  exempt  its 
property  from  the  attachment  allowed  by 
State  laws  on  the  property  of  non-residents. 

*  Goodlett  ?'.  Louisville  &  Nashville  R. 
Co.  (1887),  122  U.  S.  391. 


§  430.]  CITIZENSHIP    AND    REMOVAL    OF    CAUSES.  435 

On  tlic  other  liand,  if  tlic  original  charter  is  duplicated,  and 
the  legislation  assumes  the  form  of  creating  a  new  corporation, 
tlio  effect  will  be  to  make  the  foreign  corporation  a  citizen  of  the 
State.i 

So  also  an  intent  to  create  a  new  corporation  is  manifested  by 
the  provision  of  a  statute  which  grants  to  a  foreign  corporation  a 
right  of  way  for  the  construction  of  a  railroad  with  which  any 
railroad  company  chartered  or  to  be  chartered  in  the  State  shall 
have  the  right  to  connect  its  road,  and  requires  it  to  construct  a 
branch  railroad  in  the  State,  to  open  books  for  sul)Scriptions  of 
stock  to  a  certain  amount  in  the  State,  to  apply  the  money  so 
subscribed  to  the  construction  of  the  road  within  the  State,  and 
to  hold  elections  in  the  State.  Such  a  construction  of  the  statute 
receives  confirmation  from  the  fact  that  it  is  followed  by  other 
statutes,  each  speaking  of  the  company  as  being  "  incorporated  " 
by  the  legislature  of  the  State.^ 

When  incorporation  in  a  foreign  State  is  obtainable  by  a  com- 
pliance with  certain  formalities  prescribed  by  a  general  law,  an 
act  which  prima  facie  shows  an  intention  on  the  part  of  a  com- 
pany to  take  advantage  of  the  law  may  not  be  conclusive  as  to  its 
status.  Thus  the  mere  filing  of  a  certificate  of  organization  in  a 
foreign  State  by  some  of  the  stockholders,  the  purpose  of  which 
seems  to  be  only  the  preservation  of  certain  rights  formerly 
granted  by  that  State  to  the  company,  which  has  been  succeeded 
by  the  reorganized  corporation  to  which  those  stockholders  be- 
long, and  which  is  not  followed  by  any  acts,  such  as  the  election 
of  officers,  which  would  indicate  the  intention  of  the  company  to 
recognize  the  existence  of-the  new  company  in  the  second  State, 
will  not  have  the  effect  of  constituting  the  reorganized  corpora- 
tion a  corporation  in  tliat  State. ^ 

But  a  corporation  chartered  by  statute  in  a  State  doing  business 
there,  and  dealing  as  if  organized,  by  reciting  in  its  bonds  and 
mortgage  that  it  has  been  chartered  by  that  State,  is  estop))ed, 
when  sued  in  the  federal  court,  to  deny  that  it  was  only  organized 
under  the  laws  of  that  State.^ 

1  F.laekbnrn  v.  Sflma,  M.  &  M.  R.  Co.  3  Pennsylvania  R.  Co.  v.  St.  Louis, 
(1879),  2  Flip.  52.5  ;  8.  c.  3  Fed.  Cas.  Alton,  &  T.  H.  R.  Co.  (1886),  118  U.  S. 
526,  Case  No.  1467  ;   Henen's   Admr.   v.     290. 

Bait.  &  Ohio  R.  Co.  (1881),  17  W.  Va.  881  ;  *  Blackburn  v.  Selma,  M.  &  M.  R.  Co. 

Wasliinffton,    Alexandria,   &   Oeorgetown  (1879),   2   Flip.  525  ;  citing  Zabriskie  v. 

R.  Co.  V.  Alexandria  &  Washington  R.  Co.  Cleveland,  Columbus,  &  Cincinnati  R.  Co. 

(187n\  19  firatt.  592.  (1859),  23  How.  381. 

2  Meruj^his  &  Pharleston  R.  Co.  i'.  Ala- 
bama (1882),  107  U.  S.  581. 


436  RAILWAY   BONDS   AND    MORTGAGES.  [CHAP.  XXII. 

§  431.  Corporation  suable  in  Sister  State.  —  A  foreign  corpora- 
tion, though  not  adopted  by  the  sister  State,  is  suable  there  if  it 
has  impliedly^  or  expressly  ^  consented  to  be  sued  there  in  con- 
sideration of  its  being  permitted  by  the  legislature  to  exercise  its 
corporate  powers  and  privileges  within  the  State. 

Under  such  circumstances  a  foreign  corporation  is,  for  the  pur- 
poses of  suit  in  a  federal  court,  deemed  to  be  "  an  inhabitant  of  " 
ond  "  found  within  "  the  district  corresponding  to  the  sister  State, 
under  the  provisions  of  the  act  of  Congress  regulating  the  service 
of  process.^ 

But  a  foreign  construction  company  will  not  be  allowed  to  main- 
tain a  bill  in  equity  against  a  foreign  railroad  corporation  and  a 
citizen  of  the  State  where  suit  is  brought,  to  enforce  specific  per- 
formance of  a  covenant  in  a  contract  for  the  delivery  of  bonds  and 
certificates  of  stock  in  payment  of  work  to  be  performed  by  the 
construction  company  in  a  foreign  State,  although  the  railroad 
corporation  has  appeared  by  attorney  and  has  an  office  in  the 
State  where  suit  is  brought  for  the  transfer  of  shares  of  its  capital 
stock.  "The  determination  of  the  question"  (said  the  court), 
"  who  shall  be  entitled  to  receive  from  the  corporation  certificates 
of  its  stock  so  that  they  shall  thereby  become  members  of  it,  is 
one  which  does  not  alone  affect  the  external  relations  of  the  cor- 
poration but  involves  its  organic  laws,  which  are  necessarily  local 
and  require  local  administration."  * 

If  the  express  condition  on  which  the  foreign  corporation  is  to 
be  permitted  to  do  business  in  the  sister  State  is  that  it  shall  have 
an  agent  there  upon  whom  a  valid  service  of  process  may  be 
made,  the  corporation  may  be  sued  either  in  the  Federal  or  State 
courts.^ 

If  the  suit  is  one  to  subject  to  liens  railroad  property  which  lies 
wliolly  within  the  district  in  which  the  suit  is  brought,  the  suit 
will  not  be  defeated  by  the  fact  that  non-residents  are  joined  with 
the  railroad  company  as  defendants,  for  such  a  case  comes  within 
tlie  provisions  of   the  act  of  Congress  permitting  service  to   be 

1  Railroad  Co.  v.  Harris  (1870),  12  tion  Co.  v.  Topeka,  Salina,  &  "Western  R. 
AVall.  65  ;  Blackburn  v.  Selma,  M.  &  M.  Co.  (1883),  135  Mass.  34  ;  s.  c.  16  Aj7i.  & 
R.  Co.  (1879),  2  Flip.  525.  Eng.  R.  R.  Cas.  495. 

2  Ex  parte  Schollenberger  (1877),  96  &  Ex  parte  Scliollenberger  (1877),  96 
U.  S.  369.  U.    S.    369  ;  Runkle  v.    Lainar  Insurance 

8  Ex  parte  Schollenberger  (1877),   96  Co.  (1880),  2  Fed.  Kep.  9.     In  the  former 

U.  S.  369  ;  Hayden  v.  Androscoggin  Mills  case  the  earlier  decisions  to  the  contrary 

(1879),   1    Fed."  Rep.   08;  Riddle  v.  New  elTect  in  Day  v.  Newark  Mfg.  Co.   (1850), 

York,  L.  E.  &  W.  U.  Co.  (1889),  39  Fed.  1  Blatch.  628,  and  Romeroy  v.  New  York 

Rep.  290.  &  New  Haven   R.   Co.   (1857),    4  Blatch. 

*  Knn.sas  &  Kastcrn  llaiJroad  Construe-  120,  were  overruled. 


§§  432,  433.]     CITIZENSHIP  and  removal  of  causes.  437 

made  by  publication  ;  and  if  it  lias  been  duly  made  in  the  manner 
pi'cscribcd,  a  plea  to  tlie  jurisdiction  is  not  sustainable.^ 

A  foreign  corporation,  by  filing  an  answer,  waives  the  right  to 
be  sued  only  in  the  federal  district  of  the  State  creating  it,  and 
if  the  suit  be  in  equity  to  enforce  a  lien  or  claim  to  property  within 
the  federal  district,  the  jurisdiction  of  the  court  is  not  limited 
to  the  property  situated  therein,  but  is  plenary  for  all  proper  pur- 
poses after  such  voluntary  appearance,^ 


Article  11.  —  Removal  op  Causes.^ 

§  432.  There  can  be  no  Removal  of  a  Cause  unless  the  Right  to  remove 
it  exists  when  Suit  has  begun.  —  In  several  cases  it  has  been  held 
that  a  suit  may  be  removed  if  the  necessary  conditions  of  diverse 
citizenship  exist  when  the  petition  for  removal  is  filed,  and  that 
the  citizenship  of  the  parties  at  the  commencement  of  the  suit  is 
immaterial.* 

But  the  Supreme  Court  of  the  United  States  has  settled  the 
question  the  other  way,  by  holding  that  both  under  the  Judiciary 
Act  of  1789  ^  and  the  act  of  1875  ^  there  can  be  no  right  of  re- 
moval unless  the  requisite  citizenship  existed  both  at  the  time 
when  suit  was  begun  and  when  the  petition  for  removal  is 
filed. 

§  433.  State  Legislation  cannot  affect  the  Right  of  Removal,  — 
Hence  a  statute  is  void  which  denies  a  foreign  corporation  the 
privilege  of  transacting  business  within  a  State,  unless  on  the 
condition  of  agreeing  that  it  will  not  remove  any  suit  commenced 
against  it  by  a  citizen  of  the  State  into  the  Federal  courts.''' 

So  also  a  provision  in  a  statute  that  the  leasing,  purchasing,  or 


1  Hay  V.  Alex.  &  Wasliington  R.  Co.  Louis,  &  New  Orleans  R.  Co.  v.  McComb 
(1882),  4  Hughes,  331.  In  that  case  there  (1879),  17  Blatch.  371  ;  Jackson  v.  Mutual 
was  an  additional  circumstance  to  support  Life  Ins.  Co.  (1878),  3  Woods,  413,  417  ; 
the  jurisdiction  of  the  court,  viz.  that  the  Ciirtin  v.  Decker  (1881),  5  Fed.  Rep.  385, 
validity  of  the  liens  in  question  depended  386  ;  Jackson  v.  Mutual  Life  Ins.  Co. 
upon   the  construction    of  a    law   of  the  (1878),  60  Ga.  427. 

United  States,  the  question  being  whether  ^  Insurance  Co.  v,  Pechner  (1877),  95 

a  guaranty   of  bonds  by    the  District   of  U.  S.  183. 

Columbia  was  ultra,  vires  or  not.  6  Gibson  v.   Bruce  (1883),    108  U.   S. 

2  Blackburn  v.  Selma,  M.  &  M.  R.  Co.  561  ;  Mansfield,  C.  &  L.  M.  Ry.  Co.  v. 
(1879),  2  Flip.  525.  Swan  (1884),  111  U.   S.  379. 

3  For  a  more  detailed  review  of  this  ^  Home  Ins.  Co.  v.  Morse  (1874),  20 
subject  the  practitioner  will,  of  course,  refer  Wall.  445  ;  Insurance  Co.  v.  Dunn  (1873), 
to  other  treatises.  19  Wall.  214  ;  Kanouse  v.  Martin  (1853), 

*  McLean  v.  St.  Paul  &  Chicago  R.  Co.  14  How.  23;  15  How.  198  (1853). 
(1870),    16   Blatch.    309  ;    Chicago,    St. 


438  EAILWAY    BONDS    AND    MORTGAGES.  [CHAP.  XXII. 

operating  a  railroad  in  a  State  by  a  foreign  corporation  shall  be 
regarded  as  a  waiver  of  the  rights  of  the  latter  to  remove  suits 
against  it  is  unconstitutional  and  ineffective  as  a  statutory 
waiver.i 

Nor  can  a  State,  by  making  special  provisions  for  the  trial  of  any 
particular  controversy,  as,  for  instance,  the  amount  of  compensa- 
tion which  shall  be  paid  to  the  owner  of  land  condemned  by  the 
exercise  of  the  right  of  eminent  domain,  deprive  a  litigant  of  the 
right  of  removal.^ 

§  434.  "What  is  a  Controversy.  —  A  controversy  within  the  mean- 
ing of  the  act  of  Congress  is  involved  in  a  suit  whenever  any 
property  or  claim  of  the  parties  capable  of  pecuniary  estimation 
is  the  subject  of  litigation,  and  is  presented  by  the  pleadings  for 
judicial  determination.^ 

Hence,  although  the  right  of  eminent  domain  is  one  that  apper- 
tains to  the  sovereignty  of  the  State  in  which  the  land  to  be  con- 
demned is  situated,  and  the  United  States,  a  separate  sovereignty, 
cannot  interfere  with  the  exercise  of  that  right,  yet  when  the 
sovereign  power  attaches  conditions  to  its  exercise,  the  inquiry 
whether  the  conditions  have  been  observed  is  a  proper  matter  for 
judicial  cognizance ;  and  if  that  inquiry  takes  the  form  of  a  pro- 
ceeding before  the  courts  between  parties,  the  owners  of  the  land 
on  the  one  side  and  the  company  seeking  the  appropriation  on  the 
other,  there  is  a  "  controversy  "  which  is  subject  to  the  ordinary 
incidents  of  a  civil  suit,  and  the  suit  involving  it  is  therefore 
removable  to  the  federal  courts  if  the  requisite  conditions  of 
citizenship  exist.* 

§  435.  Removal  by  Consent.  —  The  general  rule  is  that  an  action 
pending  in  a  State  court  cannot  be  removed  to  the  United  States 
Circuit  Court  by  written  stipulation,  wliere  there  is  nothing  in 
such  stipulation  or  in  the  record  to  show  that  by  reason  of  the 
subject-matter  or  the  character  of  the  parties  the  latter  court  can 
take  cognizance  of  it.^ 

But  if  the  stipulation  by  which  the  parties  agree  to  remove  the 
cause  binds  them  to  do  nothing  more  than  they  might  by  an  in- 
junction of  the  federal  court  have  been  compelled  to  do,  the  juris- 

1  Baltimore  &  Ohio  R.  Co.  v.  Gary  U.  S.  403,  408  ;  Pacific  E.  R.  Removal 
(1876),  28  Ohio  St.  208.  Cases  (1885),  11.5  U.  S.  1  ;  Colorado  Mid- 

2  Colorado  Mi.llaiid  R.  Co.  v.  Jones  land  R.  Co.  v.  Jones  (1886),  29  Fed.  Rep. 
(1880),  29  Fed.  Rep.  193.  193. 

3  Gaines  v.  Fuentes  (1875),  92  U.  S.  '^  People's  Bank  v.  Calhoun  (1880),  102 
10,  20.  U.  S.  256. 

*  Boom   Co.    V.   Patterson    (1878),   98 


§§  4CG— 138.]    CITIZENSHIP   AND    REMOVAL   OF   CAUSES.  439 

diction  of  the  latter  will  not  be  defeated,^  and  the  parties  can 
admit  facts  iii)on  which  the  jurisdiction  depends.^ 

A  citizen  of  Ohio  having  brought  in  Ohio  an  action  for  damages 
for  personal  injuries  against  the  receivers  of  a  New  York  railroad 
corporation  who  were  citizens  of  New  York,  which  injuries  were 
sustained  on  an  Ohio  raih'oad  leased  by  the  New  York  corpora- 
tion, the  Ohio  and  New  York  companies  were  made  parties  defend- 
ant. Such  a  case  was  held  to  have  been  properly  removable  on 
motion  of  the  receivers  to  the  federal  court,  on  the  ground  that 
the  sole  controvei'sy  was  between  the  plaintiff  and  the  rcceivei's.^ 

§  436.  Who  may  remove  a  Cause.  —  Who  may  remove  a  cause 
is  a  question  which  turns  entirely  upon  the  construction  of  the 
various  statutes  which  have,  from  time  to  time,  regulated  removal 
proceedings.  Under  the  act  of  1789,  only  defendants  could 
exercise  the  right  when  sued  where  they  did  not  reside.  The 
act  of  1867  extended  the  right  of  removal  to  both  plaintiff  and 
defendant,  and  this  enlargement  of  the  right  was  continued  by 
the  act  of  1875 ;  *  but  by  the  act  of  1888  the  right  was  once 
more  restricted  to  the  defendant  or  defendants. 

A  federal  court  which  has  appointed  a  receiver  of  a  railroad 
company  in  a  foreclosure  suit,  will  have  jurisdiction  of  an  action 
against  its  receiver  for  injuries  caused  by  his  employees,  as  ancil- 
lary to  the  main  suit,  without  regard  to  the  citizenship  of  the 
parties.  And  if  such  a  suit  be  first  brought  in  a  State  court,  it 
can  be  removed  to  the  federal  court.^ 

§  437.  Amount  involved  in  Suit.  —  The  amount  which  must  be 
involved  in  a  suit  to  entitle  a  party  to  remove  it  was  fixed  at  '"ii^SOO, 
exclusive  of  costs,  until  the  enactment  of  the  statute  of  1887, 
which  fixes  the  limit  at  $2,000,  exclusive  of  interest  and  costs. 

§  438.  Removal  vwhen  there  are  several  Parties  on  either  Side.  — 
The  general  rule  which   has  been  adhered  to  through    all    the 

1  People's  Bank  v.  Calhoun  (1880),  102  held  that  the  court  might  pre.sume  from 
U.  S.  256.  Here  the  stij)ulation  was  made  the  action  of  the  parties,  and  of  the  court 
in  a  case  in  which  a  bank  was  attempting  below,  that  jurisdiction  appeared  on  the 
in  a  State  court  to  enforce  under  an  attach-  face  of  tiie  record  wliich  had  been  destroyed. 
ment  a  lien  conflicting  with  that  of  the  ^  Chamberlain  v.  New  York,  Lake  Erie, 
mortgage,  which  the  trustees  were  foreclos-  &  Western  R.  Co.  et  al.  (1895),  71  Fed. 
ing  in  the  federal  court.  Rcji.  636. 

2  Railroad  Company  v.  IJamsey  (1874),  *  Burnham  v.  Chicago,  Dubuque,  & 
22  Wall.  322,  326.  Here  the  record  had  Minnesota  R.  Co.  (1876),  4  Dill.  503, 
been  burnt  after  the  removal  of  the  case  to  where  one  of  the  defendants  was  a  cor- 
the  federal  court,  and  the  parties  having  poration  chartered  in  the  State  where  suit 
asked  that  the  record  be  renewed,  it  was  was  brought. 

))artially  renewed,  but  made  no  mention  of  °  Carpenter  v.   Northern    Pac.   P.   Co. 

facts  necessary  to  give  jurisdiction  ;  it  was     et  al.,  75  Fed.  Rep.  850  (1896). 


440  RAILWAY    BONDS    AND    MORTGAGES.  [CHAP.  XXII. 

various  legislation  on  tlie  subject  is  that,  when  there  are  several 
plaintiffs  or  several  defendants,  all  the  parties  on  one  side  must 
he  citizens  of  the  State  where  suit  is  brought,  and  all  on  the  otlier 
side  must  be  citizens  of  the  other  State  or  States.^ 

But  in  the  application  of  this  rule,  nominal,  formal,  and  un- 
necessary parties  are  not  taken  into  account.^ 

Thus,  if  individual  defendants  are  joined  with  a  corporation, 
merely  as  being  agents  and  officers  of  the  corporation,  this  joinder 
may  be  disregarded  for  the  purpose  of  deciding  whether  removal 
is  proper.^ 

So  if  the  relative  priority  of  the  claims  of  a  judgment  creditor 
and  of  a  trustee  suing  for  bondholders  is  the  sole  controversy, 
the  corporation  being  insolvent  and  its  stock  worthless,  the  cor- 
poration, if  joined  with  the  judgment  creditor,  will  be  regarded  as 
a  merely  nominal  party.* 

So  also,  where  non-resident  plaintiffs  expressly  sue  as  a  class 
for  the  benefit  of  a  class,  all  of  wiiom,  whether  named  or  not, 
may  avail  themselves  of  the  decree  if  obtained,  a  citizen  member 
of  the  class  who  is  joined  with  them  may  be  regarded  as  an  un- 
necessary party,  whose  joinder  does  not  affect  the  defendant's 
right  of  removal.^ 

On  the  other  hand  a  necessary  party  who  is  wrongfully  ex- 
cluded from  the  proceedings  in  the  State  court  will  be  treated  in 
the  federal  court  as  an  actual  party,  and  the  motion  for  removal 
determined  accordingly.^ 

And  as  it  is  proper  that,  when  joint  parties  seek  to  upset 
judicial  decrees,  charge  trusts,  and  fasten  supposed  liens  in  con- 
sequence of  joint  interests,  all  of  them  should  be  before  the  court, 
in  order  that  it  may  be  known  to  what  extent,  and  in  whose 
favor,  a  decree  may  be  had,  jurisdiction  of  a  suit  to  have  certain 
bonds  declared  a  lien  upon  the  defendant's  property  cannot  be 
entertained  by  a  federal  court,  where  it  is  shown  that,  although 
the  plaintiff  himself  is  a  non-resident,  he  is  only  one  of  many 
joint  owners  who  have  assigned  their  bonds  to  him  for  the  pur- 

1  See    especially   case   of  the    Sewinjr  R.  Co.  (1885),  25  Fed.  Rep.  65  ;  Cliicapro, 
Machine  Companies  (1873),  18  Wall.  553,  St.    Louis,  &  New  Orleans  R.  Co.  v.  Mc- 
where  the  court,  Bradley  and  Miller,  J.I.,  Comb  (1879),  17  Blateh.  371. 
dissenting,  held  that  the  act  of  1875  had  8  Pond  v.   Sibley   (1881),    19    Blateh. 
not  altered  this  rule.     Com[)are  Hervey  v.  189. 

Illinois  Midland  R.  Co.  (1876),  7  Biss.  103.  *  Hervey    v.    Illinois    Midland    R.   Co. 

2  Removal    Cases    (1879),    100    U.    S.     (1876),  7  Biss.  103. 

4.")7;  P.arney  v.  Latham  (1880),  103  U.  S.  6  MrHenry  v.   New  York,   P.  &  0.  R. 

205;  Pond  v.  Sibley  (ISSl),    19   Blateh.  Co.  (1885),  25  Fed.  Rej).  65. 
189;  Hervey  v.  Illinois  Midland  R.  Co.,  7  «  Hack  r.  Chicago  &  G.  S.  R.  Co.  (1885), 

Biss.  103  ;  McHenry  v.  New  York,  P.  &  0.  23  Fed.  Rep.  356. 


§§  439,  440.]      CITIZENSHIP  and  removal  op  causes.  441 

pose  of  the  litigation,  and  that  those  who  hold  a  majority  interest 
in  the  bonds  arc  citizens  of  the  State  where  the  suit  is  broujrht.^ 
§■  439.  Arrangement   of  Parties   according  to  their  Real  Interests. 

—  Prior  to  the  Removal  Act  of  1875  the  pleadings  only  were 
looked  at,  and  the  rights  of  the  parties  in  respect  to  a  removal 
were  determined  solely  according  to  the  position  they  occupied  as 
plaintiffs  or  defendants  in  the  suit.  Since  the  enactment  of  that 
statute  the  position  of  the  parties  in  the  record  is  immaterial. 
For  the  purposes  of  a  removal,  the  matter  in  dispute  may  be 
ascertained,  and  the  parties  arranged  on  opposite  sides  of  that 
dispute.  If  in  such  arrangement  it  appears  that  those  on  one 
side  are  all  citizens  of  different  States  from  those  on  the  other, 
the  suit  may  be  removed.^ 

Thus,  where  a  mortgage  trustee  is  made  a  party  defendant  to 
a  suit  by  a  bondholder  against  the  railroad  company,  because 
such  trustee  asserts  that  no  duty  is  imposed  on  him  in  respect 
to  the  matters  involved  in  the  suit,  and  has  refused  to  bring  suit, 
the  court  has  jurisdiction,  even  though  the  complainant  and  the 
trustee  are  citizens  of  the  same  State,  on  the  ground  that  no 
relief  is  asked  against  the  trustee,  and  his  interests  and  those  of 
the  plaintiff  are  identical.^ 

A  similar  doctrine  has  been  applied  where  suit  was  brought 
against  the  company,  and  there  were  two  boards  of  directors,  one 
illegal  and  the  other  legal,  and  the  latter  refused  to  bring  suit  to 
redress  the  wrong  complained  of.  Their  interests  being  really 
identical  with  the  interests  of  the  complainants  in  the  suit,  the 
jurisdiction  of  the  federal  court  was  held  not  to  be  defeated  by 
the  fact  that  they  were  citizens  of  the  same  State  as  those  com- 
plainants.* 

Still  less  can  the  citizenship  of  a  trustee  who  is  not  a  party 
in  fact,  and  has  refused  to  be  made  a  party  or  otherwise  execute 
the  trust,  defeat  the  right  of  removal.^ 

§  440.  Introduction  of  New  Party  ineffectual  to  divest  Jurisdiction. 

—  After  the  jurisdiction  of  the  federal  court  has  once  attached,  it 

1  Sahlgaard  v.  Kennedy  (1882),  13  Fed.  *  Pond  v.  Vermont  Valley  R.  Co. 
Eep.  242.  (1874),  12  Blatch.  280. 

2  Removal  Cases  (1879),  100  U.  S.  457,  5  Hack  v.  Chicago  &  G.  S.  R.  Co. 
affirmed  in  Pac.  R.  Co.  v.  Ketchum  (1879),  (1885),  23  Fed.  Rep.  356. 

101  U.S.  289,  298  ;  Turner  v.  Farmers'  As  to  the  jurisdiction  of  a  federal  court, 
Loan  &  Trust  Co.  (1882),  106  U.  S.  552,  growing  out  of  the  different  citizenship  of 
555  ;  Coal  Co.  v.  Blatchford  (1870),  11  the  parties,  and  the  arrangement  of  par- 
Wall.  172,  174.  ties,  see   Kildare  Lumber  Co.  v.  National 

3  Pacific  R.  Co.  V.  Ketchum  (1879),  101  Bank  of  Commerce  et  a!.,  69  Fed.  Rep.  2  ; 
U.  S.  289,  followed  in  Barry  v.  Missouri,  s.  c.  16  C.  C.  A.  107  (1895). 

K.  &  T.  R.  Co.  (1886),  27  Fed.  Rep.  1. 


442  RAILWAY    BONDS    AND    MORTGAGES.  [CHAP.  XXII. 

cannot  be  ousted  by  the  fact  that,  without  the  consent  or  con- 
currence of  the  original  plaintiff,  a  citizen  of  the  same  State  as 
the  defendants  is,  by  leave  of  the  court,  made  a  party  plaintiff.^ 

§  441.  The  Rule  that,  where  the  State  is  a  Party  to  the  Suit,  the 
federal  courts  have  no  jurisdiction,  is  not  applicable  where 
the  State  is  merely  a  party  in  interest,  but  not  a  party  to  the 
record.  The  United  States  Circuit  Court,  therefore,  has  juris- 
diction in  such  a  case,  where  it  has  jurisdiction  of  the  State's 
agent  who  has  charge  of  the  property  as  a  trustee,  and  where  the 
property  which  is  the  subject  of  the  trust  is  stock  and  shares  in 
a  railroad  company  held  by  it  in  pledge  for  the  security  of  a  debt 
due  to  the  complainant.^ 

§  442.  Separable  Controversies  —  By  the  Removal  Act  of  1875 
it  was  provided  that  when  in  certain  suits  there  should  be  a  con- 
troversy which  was  wholly  between  citizens  of  different  States, 
and  could  be  fully  determined  between  them,  either  one  or  more 
of  the  plaintiffs  or  defendants  actually  interested  in  such  con- 
troversy' might  remove  the  suit  to  the  Circuit  Court  of  the  United 
States,  and  the  act  of  1887  continues  this  privilege  as  respects 
the  defendants.  Under  the  earlier  act  the  residence  of  one 
of  the  defendants  in  the  State  where  suit  is  brought  will  not 
defeat  the  right,  provided  tliat  the  controversy  between  the  re- 
maining parties  is  one  which  can  be  wholly  determined  between 
them ;  as  where  mortgage  trustees  who  are  citizens  in  Massa- 
chusetts bring  suit  against  the  debtor  company,  an  Iowa  cor- 
poration, and  join  as  defendants  an  Illinois  and  an  Indiana 
coi-poration,  who  claim  liens  on  the  railroad  property.  Here 
there  is  a  controversy  as  to  the  priority  of  liens  lying  wholly 
between  citizens  of  different  States,  and  the  cause  is  removable.^ 

So  also  a  party  who  intervenes  in  a  suit,  and  asks  to  have  the 
priorities  determined  between  his  own  lien  and  the  one  which 
it  is  tiie  object  of  the  suit  to  enforce,  has  a  right  to  remove  the 
cause.^ 

1  Gi'aliam  v.   Boston,  Hartford,  &  Krie  was  dominus  litis,  and  the  suit  must  stand 

R.  Co.  (1883),  14  Fed.  Kep.  753,  762.    The  or  fall  on  the  case  which  he  makes.     If 

court  in  this  case  held  that  jurisdiction  the  admission  of  this  party  was  an  error 

once  having  attaclied,  it  could  not  be  de-  of  the  court,  it  should  not  prejudice  the 

feated  by  the  fact  that  the  parties  whom  original  plaintiff,  as  it  was  not  done  at 

tlie  plaintiir  represented  were  dis(iualifu'd.  his  instance. 

He  neither  consented  nor  concurred  in  the  ^  gwasey   v.   North  Carolina  Railroad 

making  of  this  citizen  a  party.     The  ad-  Co.  (1874),  1  Hughes,  17. 

mission  of  the  latter  by  leave  of  the  court  »  Burnham    v.    Chicago,    Dubuque,    & 

did  not,  in  a  jurisdictional  sense,   make  Minnesota  R.  Co.  (187(5),  4  Dill.  503. 

Lima  plaintid'.      He  acrpiired  thereby  no  *  Snow  r.  Te.xas  Trunk  R.  Co.  (1882), 

control  of  llie  suit.     Tiie  original  plaintilf  4  Woods,  394. 


§  443.]  CITIZENSHIP   AND   REMOVAL   OF   CAUSES.  443 

So  also  a  suit  to  enforce  a  lieu  for  professional  services  against 
the  purchasers  of  a  railroad  at  the  foreclosure  sale  -which  termi- 
nated the  suit  in  which  the  services  were  rendered,  is  not  a  graft 
upon  or  appendage  to  the  original  suit,  and  may,  if  the  other 
requisite  conditions  exist,  be  removed  to  the  federal  court.^ 

So  also  there  is  a  separable  controvei'sy  which  renders  a  cause 
removable  when  the  questions  involved  are  whether  certain 
bonds  which  the  complainant  seeks  to  enforce  by  obtaining  a 
foreclosure  of  the  mortgage  securing  them  are  valid  debts  against 
the  company,  and  whether  the  officers  of  the  company  have  been 
guilty  of  the  breaches  of  trust  alleged  against  them.^ 

On  the  other  hand,  where  a  receiver  has  been  appointed  for  a 
corporation  in  a  State  court,  and  empowered  to  make  contracts, 
a  contractor  litigating  with  the  receiver  and  other  claimants  in 
that  court  as  to  what  he  is  entitled  to  have  paid  him  on  his  con- 
tract cannot  remove  the  case  to  the  United  States  Circuit  Court. 
Under  such  circumstances,  whatever  controversy  there  is  has 
arisen  in  that  court  in  the  administration  of  the  property  or  assets 
which  it  has  taken  in  charge.  It  is  not  the  case  of  an  independ- 
ent controversy  which  existed  when  the  suit  was  commenced, 
but  one  which  had  arisen  in  the  execution  of  the  power  of  the 
court.^ 

Nor  does  a  creditor's  bill  to  subject  incumbered  property  to 
the  payment  of  his  judgment,  by  sale  and  distribution  of  the 
proceeds  among  lienholders  according  to  priority,  create  a  sepa- 
rate controversy  as  to  the  separate  lienholders,  parties  respondent, 
within  the  meaning  of  the  Removal  Act,  although  their  respec- 
tive defences  may  be  separate.* 

§  443.  What  does  not  affect  the  Right  to  remove.  —  Collateral 
issues  connected  with  the  property  in  the  State  court  do  not 
destroy  the  right  of  removal,  providing  the  parties  desiring  to 
remove  are  within  the  statute.^ 

Even  if  decrees  had  been  made  and  appeals  taken  therefrom,^ 

Nor  in  a  suit  by  a  bondholder  to  foreclose  the  mortgage  will 

1  Pettus  V.  Georgia  Railroad  &  Bkg.  5  Osgood  v.  Chicago,  Danville,  &  Vin- 
Co.  (1879),  3  Woods,  620.  cennes  R.  Co.  (1875),  6  Biss.  330. 

2  Osgood  V.  Chicago,  Danville,  &  Viu-  6  Farmers'  Loan  &  Trust  Co.  v.  Chi- 
cennes  R.  Co.  (1875),  6  Biss.  330.  cago,    Pekin,    &    South   Western   R.   Co. 

3  Buell  V.  Cincinnati,  Effingham,  &  (1879),  9  Biss.  133.  But  it  seems  that 
Quincy  Construction  Co.  (1881),  9  Fed.  the  decision  of  the  higher  court  of  the 
Rep.  351.  State  upon  such  questions  will  be  carried 

*  Fidelity  Ins.  Co.  v.  Huntington  out  by  the  federal  court  in  the  same  man- 
(1886),  117  U.  S.  280.  ner  as  they  would  have  been  by  the  State 

court  if  the  cause  had  remained  there. 


444  RAILWAY    BONDS    AND    MORTGAGES.  [CHAP.  XXII. 

the  fact  that  there  are  various  judgment  creditors  whose  rights 
are  subject  to  the  prior  liens  of  the  bondholders  affect  the  power 
to  remove,  as  their  rights  remain  unchanged. 

Nor  will  that  right  be  affected  by  the  fact  that  a  judgment 
creditor  has  filed  a  cross-bill,  for  then  it  would  always  be  in  the 
power  of  a  creditor  to  prevent  the  operation  of  the  statute.^ 

The  fact  that  the  sheriff,  under  an  order  of  the  State  court,  is 
in  possession  of  the  property  which  is  tlie  subject-matter  of  the 
suit  does  not  defeat  the  right  of  removal.^ 

Nor  will  possession  by  the  trustees  under  the  order  of  a  State 
court,  made  in  a  suit  by  the  stockholders  of  a  railroad  company, 
against  the  company  and  its  directors,  charging  the  latter  with 
certain  wrongful  acts  to  the  injury  of  such  stockholders,  affect 
the  right  to  remove  a  suit  brought  by  bondholders  under  a  deed 
of  trust  which  is  paramount  to  the  rights  of  the  stockholders. 
In  such  a  case  the  possession  will  follow  into  the  federal  court.^ 

Since  any  action  by  a  State  court  in  a  cause  which  has  been 
properly  removed  is  a  usurpation,  the  fact  that  the  party  at 
whose  instance  it  was  removed  has,  after  the  removal,  contested 
the  suit  in  the  State  court  does  not,  after  judgment  against  him, 
constitute  a  waiver  on  his  part  of  the  question  of  the  jurisdiction 
of  the  State  court  to  try  the  case.* 

The  fact  that  property  is  acquired  for  the  purpose  of  enabling 
a  party  to  sue  in  the  federal  courts  will  not  defeat  his  right  to 
sue  therein,  provided  the  right  is  otherwise  perfect.^ 

The  motive  of  the  transfer  under  such  circumstances  will  not 
be  inquired  into.^ 

The  only  ground  of  objection  that  is  valid  being  that  the 
assignor  or  grantor  is  the  real  party  in  interest,  and  the  plaintiff 
on  the  record  nominal  and  colorable,  his  name  being  used  merely 
for  the  purpose  of  jurisdiction.'^ 

1  Osgood  V.  Chicago,  Danville,  &  Vin-  '  Scott  r.  Clinton  &  Springfield  R.  Co. 
cennes  K.  Co.  (1875),  6  Biss.  330.  (1876),  6  Biss.  529. 

2  Kern  u.  Hiiidekoper  (1880),  103  U.S.  *  Insurance  Co.  v.  Dunn  (187.")),  19 
485.  Tlie  court  distinguished  the  circum-  Wall.  '214  ;  Removal  Cases  (1879),  100  U.  S. 
stances  from  those  in  such  cases  as  Free-  457  ;  Railroad  Co.  v.  Mississippi  (1880), 
man  v.  Howe  (1860),  24  How.  450,  which  102  U.  S.  135  ;  Kern  v.  Huidekoper  (1880), 
decide  tliat  property  held  by  an  officer  of  103  U.  S.  485. 

the  court,  by  virtue  of  process  issued  in  a  ^  Blackburn  v.  Selma,  M.  &  M.  R.  Co. 

cause  pending  therein,   cannot   be  taken  (1879),  2  Flip.  525. 

from  his  [wssession  by  the  officer  of  an-  ^  McDonald  v.  Smalley  (1828),  1  Pe- 

othcr    court    of    concurrent    jurisdiction,  ters,  620. 

upon  i)ro(;ess  issued  in  (mother  case  ))end-  "  Smith  v.   Kernochen  (1849),  7  How. 

ing  in  the  latter  court.     To  the  same  effect  198. 

see  Osgood    V.   Chicago,    Danville,  &  V'in- 

ccnnes  I!.  Co.  (1875),  6  Biss.  330. 


§  444. J  CITIZENSHIP   AND   REMOVAL   OP   CAUSES.  445 

§  444.  The  whole  Cause  is  removed.  —  The  removal  of  the  con- 
troversy from  the  State  to  the  Federal  court  takes  the  whole 
suit,  though  there  may  be  other  controversies  in  it,  and  the 
subject-matter  of  the  suit  is  in  possession  of  the  State  court.^ 

Tlie  rule  is  not  altered  by  the  fact  that  the  removal  of  the 
separable  controversy  which  takes  the  whole  cause  will  have  the 
effect  of  bringing  into  the  federal  court  another  controversy 
which  is  between  citizens  of  the  same  State.  In  this  respect  the 
jurisdiction  of  that  court  is  larger  than  can  be  obtained  by  an 
action  brought  there  in  the  first  instance.^ 

After  a  proper  petition  and  bond  have  been  filed  in  the  State 
court,  the  filing  of  the  transcript  of  the  record  in  the  United 
States  Circuit  Court  invests  that  court  with  full  jurisdiction  of 
the  cause,  irrespective  of  the  action  of  the  State  court.^  The 
general  principle  being  that,  if  the  cause  is  removable,  and  the 
statute  providing  for  its  removal  has  been  complied  with,  no 
order  of  the  State  court  is  necessary  to  confer  jurisdiction  on 
the  court  of  the  United  States,  and  no  refusal  of  such  an  order 
can  prevent  this  jurisdiction  from  attaching.^ 

Since  the  State  court  has  no  jurisdiction  in  granting  or  deny- 
ing the  removal  after  the  petition  and  bond  arc  duly  filed,  it  is 
immaterial  that  the  filing  was  made  in  vacation.^ 

Every  step  which  a  State  court  takes  in  the  exercise  of  juris- 
diction in  a  case,  after  an  application  has  been  made  in  proper 
form  for  its  removal,  and  facts  submitted  which  are  such  as  to 
bring  it  within  the  provision  of  the  act  of  Congress,  is  coram 
non  judice  and  absolutely  void.^ 

The  jurisdiction  of  a  court  of  the  United  States  to  which  a 
cause  has  been  removed  from  a  State  court  relates  back  to  the 
time  of  the  original  service  of  process.''' 

1  Farmers'  Loan  &  Trust  Co.  v.  Chi-  Louis,  &  Pac.  R.  Co.  (1885),  23  Fed.  Rep. 
cago,    Pokin,    &   South    Western    R.    Co.     513. 

(1879),   9  Biss.    133;   Hervey  v.   Illinois  ^  Kern  v.  Huidekoper  (1880),  103  U.  S. 

Midland  R.  Co.  (1876),  7  Biss.  103  ;  Kern  485. 

V.  Huidekoper  (1880),  103  U.  S.  485  ;  Os-  *  Insurance   Co.    v.    Dunn    (1875),   19 

good  V.   Chicago,    Danville,    &  Vincennes  Wall.  214,  followed  in  Kern  u.  Huidekoper 

R.  Co.  (1875),  6  Biss.  330.  (1880),  103  U.  S.  485. 

It   seems,    as   stated    above,    that    the  ^  Osgood  v.  Chicago,  Danville,  &  Vin- 

decisions  of  the  higher  court  of  the  State  cennes  R.   Co.   (1875),    6  Biss.  330,    fol- 

upon    such    incidental   questions  will    be  lowed  in  Owens  v.  Ohio  Central  R.   Co. 

onlj'  carried  out  by  the  federal  court  in  (1884),  20  Fed.  Rep.  10,  15. 
the    same    manner  as   would   have    been  ®  Gordon  v.    Longest   (1842),  16  Pet. 

done  by  the  State  court  if  the  cause  had  97 ;  Kern  v.  Huidekoper  (1880),  103  U.  S. 

remained  there.     Farmers'  Loan  &  Trust  485.    See  also  Yulee  v.   Vose  (1879),  99 

Co.  V.  Chicago,  Pekin,  &  South  Western  U.  S.  539,  546. 
R.  Co.  (1879),  9  Biss.  133.  7  Owens  v.  Ohio  Central  R.  Co.  (1884), 

2  Central  Trust   Co.    v.   Wabash,    St.  20  Fed.  Rep.  10. 


446  RAILWAY    BONDS    AND    MORTGAGES.  [CHAP.  XXII. 

And  it  seems  that  where  the  State  law  allows  service  in 
chancery  proceedings  by  publication,  and  a  cause  is  removed 
after  publication,  but  before  proof  thereof  has  been  filed  in  the 
State  court,  the  State  court  will  thus  have  acquired  jui-isdiction 
by  such  publication,  and  that  the  federal  court  will  retain  it.^ 

§445.  What  bars  the  Right  of  Removal.  —  To  bar  the  right  of 
removal,  it  must  appear  that,  when  the  application  was  made,  the 
trial  of  the  State  court  was  actually  in  progress  in  the  orderly 
course  of  proceedings.^ 

Ex  parte  orders  made  without  notice  to  the  defendant  are 
not  a  "  final  trial  or  hearing"  which  cuts  off  the  right  of  removal. 
Hence  the  entry,  before  the  application  for  removal,  of  an 
office  order,  that  the  bill  will  be  taken  pro  eonfesso  as  against 
two  of  several  defendants,  for  want  of  a  formal  appearance  by 
paper  filed,  such  order  under  the  rules  not  being  absolute,  will 
not  prevent  a  removal.^ 

§  446.  When  the  Petition  and  Bond  must  be  filed.  —  Under  the 
provision  that  the  petition  for  removal  of  the  cause  shall  be  filed 
in  the  suit  in  the  State  court  before  the  term  at  which  said 
cause  could  be  first  tried,  tlie  petition  is  filed  in  time  if,  when 
it  is  filed,  tiiere  has  been  no  issue  made  up  in  the  case  on  wliich 
the  case  could  be  tried,  although  a  term  has  elapsed  during 
which  that  miglit  have  been  done.* 

The  rule  as  to  the  petition's  being  in  time  if  presented  before 
issue  joined  is  applicable  to  a  case  in  which  the  removal  is 
petitioned   for  by  parties  intervening  in  the  original  suit.^ 

§  447.  Contents  of  Application.  —  In  a  suit  by  a  corporation  of 
one  State  against  a  citizen  of  another  State  it  is  not  necessary 
in  a  petition  for  removal  by  the  defendant  to  state  that  he  is  a 
citizen  of  such  other  State,  and  it  is  not  necessary  to  state  that 
he  was  such  citizen  when  the  suit  was  commenced.^ 

But  if  the  application  is  grounded  on  the  federal  law  which 
permits  a  defendant  to  remove  a  cause  on  a  petition  that  he  has 
a  defence  arising  under  the  constitution,  or  a  treaty  or  law  of  the 
United  States,  it  must  not  be  concluded  in  merely  general  terms, 
but  must  specifically  set  fortli  what  the  defence  is.  If  the  nature 
of  the  defence  is  neither  shown  by  the  petition  nor  appears  from 

1  Turner  V.  Indianapolis,  B.  &  W.  R.  (1876),  6  Biss.  r)29  ;  s.  c.  21  Fed.  Cas. 
Co.  (1S7«),  8  I'.iss.  380;  s.  c.  24  Fed.  820,  Case  No.  12,r.27.  See  also  Yulee  i'. 
Cas.  367,  Case  No.  14,2r)9.  Vose  (1879),  99  U.  S.  .539,  .545. 

2  Removal  Cases  (1879),  100  U.  S.  4.57.  ^  Snow  v.  Texas  Trunk  R.  Co.   (1882), 
8  McHenry  v.  New  York,   P.   &  0.  R.     4  Woods,  391. 

Co.  (188.5),  25  Fed.  R(.y..  6.5.  '■  Cl<.icn,<^o,  St.    Louis,  &   Now  Orleans 

*  Scott  V.  Clinton  &  Springfield  R.  Co.     R.  Co.  v.  MeConil.  (1879),  17  Blatidi.371. 


§§  448-452.]      CITIZENSHIP   AND    REMOVAL   OF   CAUSES.  447 

the  record,  the  defendant  is  not  entitled  to  a  removal.  Whether 
the  necessary  conditions  entitling-  him  to  a  removal  is  a  question 
which  may  be  examined  into  by  a  State  court.^ 

§  448.  Formal  Requisites  of  Record  and  Petition,  —  It  is  not 
essential  that  the  record  be  certified  by  the  judge  of  the  State 
court :  the  attestation  of  the  clerk  under  the  seal  of  the  court 
is  sufficient.  Nor  is  it  necessary  that  the  petition  for  removal  be 
verified  by  affidavit.^ 

§  449.  Bringing  up  the  Record.  —  Where  the  record  of  the  State 
court  is  before  the  United  States  Circuit  Court,  the  issue  of  a 
writ  of  certiorari  by  the  latter  court  would  be  a  useless  act.^ 

§  450.  Irregularities  in  the  Removal  of  a  Cause.  —  These  do  not 
vitiate  it,  nor  authorize  the  federal  coui-t  to  remand  or  dismiss 
it;  if  it  has  jurisdiction,  the  cause  should  be  retained.* 

§  451.  Waiver  of  Objections  to  Removal. — Waiver  of  objections 
to  removal  founded  on  the  citizenship  of  the  parties  or  on  irregu- 
larities in  the  bond  will  be  implied,  if  such  objections  are  not 
raised  in  eighteen  months;^ 

§  452.  Requisites  of  Removal  Bond.  —  Nothing  is  to  be  secured 
by  the  bond  in  removal  cases  but  the  filing  of  the  transcript  in 
the  United  States  Circuit  Court  on  the  first  day  of  its  (then)  next 
term,  and  the  payment  of  any  costs  that  may  be  awarded  by  that 
court  in  case  it  shall  hold  that  the  suit  had  been  wrongfully  or 
improperly  removed.  "  Good  and  sufficient  security  "  is  all  that  is 
required,  and  this  is  satisfied  if  there  is  one  surety  able  to  respond 
to  the  condition  of  the  bond.  The  State  court  has  no  discretion 
in  such  a  matter.  Its  action  is  governed  by  fixed  principles. 
Hence,  if  no  objection  is  made  to  the  pecuniary  responsibility  of 
the  one  person  who  signed  as  surety,  and  was  competent  under 
the  laws  of  the  State  to  do  so,  it  is  an  error  for  the  court  to  refuse 
to  accci)t  the  bond  because  a  second  surety  was  an  attorney  of  the 
court,  who  was  prohibited  by  the  laws  of  that  State  from  becom- 
ing such  a  surety.^ 

1  Texas  &  Pacific  Ry.  Co.  v.  McAllister  ^  Hervey  v.  Illinois  Midland  R.  Co. 
(1883),  59  Tex.  349  ;  12  Am.   &  Enfr-  R.     (1880),  3  Fed.  Rep.  707. 

R.  Cas.  289,  where  the  doctrine  of  the  text  ^  Removal  Cases  (1879),  100  U.  S.  457. 

was  applied  in  the  case  of  a  petition   for  For  a  discussion  as  to  the  effect  of  the  act 

removal  presented  by  a  corporation  char-  of  1875   upon   the  requisites  of  a  bond, 

tared  by  Congress.  w^liere  the  application  to  remove  is  based 

2  Osgood  V.  Chicago,  Danville,  &  Vin-  on  the  "local  prejudice"  sections  of  the 
cennes  R.  Co.  (1875),  6  Biss.  330.  act  of  1867,   see  Farmers'  Loan  &  Trust 

3  Scott  V.  Clinton  &  Springfield  R.  Co.  •  Co.  i\  Chicago,  Pekin,  &  South  Western 
(1876),  6  Biss.  529;  s.  c.  il  Fed.  Cas.  R.  Co.  (1879),  9  P.iss.  133;  s.  c.  8  Fed. 
820,  Case  No.  12,527.  Cas.  1043,  Case  No.  4665. 

*  Osgood  XI.   Chicago,  Danville,  &  Vin- 
cennes  R.  Co.  (1875),  6  Biss.  330. 


448  RAILWAY    BONDS    AND    MORTGAGES.  [CHAP.  XXII. 

Thus  when  a  foreign  railroad  corporation  purchases  the  rights, 
titles,  properties,  and  franchises  of  a  domestic  railroad  corpora- 
tion, which  latter  corporation  is,  by  the  terms  of  its  charter, 
authorized  to  sell  such  rights,  titles,  properties,  and  franchises, 
and  the  purchasing  company  assumes  all  the  liabilities  of  the 
purcliased  road,  and  becomes  merged  and  consolidated  with  it, 
doing  business  under  its  charter,  such  purchasing  company  be- 
comes a  domestic  corporation. 

A  like  result  will  follow  from  a  purchase  under  an  act  author- 
izing the  sale  of  two  domestic  corporations  to  a  foreign  corpora- 
tion, and  providing  that  such  sa>e  shall  pass  the  title  to  the 
corporate  franchises  and  property,  and  that  the  purchasing  com- 
pany shall  thereby  "  become  possessed  of  the  rights  of  charter 
and  property  sold,"  and  thereafter  have,  hold,  and  use  the  same 
in  its  "  own  name  and  right." 


§§  453,  454.] 


PLEADINGS. 


449 


CHAPTER  XXIII. 


PLEADINGS. 


§  453.    Introductory. 

454.  The  Bill  in  Foreclosure  Suits  and 

Demurrers. 

455.  The  Bill  in  Suits  for  Possession. 


§  456.  Supplemental  Bills. 

457.  The  Answer. 

458.  Cross-bills. 

459.  Dismissal  of  Bill,  and  its  EflFects. 


§  453.  Introductory.  —  This  chapter  contains  a  summary  of 
various  rulings  on  points  of  equity  pleading  which  have  been 
decided  in  cases  falling  within  the  scope  of  this  treatise.^ 

§  454.  The  Bill  in  Foreclosure  Suits.  —  The  ownership  of  the 
bonds  which  are  the  subject  of  a  foreclosure  suit  is  sufficiently 
alleged,  where  the  complaint  avers  that  the  coupons  maturing  at 
a  certain  time  are  "  due  and  wholly  unpaid,  together  with  interest 
thereon,  to  your  orator  and  other  holders  of  the  bonds."  ^ 

In  a  complaint  to  foreclose  as  an  equitable  mortgage  an  instru- 
ment executed  by  a  corporation,  an  allegation,  in  substance,  that 
certain  parties  made  defendants  claimed  some  interest  in  a  lien 
upon  the  mortgaged  premises,  but  that  such  interest  or  lien,  if 
any,  was  junior  and  subsequent  to  the  lien  of  plaintiff's  mortgage,, 
is  sufficient.^ 

A  bill  for  foreclosure  is  defective  as  an  original  bill  when  it 
does  not  give  a  sufficient  description  of  the  mortgaged  premises, 
nor  show  the  terms  and  conditions  of  the  mortgage,  nor  the 
amount  secured  by  it,  nor  the  sum  due  and  unpaid  by  the 
mortgagor.* 


1  Daniell's  Chancery  Pleading  and  Prac- 
tice, except  so  far  as  it  illustrates  doctrines 
based  upon  recent  orders  of  the  English 
Court  of  Chancery,  may  be  considered  as  an 
authoritative  commentary  by  which  the 
equity  rules  promulgated  by  the  Supreme 
Court  in  1842  are  to  be  interpreted.  See 
the  note  of  I\Ir.  Justice  Bradley  in  Thom- 
son V.  Wooster  (1885),  114  U.  S.  104,  112. 

2  Toler  V.  East  Tennessee,  Va.  &  Ga. 
Ry.  Co.  (1894),  67  Fed.  Rep.  168, 


8  Howard  v.  Iron  &  Land  Company  of 
Minnesota  et  al.  (1895),  62  Minn.  298  ; 
s.   c.  64  N.  W.  Rep.  896. 

*  Mercantile  Trust  Co.  v.  Kanawha  & 
0.  R.  Co.  (1889),  39  Fed.  Rep.  337.  In 
this  case  the  bill  in  question  was  filed  in  a 
circuit  different  from  that  in  which  the 
original  suit  was  filed,  the  relief  asked  for 
being  the  appointment  of  a  receiver.  Mr. 
Justice  Harlan  ruled  that  such  an  appoint- 
ment could  be  made  only  in  a  separate, 


29 


450 


RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  XXIII. 


But  a  bill  to  foreclose  a  deed  of  trust  executed  to  secure  bonds 
issued  and  put  in  circulation  by  a  corporation  and  made  payable 
to  bearer  is  not  demurrable  because  it  fails  to  allege  to  whom 
such  bonds  were  negotiable  in  the  first  instance,  or  how  much 
was  paid  for  them,  or  when  they  were  issued.  Nor  is  a  bill 
averring  defaults  in  payment  of  interest  demurrable  because  it 
fails  to  allege  that  the  interest  coupons  were  presented  for  pay- 
ment at  the  oi!ice  or  agency  at  which  they  were  payable.^ 

The  only  question  in  an  action  for  foreclosure  of  an  equitable 
mortgage  given  by  a  corporation  which  lienholders,  who  are 
defendants,  can  raise  on  a  demurrer  that  the  complaint  does  not 
state  a  cause  of  action,  is  whether  the  complaint  showed  a  valid 
mortgage  as  between  the  parties.^ 

Lienholders,  defendants  to  an  action  to  foreclose  an  equitable 


independent  suit,  and  for  the  purpose  of 
commencing  this  the  bill  before  him  was 
held  to  be  insufficient.  This  ruling  was 
substantially  an  indorsement  of  the  doc- 
trine ap])lied  by  Judge  Gresham  in  the 
Wabash  case.  Mr.  Justice  Harlan,  in  ren- 
dering his  judgment,  said  :  "The  request 
that  this  court  will  simply  confirm  the 
appointment  of  a  receiver,  made  in  another 
circuit,  and  by  its  order  invest  that  receiver 
with  the  possession  and  control  of  the 
mortgaged  premises  within  this  district,  — 
no  other  relief  being  contemplated,  —  is, 
in  effect,  a  request  that  this  court  will 
compel  all  who  have  claims  and  rights  in 
respect  to  the  mortgaged  property  situated 
in  West  Virginia  to  seek  relief  in  the  orig- 
inal suit  for  foreclosure  pending  in  another 
State;  and  this,  notwithstanding  such 
parties  may  have  the  right,  under  exist- 
ing Iftgi.slation,  to  invoke  the  jurisdiction 
of  tills  court,  or  of  some  court  of  general 
jurisdiction  established  by  this  State.  It 
might  be  well  if  Congress  would  so  enlarge 
or  regulate  the  jurisdiction  of  the  courts  of 
the  United  States  as  to  enable  a  Circuit 
Court  in  which  is  brought  an  original  suit 
for  the  foreclosure  of  a  mortgage  resting 
upon  an  interstate  railroad  to  take  actual 
possession,  by  itsofficers,  of  the  entire  line, 
and  of  all  the  mortgiiged  property,  wher- 
ever situate<l,  and  administer  it  for  the 
benefit  of  all  eoncerned  ;  preserving  in  that 
mode  the  unity  of  the  railroad,  and  tlie 
ju.st  rights  of  mortgagors,  mortgagees, 
creditors,  as  well  as  those  of  the  general 


public  interested  in  commerce  among  the 
States.  But  there  has  been  no  such  legis- 
lation, and  we  do  not  see  our  way  clear  to 
eflfect  any  such  result  bj'  judicial  orders 
merely.  A  good  deal  was  said  at  the  argu- 
ment about  the  injury  that  might  ]iossibly 
ensue  to  mortgagors,  mortgagees,  creditors, 
and  tlie  public,  if  an  interstate  railroad, 
covered  by  one  mortgage,  be  placed  under 
the  management  of  ditferent  receivers,  each 
acting  under  the  orders  of  the  court  ap- 
pointing him,  and  sold  under  separate 
decrees,  rendered  in  distinct  foreclosure 
suits  brought  in  ditferent  Circuit  Courts  of 
the  United  States.  Undoubtedly  railroad 
property  of  that  kind  could  be  very  mate- 
rially injured  in  value,  and  the  general 
public  put  to  serious  inconvenience,  if  the 
courts  in  which  such  separate  suits  are 
brought  decline  to  act  in  harmony,  or  ac- 
cording to  some  fixed  plan,  in  the  admin- 
istration and  sale  of  the  propert}'.  It  is 
not,  liowever,  to  be  assumed  that  this 
court,  if  its  jurisdiction  is  properly  invoked 
in  reference  to  this  railroad,  so  far  as  it  lies 
in  West  Virginia,  will  fail  in  any  duty 
imposed  ujion  it  by  law,  or  the  comity 
prevailing  lietween  courts  of  equal  dignity 
and  authority."  Mercantile  T.  Co.  v. 
Kanawlia  &  0.  Ey.  Co.,  39  Fed.  Rep. 
337. 

1  Savannah  &  Memphis  R.  Co.  v.  Lan- 
caster (1878),  62  Ala.  5.^5. 

2  Howard  v.  Iron  &  Land  Company  of 
Minnesota  et  al.  (189;")),  62  Minn.  298; 
s.  c.  64  N.  W.  Rep.  896. 


§§  455, 456.]  PLEADINGS.  451 

mortgage,  cannot,  by  demurrer,  raise  the  question  that  plaintiff's 
mortgage  was,  on  its  face,  void  as  to  creditors  and  subsequent 
incumbrancers. 1 

§  455.  The  Bill  in  Suiljs  by  Trustees  to  obtain  Possession.  —  A  bill 
filed  by  trustees  to  obtain  possession  after  default  with  a  view  to 
foreclosure  usually  asks  that,  unless  the  sums  due  to  the  bond- 
holders be  paid  within  a  time  to  be  prescribed,  possession  of  the 
mortgaged  premises  be  given  by  the  corporation  to  the  plaintiffs 
for  the  purposes  of  foreclosure.^ 

§  456.  Supplemental  Biiis.3  —  After  the  filing  of  an  original  bill 
for  foreclosure  of  mortgage  for  a  default  in  interest,  if  other 
defaults  of  interest  occur  and  it  be  desired  to  change  the  action 
with  a  view  to  declaring  the  principal  debt  due,  such  facts  are 
germane  to  the  foreclosure  proceedings,  and  a  supplemental  bill 
is  the  proper  mode  to  bring  them  before  the  court.* 

A  supplemental  bill  will  be  dismissed,  as  relating  to  matters 
not  in  their  nature  supplemental,  where  it  is  filled  with  matters 
of  complaint  which  have  occurred  since  the  original  decree,  and 
which  have  no  necessary  connection  with  that  decree,  such  as  a 
claim  for  the  use  of  rolling-stock,  the  title  to  which  is  still  in 
litigation,  and  an  alleged  violation  of  the  charter,  and  attempt  to 
divei-t  the  travel  and  interrupt  the  through  communication  in 
running  the  road.^ 

After  the  trustees  have  taken  a  decree  pro  cow/esso,  bondholders 
may,  by  filing  a  petition  which  alleges  that  the  original  bill  was 
not  sufficiently  specific  in  its  description  of  the  mortgaged  prop- 
erty to  secure  their  claims  to  a  lien  on  certain  after-acquired  per- 
sonalty, obtain  an  order  directing  the  trustees  to  file  a  suplemental 
bill  distinctly  and  fully  setting  up  the  claim  of  the  petitioners,  and 
making  all  parties  in  adverse  interest  defendants.  The  litigation 
under  such  supplemental  bill  to  be  confined  to  subject-matter 
thereof.^ 

A  supplemental  bill  being  a  mere  adjunct  to  an  original  bill,  it 
is  not  necessary  to  serve  a  subpoena  upon  any  of  the  parties  named 
therein  except  those  who  were  not  included  in  the  original  bill.'' 

^  Howard  v.  Iron  &  Land  Company  of  ^  Minnesota  Co.  v.  St.  Paul  Co.  (1867), 

Minnesota  et  al.    (1895),   62  Minn.  298  ;  6  Wall.  742. 

s.  c.  64  N.  W.  Rep.  896.  6  Williamson  v.   New  Jersey  Southern 

2  See,    for   instance,  Shaw  v.   Norfolk  R.  Co.  (1874),  25  N.  J.  Eq.  13. 

County  R.  Co.  (1855),  5  Gray  (Mass.),  162.  '^  Shaw  v.  Bill  (1877),  95  U.  S.  10,  14. 

^  See  ojenerally  DaniellCh.  PL,  §§  1515  In  this  case  the  defendant  company  was 

et  seq.  ;  Story's  Eq.  PI.,       Z^2  et  scq.  ruled    to   answer,    and    the    new    parties 

*  New  York  Security  &  Trust  Co.  r.  appeared    by    counsel.       This    was    held 

Lincoln  St.  Ry.  Co.  et  al.  (1896),  74  Fed.  sufficient. 
Rep.  67,  70. 


452  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  XXIII. 

§  457.  The  Answer.!  — The  answer  of  stockholders  who  appear 
bj  leave  of  the  court  cannot  be  taken  as  the  answer  of  the  cor- 
poration itself ;  for  the  latter  must  not  be  under  oath,  but  under 
the  common  seal  of  the  corporation.  An  omission  on  the  part  of 
the  corporation  to  appear  and  answer  in  conformity  with  this 
rule  entitles  the  plaintiffs  to  an  order  that  the  bill  be  taken  pro 
confesso? 

Lienholders  made  parties  defendant  in  an  action  to  foreclose 
an  equitable  mortgage  executed  by  a  corporation,  the  complaint 
in  which  action  has  sufficiently  alleged  that  they  claimed  such 
liens,  if  they  have  any  interest,  must  set  it  up  by  answer.^ 

§  458.  Cross-bills.^  —  It  frequently  happens  that  a  complete  de- 
cree cannot  be  made  without  a  cross-bill,  to  bring  the  whole 
matter  in  dispute  completely  before  the  court.  In  such  a  case  it 
becomes  necessary  for  some  or  one  of  the  defendants  to  the  origi- 
nal bill  to  file  a  bill  against  the  plaintiff,  and,  if  necessary,  other 
defendants  to  the  bill,  or  some  of  them,  and  bring  the  litigated 
point  before  the  court.^ 

Thus,  where  a  bill  has  been  filed  against  certain  parties  and 
trustees  in  the  mortgage,  asking  relief  on  the  theory  that  they 
have  participated  in  a  fraudulent  scheme  by  which  the  complain- 
ants were  induced  to  invest  in  certain  bonds,  any  of  the  defend- 
ants who  wish  to  set  up  their  discharge  in  bankruptcy  as  a 
defence  may  file  a  cross-bill  for  that  purpose.^ 

So  a  bill  in  which  a  trustee,  who  has  been  brought  in  by  supple- 
mental bill  as  a  defendant,  in  a  suit  commenced  by  an  unsecured 
creditor  who  asks  for  a  receiver  and  a  sale  of  the  property,  —  such 
supplemental  bill  alleging  that  the  plaintiff's  claim  is  an  equitable 
lien  on  the  property  superior  to  that  of  the  mortgage,  —  sets  up  the 
mortgage  and  a  default  in  the  payment  of  the  bonded  interest,  and 
asks  for  a  receivership  and  a  sale,  and  a  decree  to  the  effect  that 
the  plaintift"'s  claim,  if  a  lien  at  all,  is  inferior  to  that  of  the  mort- 
gage, is  properly  styled  and  treated  as  a  cross-bill.  Such  a  bill 
comes  under  the  head  of  cross-bills  filed  to  obtain  full  relief  to  all 
parties,  touching  the  matters  of  the  original  bill.  The  mere  fact 
that,  so  far  as  it  seeks  the  further  aid  of  the  court  beyond  the  pur- 
poses of  defence  to  the  original  bill,  it  is  not  a  pure  cross-bill  is 

See  (generally   Daniell's   Ch.   PI.,  cli.  *  See    Daniell's   Ch.    PI.,   ch.   xxxiv.  ; 

xvii.  ;  Story's  Eq.  PI.,  ch.  xviii.  Story's  Eq.  PI.,  §§  389  et  srq. 

2  BrorLSon  v.   La  Crosse  &  Milwaukee  *  DiinieH's  Ch.  PI.,  §  1548 ;  Story's  Eq. 

R.  Co.  (1863),  2  Wall.  283,  302.  PI.,  §  392. 

*  Howard  v.  Iron  &  Land  Company  of  •>  i'anijne  Franco-Ei^yptienne  v.  Brown 

Minnesota  et  aL,  62  Miun.   298  ;  s.  c.  04  (1885),  24  Fed.  Rep.  lOG. 
N.  W.  Ki'Y.  896. 


§  458.]  PLEADINGS.  463 

immaterial.  Different  relief  from  that  sought  in  the  original  bill 
will  necessarily  be  asked  for  by  a  pleading  filed  on  the  theory  that 
without  it  a  complete  determination  of  the  matters  already  in  liti- 
gation cannot  be  obtained.^ 

If  the  cross-bill  sets  up  new  matter  which  is  intimately  con- 
nected with  the  subject-matter  of  the  original  bill,  it  is  error  to 
strike  it  from  the  files  and  refuse  leave  to  defendant  to  refile  and 
prosecute  it.  In  such  a  case  it  is  impossible  to  say  that  all  the 
facts  have  been  as  fully  shown  as  they  would  have  been  if  the 
defendant  had  been  allowed  to  investigate  them  under  the  alle- 
gations of  his  cross-bill.2 

When  a  cross-bill  is  necessary  to  bring  the  parties  before  the 
court,  in  order  that  equity  may  be  done,  the  court  may  order  one 
filed  ;  but  where  a  party  is  merely  entitled  to  a  cross-bill  in  order 
to  obtain  affirmative  relief,  he  may  or  may  not  file  it,  at  his  dis- 
cretion, and  without  prejudice  to  his  rights.^ 

The  circumstances  under  which  the  filing  of  a  cross-bill  is  op- 
tional are  frequently  illustrated  in  those  cases  where  the  interests 
of  co-defendants  are  antagonistic.  Thus  where  the  original  bill 
was  filed  by  a  judgment  creditor  denying  the  validity  of  the  bonds, 
a  cross-bill  may  properly  be  filed  between  the  several  bondholders 
who  assert  antagonistic  interests  under  the  deed  of  trust,  for 
the  purpose  of  adjusting  and  settling  their  conflicting  liens  and 
priorities.* 

If  such  co-defendants  wish  to  have  the  equities  between  them 
settled  without  instituting  an  original  suit  for  that  purpose,  the 
proper  course  is  to  make  application  to  the  court  at  an  early  stage 
of  the  litigation.  To  undertake  to  do  this  by  filing  a  cross-bill 
after  the  rendition  of  the  decree  is  a  course  which  has  been 
strongly  condemned  by  the  Supreme  Court  of  the  United  States.^ 

As  a  general  rule  a  cross-bill  can  be  filed  only  by  one  who  is  an 
actual  party  to  the  suit.  But  creditors  belonging  to  the  classes 
whose  claims  are  preferred  to  the  mortgage  lien,  either  by  virtue 
of  some  statute  passed  for  the  protection  of  material-men  and 
laborers,  or  under  the  doctrine  of  Fosdick  v.  Schall,*^  as  to  the 
equitable  liens  acquired  by  those  who,  by  labor  or  supplies  fur- 
nished to  the  company,  keep  up  the  company  as  a  going  concern, 

1  Morgan's  La.  &  Texas  Railroad  &  St.  ^  American  Loan  &  Trust  Co.  v.  East  & 
Ship  Co.  V.  Texas  Central  R.  Co.   (1890),  West  R.  Co.  (1889),  37  Fed.  Rep.  242. 
137  U.  S.  171  ;  45  Am.  &  Eiig.  R.  R.  Cas.  *  Morton  v.  New  Orleans  &  Selma  R. 
631,  citing  Story's  Eq.  PL,  §  389.  Co.  (1885),  79  Ala.  590. 

2  Peoria  &  Springfield  R.  Co.  v.  Bryan  *  Bronson  v.  Railroad  Company  (1862), 
(1879),  5  Bradw.    (111.)   387,  citing  Jones  2  Black,  524,  528. 

V.  Smith  (1852),  14  III.  229.  6  99  u.  s.  235  (1878). 


454  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  XXIII. 

may,  although  not  parties  to  the  original  suit,  file  a  cross-bill  in 
behalf  of  themselves  and  others  holding  like  claims,  for  the  pur- 
pose of  having  those  claims  declared  a  paramount  charge  on  the 
earnings  of  the  road  in  the  hands  of  the  receiver.^ 

Such  a  cross-bill  is  not  multifarious,  since  the  orators  are  seek- 
ing, as  a  class,  to  enforce  a  common  right  against  a  common 
fund,  which  they  assert  to  be  in  equity,  chargeable  in  their 
favor.2 

A  bondholder  is  deemed  a  quasi  party  to  a  suit  in  which  he  is 
represented  by  the  trustee  of  the  mortgage,  and,  as  the  question 
of  the  trustee's  fraud  is  one  incidental  to  the  suit,  a  bondholder,  if 
he  wishes  to  raise  that  question,  may  and  should  file  a  cross-bill 
for  that  purpose,  and  not  institute  an  independent  suit.  If  he 
takes  the  latter  course,  his  bill  will  be  dismissed,  and  the  trustee's 
suit  alone  proceeded  with,  the  bondholder  having  the  option  of 
filing  a  cross-bill  therein,  and  thus  obtaining  full  relief.^ 

One  who  is  already  a  party  to  the  suit  need  not  file  a  cross-bill 
for  the  purpose  of  obtaining  the  appointment  of  a  receiver.* 

The  filing  of  a  cross-bill  on  a  petition  without  the  leave  of  the 
court  is  an  irregularity,  and  such  a  cross-bill  may  be  properly  set 
aside.^ 

But  the  permission  of  the  court  to  file  a  cross-bill  will,  upon 
appeal,  be  presumed  to  have  been  given  when  action  has  been 
taken  upon  it.^ 

§  459.  Dismissal  of  Bill  by  Complainant,  and  its  Effect.  —  The 
general  rule  is  that  a  complainant  may,  upon  payment  of  costs, 
dismiss  his  own  bill  at  any  time  before  the  rendition  of  a  final  or 

^  Poland   V.    Lamoille   Valley    R.   Co.  aut.iority  for  any  wider  proposition  than 

(1879),  52  Vt.  144  ;  s.  c.  4  Am.   &  Eng.  that  a  person  who  is  a  stranger  to  the  suit 

II.  R.  Gas.  408.  cannot  file  a  cross-bill  without  leave.   Neal 

2  Poland   V.    Lamoille   Valley   R.    Co.  v.  Foster  (1888),  13  Sawyer,  236  ;  s.  c.  34 

(1879),  52  Vt.  144  ;  s.  c.  4  Am.  &  Eng.  Fed.  Rep.  496,  per  Deady,  J.      It  seems, 

R.  II.  Cas.  408.  however,  very  doubtful  whether  the  posi- 

2  Stern    v.   Wisconsin  Central  R.    Co.  tion  thus  taken   by   the   learned    circuit 

(1880),  1  Fed.  Rep.  555.  j'li^ge  can  be  sustained  in  view  of  the  lan- 

*  Indiana  Southern  R.  Co.  v.  Liverpool,  guage  of  the  Supreme  Court  of  the  United 

Loudon,  &GlobeIns.  Co.  (1883),  109  U. S.  States  in  the  above  case,  which  is  appar- 

168.  ently  the  only  direct  decision  on  the  sub- 

'  Bronson  v.   La  Crosse  &  Milwaukee  ject.      The  decusion  cited  in  the  following 

R.   Co.    (1863),    2    Wall.    283.     There   a  note  certainly  implies  the  existence  of  a 

stoc^kholdcr  petitioned  for  leave  to  answer  wider  rule  than  that  supposed  by  Judge 

in  the  name  of  tlic  mortgagor  corporation,  Deady  to  be  laid  down  in  the  Bronson  case, 

and  to  file  a  cross-bill.     Leave  was  granted  as  tlie    comjianies  whose   cross-bills  were 

to  put  in   the  answer,  but  not  to  file  the  asserted  to  have  been   filed  without  leave 

bill,  which  was  for  this  reason  set  aside,  were  pai'ties  defendant  in  the  original  suit. 

This  case  has  been  declared  not  to  be  an  *  Muller  v.  Dows  (1877),  94  U.  S.  444. 


§  459.]  PLEADINGS.  455 

interlocutory  decree.  After  a  decree  has  been  made  determining 
the  rights  of  a  party  defendant,  or  such  proceedings  have  been 
taken  as  entitle  the  defendant  to  a  decree,  the  complainant  will 
not  be  allowed  to  dismiss  his  bill  without  the  consent  of  the 
defendant.^ 

The  fact  that  the  defendant  has  not  only  answered,  but  has 
also  filed  a  cross-bill  for  the  purpose  of  securing  more  complete 
relief,  merely  affords  stronger  grounds  for  the  application  of  the 
rule.  Hence,  where  several  defendants  have  independent  rights 
in  the  subject-matter  of  the  suit,  and  one  defendant  after  having 
answered,  setting  up  his  particular  right,  files  a  cross-bill  to  en- 
force it,  and  the  cases  proceed  together  and  are  heard  together, 
and  an  interlocutory  decree  is  entered  to  protect  and  enforce  the 
rights  thus  set  up,  entitled  as  of  both  suits,  the  complainant  in 
the  original  suit  cannot,  unless  upon  consent,  dismiss  his  bill, 
and  thus  deprive  the  defendants  of  the  right  acquired  by  the 
decree.^ 

The  exception  to  the  general  right  of  the  plaintiff  to  dismiss 
his  bill  on  payment  of  costs  is  not  confined  to  rights  acquired  by 
some  order  or  decree  entered  in  the  case.  It  may  arise  out  of 
any  proceeding  in  it,  and  may  be  found  in  the  nature  of  the  de- 
fence, the  condition  of  the  pleadings,  the  agreement  of  the  parties, 
or  any  circumstance  appearing  in  the  record  which  shows  that  it 
would  be  inequitable  to  allow  the  dismissal.  Thus  where  the  de- 
fendant pleaded  an  estoppel  which,  if  established,  would  amount 
to  a  defeasance  of  a  lien  claimed  by  the  plaintiff  on  his  property, 
and  which  it  was  the  object  of  the  bill  to  enforce,  and  it  appeared 
that  this  defence  could  be  endangered  by  a  transfer  of  the  lien 
after  dismissal,  the  plaintiffs  were  not  allowed  to  dismiss.^ 

But  the  mere  ordinary  inconveniences  of  double  litigation  are 
not  such  an  injury  to  the  defendant  as  will  prevent  the  plaintiff 
from  dismissing  his  bill.  Such  inconveniences  are,  in  the  view  of 
the  law,  compensated  by  the  costs.* 

A  dismissal  is  usually  "  without  prejudice  to  the  bringing  of 
another  suit ; "  ^  but  the  plaintiff  will  not  be  allowed  to  dismiss 
on  these  terms,  unless  the  circumstances  are  such  that  the  court 
would,  upon  final  hearing,  permit  the  bill  to  be  so  dismissed.^ 

1  Chicago  &  Alton  R.  Co.  v.  TJnion  '  Stevens  t'.  Railroad.  Companies  (1880), 
Rolling  Mill  Co.   (1883),  109  U.  S.  702,     4  Fed.  Rep.  97. 

citing  Daniell's  Ch.  Pr.,  §  793,  and  numer-  *  Ibid. 

ous  cases.  ^  Daniell's  Ch.  Pr.,  §  790,  note. 

2  Chicago  &  Alton  R.  Co.  v.  Union  ^  Stevens  v.  Railroad  Companies  (1880), 
Rolling  Mill  Co.  (1883),  109  U.  S.  702.  4  Fed.  Rep.  97. 


456  RAILWAY   BONDS  AND  MORTGAGES.         [CHAP.  XXIII. 

When  an  original  bill  is  dismissed  before  final  hearing,  a  cross- 
bill filed  by  a  defendant  falls  with  it.^ 

So  also,  after  a  bill  has  been  dismissed  on  the  ground  that  it  is 
defective  as  an  original  bill,  an  order  made  in  the  same  suit, 
allowing  a  person  to  become  a  party  defendant,  will  be  set  aside, 
and  his  answer  and  cross-bill  will  be  stricken  from  the  files,  but 
without  prejudice  to  any  right  that  he  may  have  to  become  a 
party  to  a  subsequent  suit  brought  by  an  amended  bill.^ 

1  Chicago   &   Alton   R.  Co.   v.   Union  ^  Mercantile  Trust  Co.  v.  Kanawha  & 

Rolling  MiU  Co.  (1883),  109  U.  S.  702.        0.  E.  Co.  (1889),  39  Fed.  Eep.  337. 


460.] 


PARTIES   IN   SUITS,   EtC. 


4ot 


CHAPTER  XXIY. 


PARTIES  IN  SUITS  RELATING   TO   CORPORATE   SECURITIES. 


§  460.    Introductory, 
Art.  I.  —  Rule  requiring  all  Parties 

MATERIALLY     INTERESTED     IN 

THE  Mortgage  to  be  joined 
EITHER   AS     Plaintiffs    or 
Defendants. 
§  461.    Who  should  be   Parties  Plaintiff 
generally. 

462.  Bondholders  as  Parties  Plaintiff 

and     Committees     of     Bond- 
holders. 

463.  Effect  of  pledging  the  Bonds  on 

the  Question  of  Proper  Parties 
Plaintiff. 

464.  Who      are      Necessary      Parties 

Defendant. 

465.  Prior  Mortgagee,  when  Necessary 

Party. 

466.  Subsequent  Mortgagee,  Necessity 

of  joining. 

467.  Mortgagee  of  Divisional  Mortgage. 

468.  Mortgagor  Company. 

;     469.   Stockholders    when    sufficiently 
represented. 

470.  Directors  of  Construction   Com- 

pany to  whom  Bonds  have  been 
issued,  when  Proper  Parties. 

471.  Guarantors  of  the  Bonds. 

472.  Receivers. 

473.  States  as  Parties  Defendant. 

474.  United   States   as    a    Party    De- 

fendant. 

475.  States  and  United  States  bound 

by  Decree,  if  actually  Parties. 

476.  Intervention  of  Parties  materially 

interested. 
Art.  II. — Parties  in  Suits  by  or  against 
THE  Trustees  or  Represent- 
ative Bondholders. 
§  477.    Introductory. 

478.  Representation  of  Bondholders  by 

one  or  more' of  their  Number. 

479.  Bondholder  allowed  to  sue,  when 

Trusteeship  of  Foreign  Corpo- 
ration is  vacant. 

480.  Bondholder  allowed  to  sue  when 

Trustee  is  Non-resident. 


§481. 
482. 

483. 

484. 

485. 
486. 

487. 

488. 
489. 
490. 
491. 


492. 
493. 


494. 
495. 

496. 
497. 
498. 
499. 


Suit  by  a  Representative  Bond« 
holder,  when  not  permissible. 

Participation  of  Bondholders  in 
a  Suit  begun  by  one  of  their 
Number. 

Representative  Position  of  Trustee 
in  Suits  affecting  the  Trust 
Property  generally. 

Request  to  begin  Suit  must  come 
from  Owner,  not  merely  Holder 
of  Bond. 

Suits  in  which  the  Trustee  is  the 
Proper  Party  Plaintiff. 

Bill  filed  by  or  against  Trustees 
alone  not  demurrable  for  De- 
fect of  Parties. 

Defences  available  against  thfe 
Bondholders  are  available 
against  the  Trustee. 

Trustee  as  Party  Defendant 
generally. 

Joinder  of  Non-resident  Trustee, 
whether  necessary. 

Trustee's  Control  of  Suits  affect- 
ing the  Trust  Property. 

Proper  Way  to  raise  Question  of 
Trustee's  Unfitness.  Interven- 
tion by  Bondholder  in  Trustee's 
Suit. 

Proper  Time  to  intervene. 

Intervention  must  be  to  enforce 
Rights  accruing  under  Mort- 


Intervention  by  Trustee  in  Bond- 
holder's Suit. 

Action  of  Trustees,  to  what  Extent 
binding  on  Bondholders  gen- 
erally. 

Discretionary  Acts  of  Trustee  are 
binding. 

In  what  Matters  Trustee  cannot 
bind  Bondholders. 

Action  of  Trustee  inures  to 
Benefit  of  Bondholders. 

Remedies  of  Dissatisfied  Bond- 
holder after  Rendition  of 
Decree. 


458  •  RAILWAY  BONDS  AND   MORTGAGES.  [CHAP.  XXIV. 

§  460.  Introductory.  —  The  cases  involving  controversies  as  to 
the  proper  parties  in  suits  relating  to  corporate  securities  may 
be  divided  into  two  classes  :  the  first  illustrating  the  application 
of  the  general  rule  of  equity  practice,  that  all  persons  materially 
interested  in  the  subject  of  the  litigation  ought,  under  ordinary 
circumstances,  to  be  made  parties  thereto,  either  as  plaintiffs  or 
defendants  ;  ^  the  second  embracing  instances  of  the  well-estab- 
lished qualification  of  this  rule,  that  a  plaintiff  may  sue  on  behalf 
of  himself  and  of  all  the  others  of  a  numerous  class  of  which  he 
is  one,  and  that  one  of  a  numerous  class  may  be  brought  into 
court  as  the  only  defendant,  and  be  treated  for  the  purpose  of  the 
suit  as  representative  of  the  others  in  that  class,  on  the  allegation 
that  they  are  too  numerous  to  be  made  parties.^  The  doctrines 
applied  in  the  first  of  these  classes  are  in  no  way  peculiar  to  suits 
for  the  enforcement  of  corporate  mortgages,  and  it  would  there- 
fore carry  us  beyond  the  scope  of  the  present  treatise  to  refer  to 
any  decisions  except  those  actually  rendered  with  regard  to  suits 
on  railroad  mortgages.  The  second  class,  dealing  mainly  with 
the  peculiar  functions  of  the  trustee,  has  developed  the  familiar 
doctrine  as  to  suits  by  or  against  a  representative  of  a  class  in 
such  a  manner  as  to  have  created  almost  a  separate  branch  of 
equity  practice,  and  therefore  calls  for  a  fuller  treatment. 

Article  I.  —  Rule  requiring  all  Persons  materially  interested 
IN  THE   Mortgages  to  be   joined   either   as  Plaintiffs  or 

Defendants. 

§  461.  Who  should  be  Parties  Plaintiff  generally.  —  As  any  one 
who  has  a  real  interest  in  the  mortgage  or  the  debt  secured 
thereby  may  set  the  machinery  of  the  law  in  motion  to  enforce 
the  security,  the  most  natural  arrangement  of  the  parties  would 
be  that  all  those  whose  interests  are  similar  should  join  as  plain- 
tiffs in  a  suit  for  that  purpose.  But  this  is  not  necessary  to 
enable  the  court  to  adjudicate  their  rights.  Provided  all  the 
persons  whom  it  is  intended  to  bind  by  the  decree  are  actually 
brought  in  as  parties,  it  is  immaterial  whether  they  are  brought 
in  as  plaintiffs  or  defendants.  The  familiar  rule  of  equity  ])ro- 
cedure  now  embodied  in  the  codes  of  many  States  is  that  any  one 
whose  interests  are  similar  to  those  of  the  originator  of  the  suit 
may,  if  he  declines  to  be  a  plaintiff,  be  joined  as  a  defendant. 

The  only  proper  parties  to  a  foreclosure  suit  are  the  mortgagor, 

1  Daniell  Cli.  I'r.,  p.  190.  »  Daniell  Ch.  Pr.,  p.  191. 


§  462.]  PARTIES   IN    SUITS,   ETC.  459 

the  mortgagee,  and  those  who  have  acquired  any  interest  from 
either  of  them  subsequently  to  the  mortgage.^ 

Persons  belonging  to  a  class  represented  in  a  foreclosure  suit, 
or  on  whose  behalf  the  suit  is  brought,  are  regarded  as  quasi 
parties.  They  may  have  a  standing  in  court,  and  be  heard  for  the 
purpose  of  protecting  their  interest.^ 

§462.  Bondholders  as  Parties  Plaintiff.  —  Unless  the  mortgage 
qualifies  in  some  way  the  inherent  right  of  a  secured  creditor  to 
institute  proceedings  for  the  enforcement  of  his  security,  it  is 
plain  that  the  bondholders  may  bring  suit  to  foreclose  whenever 
the  necessary  breach  of  condition  occurs.  So  far  as  the  abstract 
existence  of  this  right  is  concerned,  it  is  immaterial  whether  the 
mortgage  is  executed  directly  to  the  bondholders  or  in  the  form 
of  a  trust  deed.^  The  interposition  of  a  trustee,  however,  although 
not  limiting  in  any  decree  the  abstract  right  itself,  modifies  the 
remedial  procedure  for  its  enforcement  to  the  extent  that  the 
bondholders  are  not  allowed  to  take  any  active  steps  in  initiating 
a  foreclosure  suit,  unless  they  show  that  the  trustee  has  refused  to 
bring  the  suit,  or  is  for  some  reason  an  improper  person  to  repre- 
sent their  interests.     (See  Art.  II.,  below.) 

Re  Uruguay  Central  Ry.  Co.  (1879),  11  Ch.  D.  372,  was  a 
proceeding  in  which  a  bondholder  of  a  limited  railway  company 
presented  a  winding-up  petition,  the  interest  on  the  bond  debt 
having  fallen  into  arrear.  The  petition  was  dismissed  on  the 
ground,  first,  that  the  bondholder  was  not  a  creditor  of  the  com- 
pan}^,  either  at  law  or  in  equity,  within  the  meaning  of  the 
Companies  Acts,  his  right  of  action  being  through  the  trustees 
named  in  the  trust  deed  under  the  provisions  of  which  the  bonds 
were  issued  ;  and,  second,  that  assuming  a  bondholder  to  be  a 
creditor,  then,  under  the  act  mentioned,  regard  must  be  had  to  the 
wishes  of  the  bondholders  other  than  the  petitioner,  all  of  whom 
opposed  the  motion.  It  is,  however,  recognized,  in  this  case,  as  a 
general  rule  that  an  unpaid  creditor  of  a  company  is  entitled  to  a 
winding-up  order  ex  dehito  justitice. 

1  California  Safe  Deposit  &  Trust  Co.  v.  Mason  v.  York  &  Cumberland  R.  Co. 
Cheney  Electric  Light,  Telephone,  &  Power  (1861),  52  Me.  82;  Mercantile  T.  Co.  v. 
Co.  et  al.  (1895),  12  Wash.  138;  s.  c.  40  Lamoille  Valley  R.  Co.  (1879),  16  Blatch. 
Pac.  Rep.  732.  324  ;  Webb    v.  Vermont  Central  R.    Co. 

2  Fidelity  Trust  &  Safety  Vault  Co.  v.  (1882),  20  Blatch.  218  ;  Fartners'  Loan 
Mobile  St.  Ry.  Co.,  53  Fed.  Rep.  850  &  Trust  Co.  v.  Winona  &  S.  W.  R.  Co. 
(189:'-):  Searles  r.  Jacksonville,  Pensacola,  (1893),  59  Fed.  Rep.  957;  Alexander  v. 
&  Mobile  R.  Co.  (1873),  2  Woods,  625  ;  Central  Railroad  of  Iowa,  3  Dill.  487  ; 
21  Fed.  Cases,  No.  12,586.  s.   c.   1    Fed.    Cas.    363,    Case    No.    166  ; 

8  Chicago,  Danville,  &  Vincennes  R.  Woods  Ry.  Law,  1970,  1974,  See  Chap. 
Co.  V.  Fosdick  (1882),  106  U.  S.  47,  68  ;     XVIII.,  ante. 


460  RAILWAY  BONDS  AND  MORTGAGES.  [CHAP.  XXIV. 

But  a  bondholder  of  a  railway  company  is  entitled  to  maintain 
an  action  on  behalf  of  himself  and  the  other  bondholders  for  the 
specific  performance  of  an  agreement  contained  in  the  mortgage 
securing  payment  of  his  bonds,  upon  the  refusal  of  the  trustee  of 
the  mortgage  to  bring  the  action,  and  whatever  rights  are  vested 
in  the  trustee  through  the  mortgage  instrument  inure  to  the  bene- 
fit of  the  bondholders.^ 

A  trustee  refusing  to  sue  for  specific  performance  of  a  covenant 
to  bondholders  to  give  an  additional  security  under  the  mortgage, 
the  bondholder,  for  himself  and  others,  may  bring  such  action 
before  default  upon  the  bonds. ^ 

The  bondholders  cannot  ignore  the  trustee  of  the  mortgage 
securing  them,  and  proceed  in  their  own  names  to  foreclose, 
without  showing  that  they  have  requested  the  trustee  to  proceed 
and  he  has  refused.^ 

If  the  company  has  failed  to  execute  a  trust  deed  to  secure  its 
bonds,  the  bondholders  are,  of  course,  the  only  possible  parties 
plaintiff  in  any  suit  which  touches  their  interest  in  the  company's 
property.* 

Though  there  may  be  differences  in  the  immaterial  circum- 
stances of  other  bondholders  from  those  of  the  complainant  bond- 
holder in  an  action  against  their  trustee  under  a  mortgage,  it  is 
proper  that  they  be  joined  as  parties  plaintiff  in  his  action.^ 

In  a  foreclosure  suit  brought  by  a  trustee  under  different  mort- 
gages of  diverse  interests,  a  committee  of  each  series  of  bonds 
will  be  made  parties,  so  that  they  may  represent  the  interests  of 
each  set  of  bondholders,  unhampered  by  any  obligation  to  opposing 
interests.^ 

While  a  trustee  in  foreclosure  proceedings  represents  all  the 
bondholders,  and  his  acts  are  binding  upon  them,'''  and  though 
when  differences  exist  between  the  bondholders  it  is  not  improper 
that  he  should  be  governed  by  the  voice  of  the  majority  acting  in 

1  O'Beirne  v.  AUeglieny  &  Kinzua  Ry.  6  Fanners'  Loan  &  Tinst  Co.  v.  North- 
Co.,  N.  Y.  L.  J.,  Jan.  26,  1897.  ern  Pac.  K.  Co.  (1895),  70  Fed.  Rep.  423, 

2  O'Beirne  V.  A.  &  K.  R.  Co.,  151  N.  Y.  following  Farmers'  Loan  &  Trust  Co.  v. 
872.  Northern   Pac.    R.    Co.    (1895),    66    Fed. 

"Central  Electric   Co.   v.    La   Grande  Rep.  169;  Clyde  t^.Richmond  &  Danville  R. 

Edison  Electric  Co.  (1897),  79  Fed.  Co.  (1893),  55  Fed.  Rep.  445,  disapproved. 
Rep.   25.  ^  Richter  u.  Jerome  (1887),  123  U.   S. 

*  Young  V.  Montgomery  &  Eufaula  R.  246  ;  s.  c.  8  Sup.  Ct.  Rep.  233,  246  ;  s.  c. 

Co.  (1875),  2  Woods,  606,  612.  7  Sup.  Ct.  Rep.  807  ;  Kerrison  v.  Stewart 

^  Indiana,  111.  &  Iowa  R.  Co.  v.  Swam-  (1876),  93  U.   S.   155,   160  ;  Corcoran  i'. 

raell,  Execr.  et  al.   (1895),  157   111.    616  ;  Chesapeake  &  Ohio  Canal  Co.  (1876),  94 

8.  c.  41  N.  E.  Rep.  989,  aflinning  Same  v.  U.    S.    741,    745  ;  Shaw   r.  Railroad  Co. 

Same,  54  111.  Apj).  260  (1894).  (1879),  100  U.  S.  605,  611. 


§§  463,  464.]  PARTIES  IN   SUITS,   ETC.  461 

good  faith  and  without  collusion,  if  what  they  ask  is  not  incon- 
sistent with  the  provisions  of  the  trust,^  his  decision  is  not  final 
or  conclusive  upon  the  bondholders.  Where  different  sets  of  bond- 
holders, as  represented  by  their  committees,  differ  as  to  a  manner 
of  sale  of  the  property,  for  instance,  or  the  distribution  of  the 
assets,  they  should  be  allowed  to  intervene  so  as  to  be  heard  by 
the  court  before  a  decree  is  made.^ 

A  minority  bondholder's  bill  to  foreclose  a  mortgage  will  be 
sustained  where  the  road  of  the  mortgagor  is  controlled  and  oper- 
ated by  another  company  which  owns  more  than  one-fourth  of  the 
stock  and  bonds  of  the  mortgagor,  notwithstanding  the  require- 
ment of  the  mortgage  that  the  request  of  one-fourth  of  the  bond- 
holders was  necessary  to  a  foreclosure,  especially  when  his  bill 
seeks  an  accounting  from  the  company  operating  the  road,  alleging 
that  the  latter  has  diverted  the  earnings  of  the  mortgagor  and 
appropriated  them  to  his  own  use,  and  caused  the  insolvency  of 
the  mortgagor,  and  the  examination  of  its  books  is  either  denied 
him  or  they  are  inaccessible  to  him.^ 

§  463.  The  Assignment  of  the  Bonds  by  -way  of  Collateral  Security. 
—  This  does  not  deprive  the  pledgor  of  his  right  to  maintain  a 
suit  in  behalf  of  himself  and  the  other  bondholders  for  the  protec- 
tion of  their  joint  interests  in  the  mortgaged  property.*  But  in 
such  a  case  the  pledgee  should  also  be  a  party .^ 

The  pledgee  of  bonds,  on  the  other  hand,  may  also  institute 
proceedings  for  the  foreclosure  of  the  mortgage  by  which  they 
are  secured.^  But  the  owner  of  the  bonds  should  also  be  made  a 
partyJ 

§  464.  Who  are  Necessary  Parties  Defendant.  —  This  question  in 
a  suit  affecting  the  mortgaged  property  depends  upon  the  nature 

1  First  Nat.  Bank  of  Cleveland?;.  Shedd  pany,  as  he  alleged,  on  behalf  of  himself 
(1884),  121  U.  S.  74,  86 ;  s.  0.  7  Sup.  Ct.  and  other  bondholders.  A  bondholder 
Kep.  807.  appeared  and  petitioned,  as  he  and  others 

2  Farmers'  Loan  &  Trust  Co.  v.  Cape  dissented  from  this  action  of  the  plaintiff. 
Fear  &  Y.  V.  Ry.  Co.  et  al.  (1895),  71  Fed.  that  he  be  made  a  party  defendant,  which 
Rep.  .38.  See  Williams  v.  Morgan,  111  was  allowed.  Fraser  v.  Cooper,  Hall,  & 
U.  S.  684  ;  s.  c.  4  Sup.  Ct.  Rep.  638,  Co.  (1882),  21  Ch.  Div.  718. 

Where  the  equity  of  redemption  in  one  ^  Linder  v.  Hartwell  R.  Co.  et  al.  (1896), 

of  several  mortgages  had  been  purchased  73  Fed.  Rep.  320. 

by  a   company  limited,   which   company  *  Butler  v.  Rahm  (1877),  46  Md.  541  ; 

had  issued  debentures  to  a  large  amount,  s.  c.  18  Am.  Ry.  Rep.  86. 
which  were  a  charge  upon  the  mortgaged         ^  Wiltsie    on    Mortgage     Foreclosure, 

property,  the  English  court  held  that  all  §§  87,  88,  and  authorities  cited, 
the  debenture-holders,  having  an  interest  ^  McCurdy's  Apjieal  (1870),  65  Pa.  St. 

in  the  equity  of  redemption,   should   be  290  ;  Morton  v.  New  Orleans  &  Selma  R. 

made  parties  to  a  foreclosure  action.    Grif-  Co.  (1885),  79  Ala.  590. 
fith  V.  Pound  (1889),  45  Ch.  Div.  553.  "  Ackerson  ct  al.  v.  Lodi  Branch  R.  Co. 

A  holder  of  railway  bonds  sued  a  com-  (1877),  28  N.  J.  Eq.  542. 


462  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  XXIV. 

and  extent  of  the  relief  asked.  If  the  proceedings  are  for  fore- 
closure of  the  mortgage,  it  is  obvious  that  where  the  complainant 
merely  wishes  to  extinguish  the  equity  of  redemption  which  the 
mortgagor  possesses  under  the  mortgage  to  be  foreclosed,  the 
mortgagor  himself  is,  strictly  speaking,  the  only  necessary  party 
defendant.^ 

But  in  practice  a  foreclosure  suit  of  such  unlimited  scope  is 
unknown.  Wherever  there  are  several  antagonistic  liens  upon 
the  mortgaged  property,  the  invariable  object  of  such  a  proceeding 
is  to  cut  off  all  subordinate  liens,  and  thus  offer  for  sale  a  title  as 
free  from  incumbrances  as  the  case  admits.  Necessary  parties, 
therefore,  are  those  who  must  be  joined  in  order  to  attain  that 
object.^ 

But  the  mortgagor  company  is  not  a  necessary  or  proper  party 
in  a  suit  brought  to  reach  and  adjust  rights  which  accrue  upon  a 
foreclosure  of  the  mortgage.  The  riglits  of  the  company  having 
been  extinguished  by  the  sale,  it  has  no  interest  in  the  corporate 
property  to  defend  or  protect,  nor  can  any  relief  against  it  be  had 
in  respect  to  that  property .^ 

§  465.  Prior  Mortgagee,  when  a  Necessary  Party.  —  A  prior  mort- 
gagee is  not  a  necessary  party  when  the  decree  cannot  injure  or 
affect  him.  "  It  can  never  be  indispensable  to  make  defendants  of 
those  against  whom  nothing  is  alleged,  and  from  whom  no  relief 
is  asked."  * 

Hence  a  prior  mortgagee  is  not  a  necessary  party  where  a  bill 
is  filed  by  a  junior  mortgagee  seeking  only  a  foreclosure  or  sale 
of  the  equity  of  redemption.     This  rule  prevails  in  the  Supreme 

1  "Wabash,  St.  Louis,  &  Pac.  R.  Co.  v.  the  Supreme  Court  of  the  United  States 

Central  Trust  Co.  (1885),    23  Fed.    Rep.  that  an  independent  controversy  between 

613,  514,  in  which  the  following  pertinent  the  mortgagor  and  a  third  party,  one  in- 

remarks  were  made  by  Judge  Brewer  :  —  volving  the  question  of  paramount  title,  is 

"  In  the  foreclosure  of  a  mortgage  there  not  to  be  litigated  in  a  foreclosure  suit, 

is  a  certain  sense  in  which  you  may  say  yet  all  those  things  which  simply  involve 

that  the  only  indispensable  parties  are  the  matters  of  liens  on  the  property,  whether 

mortgagor  and  the  mortgagee.     You  can  prior  or  not,  may  be  considered  in  such  a 

foreclose   that   mortgage   and   divest   the  suit." 

mortgagor  of  all  his  interest,  and  transfer  ^  Wiltsie    in    his   work    on    Mortgage 

it  by  sale  into  the  mortgagee  or  any  other  Foreclosures  criticises,  very  justly,  in  our 

purchaser,  and  that  without  the  presence  opinion,  the  extreme  looseness  with  which 

of  otlier  incumbrancers  as  parties.    And  yet  the  word   "necessary"   is   often   used  in 

we  all  know  that  there  are  certainly  proper  this  connection  by  the  courts.     See  also 

parties,  or  may  bo   profier  parties,  other  Pomeroy  Rem.,  §  329. 
than  the  mortgagor  and  mortgagees.    Sub-  ^  Brooks  v.    Vermont  Central  R.  Co. 

.seijuent  mortgagees,  of  course,  are  projjer  (1884),  22  Fed.  Rep.  211. 
l)arties,  in  order  to  cut  off  any  equity  of         *  Payne  V.  Hook  (18(58),  7  Wall.  425, 

redemption  ;  and  while  it  is  laid  down  in  432. 


§  465.]  PARTIES   IN   SUITS,   ETC.  463 

Court  of  the  United  States,^  and  in  all  other  courts  of  equity  l)oth 
in  this  country  and  in  England.  In  Manitoba  it  was  recently 
held  that  mortgagees  holding  the  first  lien  on  a  railway  coni[)any 
and  its  revenues  are  not  proper  parties  in  a  judgment  creditors' 
action,  and  the  inquiry  should  be  confined  to  subsequent  incum- 
brancers.2  If  the  State  is  the  prior  lienor,  this  rule  will,  of  itself, 
be  a  sufficient  ground  for  dismissing  a  demurrer  to  a  bill  for 
foreclosure,  based  on  the  omission  to  make  the  State  a  party 
defendant,  though  such  omission  may  also  be  justified  on  ac- 
count of  the  impossibility  of  making  the  State  a  party  against  its 
consent.^ 

In  a  suit  for  an  accounting  brought  against  the  trustees  by  the 
bondholders,  it  is  equally  unnecessary  to  make  the  claimant  of  a 
prior  lien  upon  the  trust  fund  a  party  to  the  proceedings.* 

When  the  prior  mortgage  is  not  due,  an  additional  i-eason 
exists  for  holding  the  owner  of  such  a  mortgage  not  to  be  a  neces- 
sary party  to  a  foreclosure  suit  brought  by  a  subsequent  mort- 
gagee, for  in  that  case  nothing  more  than  the  equity  of  redemption 
under  the  later  mortgage  could  be  sold  without  the  consent  of 
the  prior  mortgagee.^  A  contrary  doctrine  would  be  equivalent 
to  holding  that  a  prior  mortgagee  might  be  compelled  to  foreclose 
his  lien  before  the  maturity  of  the  debt,  a  theory  inconsistent 
with  the  paramount  character  of  that  lien.^ 

If  the  prior  mortgage  is  due,  its  holder  may  be  compelled  to 
surrender  it  upon  being  tendered  the  sum  due  thereon.'^ 

On  the  other  hand,  a  prior  mortgagee  is  a  proper  party  to  bill 
for  foreclosure,  which  asks  at  tlie  same  time  that  a  receiver  be 
appointed,  and  that  the  net  revenues  of  the  receivership  be  paid 
to  such  persons  as  the  court  should  adjudge  to  be  entitled  to 
them.  The  priority  of  the  earlier  mortgagee  should  be  admitted 
and  no  direct  relief  asked  against  him.^ 

The  reason  of  this  qualification  of  the  general  rule  is  that 
the  effect  of  the  appointment  of  a  receiver  is  to  defeat  the  power 

1  Jerome  v.  McCarter  (1877),  94  U,  S.  *  Andrews  v.  Smith  (1881),  19  Blatch. 
734  ;    Woodworth   v.    Blair    (1884),    112     100  ;  s.  c.  5  Fed.  Rep.  833,  845. 

U.  S.  8  ;  Haniia  et   al.  v.  State  Trust  Co.  5  Jerome  v.  McCarter  (1877),  94  U.  S. 

et  al.  (1895),  70  Fed.  Rep.  2,  7  ;  s.  c.  16  734. 

C.  C.  A.  586.  8  Siebert  v.  Minneapolis  &  St.  Louis  R. 

2  Allan  V.  The  Manitoba  &  N.  W.  Ry.  Co.  (1888),  52  Minn.  148  ;  s.  c.  53  N.  W. 
Co.  (1894),  10  Manitoba,  106.     See  Grey  Rep.  1134. 

V.  Manitoba  &  N.  W.   Ry.   Co.   (1897),  ''  Lambertville  National  Bank  v.  Mc- 

L.  R.  App.  Cas.,  p.  254.  Cready   Bag   &   Paper   Co.    (N.  J.   Eq., 

8  Kelly  V.  Trustees  of  Alabama  &  Cin-  1888),  1  Law  Rep.  Ann.  334. 
cinnati  R.  Co.  (1880),  58  Ala.  489  ;  s.  c.  ^  Miltenberger  v.  Logansport  Ry.  Co. 

21  Am.  Ry.  Rep.  138.  (1882),  106  U.  S.  286,  306. 


464  RAILWAY  BONDS   AND   MORTGAGES.  [CHAP.  XXIV. 

of  those  trustees  to  take  possession  of  and  operate  the  road,  as 
the  deed  authorizes  them  to  do.^ 

So,  also,  a  prior  mortgagee  should  be  made  a  party  where  the 
junior  mortgagee  is  endeavoring  to  obtain  a  sale  of  the  entire 
property  or  estate,  and  not  merely  of  the  equity  of  the  redemp- 
tion ;  2  or  where  there  are  real  doubts  respecting  the  amount  of 
the  debt  due  to  the  prior  lienor.^ 

The  grantee  of  a  trust  deed  alleged  to  be  prior  to  the  mortgage 
in  suit  should  be  made  a  party  to  the  suit  if  the  defendant  so 
desires,  as  he  has  a  right  to  have  the  question  of  the  priority 
determined  in  the  proceedings,* 

Senior  mortgagees  will  not  be  allowed  to  become  parties  to  an 
action  for  the  foreclosure  of  a  junior  mortgage  and  contest  the 
accuracy  of  the  judgment  rendered  therein.  If  their  rights  are 
in  any  way  impaired,  they  should  bring  a  separate  action 
through  their  trustees,  or,  if  the  trustees  are  hostile,  in  their 
own  names.^ 

Where  the  prior  mortgagee  is  improperly  made  a  party,  the 
usual  course  is  to  dismiss  the  bill  as  to  him,  and  retain  it  as  to 
all  the  other  parties ;  ^  and  if  a  subsequent  mortgagee  or  other 
incumbrancer  brings  in  a  prior  mortgagee  as  a  party,  for  the  pur- 
pose of  ascertaining  the  priorities  of  the  different  lienors,  and 
does  not  offer  to  redeem  the  prior  incumbrance,  the  prior  mort- 
gagee may  insist  upon  being  dismissed  with  costs.''' 

In  foreclosure  proceeding  instituted  by  a  junior  mortgagee,  the 
prior  mortgagee  can  be  made  a  party  only  by  service  of  process 
or  voluntary  appearance.  A  general  notice  calling  upon  him  to 
present  his  claims  will  not  make  him  a  party,  nor  bind  him ;  ^  in 
all  cases  in  which  he  is  not  made  a  party,  the  sale  is  made  subject 
to  the  lien  of  his  mortgage.^ 

His  rights,  not  being  prejudiced  in  any  way  by  such  proceedings, 
an  order  will  not  be  granted  making  him  a  party  to  such  proceed- 

1  Tome  V.  King  (1891),  64  Md.  166  ;  *  Baass  r.  Chicago  &  Northwestern  Ry. 
s.  c.  21  Atl.  Rep.  279.  Co.  (1876),  39  Wis.  296. 

2  Jerome  v.  McCarter  (1877),  94  U.  S.  5  McHemy's  Petition  (1878),  9  Abb. 
734.  N.  C.  (N.  Y.)  256. 

8  Jerome  v.  McCarter  (1877),  94  U.  S.  «  Wabash,  St.  Louis,  &  Pac.  Ry.  Co. 

734  ;  Sutherland  v.    Lake  Superior  Ship  v.  Central  Trust  Co.  (1884),  22  Fed.  Rep. 

Canal,    Railroad,    &   Iron   Co.    (1874),   2  138,  144. 

Flip.  449  ;  s.  c.  9  N.  B.  R.  298  ;  Richards  ^  Daniell'sCh.  Pr.  1390  ;  Tome  v.  King 

V.  Chesapeake  &  Ohio   R.   Co.  (187.5),  1  (1891),  64  Md.    166  ;  s.  c.  21   Atl.  Rep. 

Hughes,    28  ;  Metropolitan   Trust   Co.    v.  279. 

Tonawanda  Valley  k.  Cuba  R.  Co.  (1887),         »  Young  v.  Montgomery  R.  Co.  (1875), 

43  Hun,  521.  2  Woods,  606,  620. 


8 


Ibid. 


§  466.]  PARTIES   IN   SUITS,   ETC.  465 

ings,  and  allowing  him  to  contest  the  accuracy  of  the  judgment 
entered  tlicrein,  there  being  nothing  to  show  him  that  the  suffi- 
ciency of  his  security  has  been  impaired  by  the  judgment.^ 

The  holder  of  a  mortgage,  filing  a  bill  to  foreclose  the  same, 
need  not  make  other  mortgagees  parties ;  the  rights  of  those 
Avhosc  mortgages  have  precedence  over  his  he  cannot  disturb, 
and  this  bill  will  affect  the  rights  of  only  such  subsequent  mort- 
gagees as  he  makes  parties  to  his  suit :  they  are  proper,  but  not 
necessary,  parties.^ 

§  466.  Subsequent  Mortgagees,  Necessity  of  joining^  —  From  the 
general  principle  noticed  above,  that  the  question  whether  there 
are  any  necessary  parties  defendant  omitted  depends  upon  the 
object  of  the  suit,  it  follows  tliat,  wherever  the  intention  of 
the  complainant  is  to  clear  the  title  of  incumbrances  as  far  as  is 
possible,  having  due  regard  to  the  paramount  rights  of  prior 
lienors,  every  holder  of  a  lien  subsequent  to  that  which  is  being 
foreclosed  must  be  made  a  party,  in  order  that  his  rights  may  be 
determined  by  the  decree.  In  other  words,  such  a  lienholder  is 
always  a  proper,  but  is  never  an  indispensable,  party.* 

If  he  is  not  made  a  party,  his  right  to  redeem  is  unaffected  by 
the  decree  ;^  and  this  right  passes  to  one  who  purchases  at  a  sale 
in  foreclosure  proceedings  afterwards  instituted  by  such  junior 
lienholders.^ 

Even  though  the  junior  mortgagee  be  made  a  party  to  the  suit, 
the  terms  of  the  decree  may  show  that  it  was  not  intended  to  cut 
off  his  lien  ;  and  unless  his  rights  are  actually  determined,  the 
mere  fact  that  he  was  made  a  party  does  not  estop  him  from 
afterwards  asserting  those  rights  and  redeeming  from  the  fore- 
closure sale.'' 

1  MrHenry's  Petition  (  1878),  9  Abb.  5  Jones  on  Mortg.,  §  1431  ;  Wiltsie  on 
N.  C.  (IST.  Y.)  256.  Mortg.  Forecl.,  §  160. 

2  Chandler  v.  O'^eil,  Delany,  &  Mnr-  °  Memphis  &  Little  Eock  R.  Co.  as 
phy  (a  corporation),  62  111.  App.  418  reorganized  v.  The  State  (1881),  37  Ark. 
(189.5).  632;  s.   c.    12  Am.  &  Eng.    R.    R.    Cas. 

8  See  generally  on  this  subject  a  useful  322. 
colleetion  of  cases  in  the  notes  to  1  Law-  '  Simmons  v.   Taylor  (1885),  23  Fed. 

yers'  Rep.  Ann.  334  ;  3  Am.  &  Eng.  R.  R.  Rep.  849.     In  regard  to  the  question  of 

Cas.  530;  12  Am.  &  Eng.  R.  R.  Cas.  329.  estoppel,  Judge  Brewer  expressed  his  views 

*  Forrest's  Exrs.  ?•.  Luddington  (1880),  as  follows  :  — 
68  Ala.  1  ;  s.  c.  12  Am.  &  Eng.  R.  R.  Cas.  "  A  second  mortgagee  is  not  bound  to 

330,  and  the  full  list  of  cases  cited  in  the  insist  upon  a  foreclosure  of  his  mortgage, 

notes  to  Jones  on  Mortgages,  §  1425,  and  It  matters  not  whether  the  first  mortgngee 

Wiltsie  on  Mortgage  Forecl.,  §  188.      To  forecloses  or  not.     The  second  mortgigee 

these  woiks  reference  must  be  made    for  owes   no  duty  to  anybody  to   act.     If  the 

fuller  information  as  to  the  application  of  first  mortgagee  wishes  to  cut  off  his  eiiuity 

the  gi'ueral  rule.  of  redemption,  it  is  the  duty  of  such  first 

30 


466  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  XXIV. 

If  the  trustee  of  a  subsequent  mortgage  has  been  made  a  party 
to  a  foreclosure  suit,  and  it  is  found  that  his  being  a  party  to  the 
litigation  will  hinder  or  defeat  the  suit,  the  bill  will  be  dismissed 
as  to  him.i 

§  467.  —  Mortgagee  of  Divisional  Mortgages.  —  Such  mortgagee 
is  not  a  necessary  party  in  a  foreclosure  suit  brought  by  another 
divisional  mortgagee,  whose  lien  operates  upon  an  entirely  dis- 
tinct portion  of  the  road.^ 

§  468.  Mortgagor  Company.  —  A  Company  which,  during  the 
pendency  of  such  a  bill,  takes  from  the  operating  company,  as  its 
successor,  the  bonds  of  the  mortgagor  company,  after  their  ma- 
turity, will  stand  in  the  shoes  of  the  original  defendant  company .'^ 

§  469.  The  Stockholders.  —  The  stockholders  of  the  company 
are  sufficiently  represented  in  a  suit  brought  by  the  holders  of 
municipal  bonds,  which  the  company  has  guarantied,  to  enforce 
the  priority  of  a  claim  as  against  the  stockholders  to  the  proceeds 
of  the  foreclosure  sale,  where  not  only  the  company  itself,  but  the 
committee  appointed  by  the  stockholders  and  bondholders,  are 
made  parties  to  the  proceedings.* 

The  proper  party  to  impeach  the  legal  title  of  the  purchaser  by 
impressing  a  trust  upon  the  property  in  favor  of  the  company,  as 
against  the  purchasers  at  a  foreclosure  sale,  is  not  a  single  stock- 
holder, but  the  corporation  which  represents  the  whole  body  of 
stockliolders.°  And  since  the  stockholders,  being  an  integral  part 
of  the  corporation,  are  regarded  as  parties  to  proceedings  involving 
the  corporation,  they  are   bound  by  the   decree   entered  in  such 


mortgagee  to  make  him  a  party,  and  to  of  the  mortgage  by  the  decree  were  that 

take  a  decree  against  him  ;  and  if  he  fails  the  claim  of  the  second  mortgagee  was  not 

to  do  that,  the  seconil  mortgagee  is  not  con-  harred  in  terms, that  there  was  no  finding 

eluded.     The  mere  fact  that  he  is  made  a  of  the  amount  due  to  him,  nor  any  order 

party  casts  uo  oldigations  upon  him.     He  of  sale  to  satisfy' his  lien,  nor  in  fact  any 

may    remain   silent,   and   if  no  decree  is  reference  to  that  lien  excej)t  a  simple  ref- 

taken   against  him,  his  rights  remain  as  erence   for   future   determination    by   the 

though  he  had  not  been  made  a  party.     No  court  of  so  mucli  of  its  claim  as  asserted 

one   would   pretend  that,   if  not  made  a  a  first  lien  upon  s])ecific  {)ersonal  jiroperty. 

]irirty,  his  rights  are  cut  off  by  his  mere  i  Richards  v.  Chesai)eake  &  Ohio   K. 

failure  to  come  into  court  and  ask  to  be  Co.  (1875),  1  Hughes,  28. 

made  a  party.     And  afterwards  in  all  pro-  2  Bi-onson  v.  Railroad  Company  (1S('>'2). 

ceedings  by  the  first  mortgagee  the  second  2  Black,  524. 

mortgagee  stands  on  the  defensive.     His  3  Linder    v.    Hartwell    R.    Co.    ct   al. 

rights  are  perfect,  unless  at  the  instance  of  (1896),  73  Fed.  Rep.  320. 

the  first  mortgagee  they  are  affirmatively  *  Railroad  Company  u.  Howard  (1869), 

cut  off,  or  lost  through  the  running  of  tlie  7  "Wall.  392. 

Statute  of  Limitations."     In  this  case  the  ^  Harpcnding   v.    Munson    (1883),    91 

grouniJH  assigiu-d  by  Judge  Brewer  for  his  N.  Y.  650,  653  ;  s.  c.  12  Am.  &  Eng.  R. 

con(dusion   that  there  was  no  foreclosure  R.  Cas.  408. 


§§  470-472.]  PARTIES   IN   SUITS,   ETC.  467 

proceedings,  and  cannot  impeach  it  collaterally  on  the  ground 
of  fraud. ^ 

•Stockholders,  on  allegations  that  the  directors  of  a  railroad 
company,  for  the  purpose  of  sacrificing  the  interest  of  the  stock- 
holders, refuse  to  defend  a  foreclosui-e  suit,  will  be  allowed  to 
intervene  and  become  parties  defendant,  so  as  to  protect  their 
own  interests  and  those  of  other  stockholders  choosing  to  join 
them  in  the  defence.^ 

§  470.  Directors  — The  directors  of  a  construction  company  to 
whom  bonds  and  stock  are  alleged  to  have  been  fraudulently  trans- 
ferred are  proper  parties,  with  a  view  to  a  discovery,  in  a  suit  in 
which  the  complainant,  besides  asking  for  another  relief,  insists 
that  those  bonds  should  be  surrendered.^ 

§471.  Guarantors.  —  The  guarantor  of  the  bonds,  who  after- 
wards joins  the  mortgagor  in  borrowing  money  to  pay  the  interest 
coupons,  does  not  thereby  become  subrogated  'pro  tanto  to  the 
rights  of  the  mortgagee,  so  as  to  become  an  indispensable,  or  even 
proper,  ])arty  to  a  subsequent  foreclosure  suit.  Subrogation  does 
not  take  place  until  the  payment  of  the  whole  debt  for  which  the 
security  is  liable.* 

§  472.  Receivers.  —  When  a  foreclosure  suit  is  instituted  after 
the  appointment  of  a  receiver,  he  is  a  proper,  though  not  neces- 
sary,^ party  defendant  therein.  Still  less  is  it  necessary  to  make 
liim  a  party  to  a  suit  already  begun  in  another  court  when  he  was 
appointed  ;^  especially  when  a  decree  j?ro  confesso  has  already  been 
taken  in  the  earlier  suit,  by  which  the  right  of  the  complainant  to 
recover  has  been  ascertained.^ 

1  Graham  v.  Boston,  Hartford,  &  Erie  N.  J.  Eq.  234  ;  Herring  v.  New  York, 
R.  Co.  (1886),  118  U.  S.  161  ;  s.  c.  6  Sup.  Lake  Erie,  &  Western  R.  Co.  (1887),  105 
Ct.  Rep.  1009  ;  25  Am.  &  Eng.  R.  R.  Cas.     N.  Y.  340. 

53.    Compare  Great  Western  Tel.  Co.   for  ^  Mercantile  Trust  Co.  v.  Pittsburgh  & 

Use,  etc.  V.  Gray  (1887),  112  111.  630  ;  s.  c.  W.  R.  Co.  (1887),  29  Fed.  Re)>.  732. 

14  N.  E.  Rep.  214.  ''  Willink  v.  Morris  Canal  &  Bkg.  Co. 

2  Guarantee  Trust  &  Safe  Deposit  Co.  (1843),  4  N.  J.  Eq.  377.  There  the  court 
V.  Duluth  &  Winnipeg  R.  Co.  rf«/.  (1895),  said,  in  re[)ly  to  the  contention  that  the 
70  Fed.  Rep.  803,  on  authority  of  Bronson  receivers  should  be  joined  as  defendants 
V.  R;iilroad  Co.  (1864),  2  Wall.  302.  (p.  400)  :  "  The  title  to  the  property  is  not 

3  Terhune  v.  Midland  R.  Co.  of  New  changed,  but  a  power  only  is  delegated  To 
Jersey  (1884),  38  N.  J.  Eq.  423  ;  s.  c.  38  the  receivers  to  take  charge  of  it  and  sell 
Am.  &  Eng.  R.  R.  Cas.  665.  it.    These  receivers,  too,  may  bring  suits  in 

*  Columbia    Finance   &   Trust   Co.   v.  their  own  name,  and,  for  aught  I  see,  in 

Kentucky  Union  R.  Co.   (1894),  60  Fed.  the  name  of  the  corporation,  should  they 

Rep.  794.    As  to  when  a  guarantor  should  prefer  it  ;  and  if  so,  they  may  deft- nd  a  suit 

be  joined,  see  generally  Jones  on  Mortg.,  in  the  name  of  the  corporation.    As  a  decree 

§  1432.  pro  confesso  in  this  cause  was  taken  against 

^  Raynor  v.   Selmes  (1873),  52  N.   Y.  this    company   before    the    receivcis    were 

579;  Kirkpatrick  v.  Corning  (1884),    38  appointed,  by  which  the  right  of  the  com- 


468  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  XXIV. 

If  the  receiver  should  ask  to  be  made  defendant,  with  a  view  to 
making  a  defence,  the  court  will  permit  him  it  at  any  stage  of  the 
proceedings.^ 

A  receiver  is,  to  the  extent  of  his  interest,  a  proper  party  to  a 
suit  instituted  by  a  stockholder  in  the  mortgagor  company  to  have 
certain  bonds  held  by  the  receiver  in  his  official  capacity  declared 
iiltra  vires  and  illegal.^ 

After  the  receiver  has  ceased  to  exercise  his  functions,  and  the 
property  has  passed  out  of  his  control  by  a  sale  under  the  decree 
of  a  State  court,  he  is  not  a  necessary  party  to  a  suit  brought  in  a 
federal  court  to  have  the  proceedings  in  the  State  court  avoided 
on  the  ground  that  they  were  collusive  and  fraudulent.^ 

§  473.  states  as  Parties  Defendant. — The  general  rule  is  that 
the  State  cannot  be  made  a  party  to  a  suit  without  its  consent. 
For  this  reason  an  injunction  against  the  sale  of  a  railroad  to 
satisfy  the  lien  of  the  State,  imposed  upon  the  property  of  a  rail- 
road company  to  indemnify  it  for  its  indorsement  of  the  company's 
bonds,  will  be  refused  to  the  holder  of  a  portion  of  a  subsequent 
issue  of  such  bonds,  which  had  recently  been  declared  not  binding 
upon  the  State.  Under  such  circumstances  the  relief  cannot  be 
given  without  passing  upon  the  rights  of  the  State,  and  this  would 
necessitate  the  joinder  of  the  State  as  a  party .^ 

Such  a  case  is  to  be  distinguished  from  those  in  which  the  courts 
have  sustained  suits  against  State  ofificers  for  the  recovery  or  pro- 
tection of  property  belonging  to  the  complainants,  in  which  the 
State  has  no  interest  or  right ;  and  the  pretension  of  the  agents 
in  behalf  of  the  State  were  unconstitutional  and  void.^ 

But  if  the  State  is  the  real  party  in  interest,  the  operation  of 

plainnnt  to  recover  is  ascertained,  ami  the  (1875),  2  Woods,  385,  388,  per  Bradley,  J., 

amount   only   remains  to  be  settled,  and  who  said:  "The  State  was  here  in  pos- 

niore  especially  as  the  corporation  is  not  session  of  this  property,  and  rightfully  so. 

put  an  end  to  by  this  act  of  the  court,  and  The  object  of  this  bill  could  not  be  effected 

the  receivers  may  appear  and  controvert  except  \>y  displacing  the  State,  and  subro- 

the  amount  in  the  name  of  the  corporation,  gating  the  bondholders  in  its  stead  in  refer- 

I  see  no  good  reason  why  the  proceedings  ence  to  this  property,  and  dispossessing  the 

in  this  cause  should  be  delayed  to  bring  State  of  the  actual  possession  of  the  same." 

them  before  the  court."  In  deciding  that  .such  dispossession  was  not 

1  Willink  V.  Morris  Canal  &  Bkg.  Co.  allowable,  the  learned  justice  deferred  to 
(1843),  4  N.  J.  Eq.  377.  the  opinion  of  the  court  of  the  State  in 

2  Central  Trust  Co.  v.  Wabash,  St.  which  he  was  sitting.  Printup  u.  Cherokee 
Louis,   &  I'ac.   Ry.  Co.    (1885),   23   Fed.  R.  Co.  (1872),  4.5  Ga.  365. 

Rep.  858.  ^  iiranoh  v.  I\Iacon  &  Brunswick  R.  Co. 

8  .Massachusetts  Mutual  Life  Ins.  Co.  v.  (1875),  2  Woods,  385,  388.      See  also  the 

Chicago  &  A.  R.  Co.  (1882),  13  Fed.  Kcp.  authorities  cited  in  the  opinion  of  Justice 

857.  Miller  in  Cunuinghain  v.  Macon  k  Bruns- 

♦  Branch  v.  Macon  &  Brunswick  R.  Co.  wick  R.  Co.  (1883),  109  U.  S.  446. 


§  473.] 


PARTIES   IN   SUITS,   ETC. 


469 


the  general  rule  cannot  be  evaded  by  making  the  State  officers  the 
nominal  parties.^ 

On  the  other  hand,  the  mere  fact  that  the  State  cannot  be  sued 
is  no  reason  why  holders  of  bonds  indorsed  by  the  State  should 
not  be  subrogated  to  the  rights  of  the  State,  and  have  the  benefit 
of  the  security.  In  a  suit  by  them  to  enforce  the  lieu  thus  im- 
posed for  their  benefit,  the  State  should  be  joined,  if  that  can  be 
done,  for  the  reason  that  it  is  concerned  in  the  subject-matter  in 
the  proceedings ;  but  its  non-amenability  to  suit  is  a  sufficient 
reason  for  not  joining  it  as  a  party.^ 

Still  stronger  reasons  exist  for  permitting  the  bondholders  to 
assert  their  claims  under  such  circumstances  where  the  State  has 
disclaimed  its  rights  in  respect  to  the  enforcement  of  the  statutoi-y 
lien,  and  disavowed  all  liability  for  the  payment  of  the  bond.  The 
State,  when  a  lien  is  declared  in  its  favor  to  indemnify  it  for  its 
indorsement  of  corporate  bonds,  is  not  merely  a  beneficiary  of  the 
lien,  but  stands  also  in  the  relation  of  a  trustee  in  respect  to  the 


1  Printup  V.  Cherokee  Railroad  Co. 
(1872),  45  Ga.  365  ;  Ciinniiighaiii  v.  Macon 
&  Brunswick  R.  Co.  (1878),  3  Woods,  418, 
affirmed  in  Cunningham  v.  Macon  &  Bruns- 
wick R.  Co.  (1883),  109  U.  S.  446.  This 
case  was  an  attempt  to  get  over  the  diffi- 
culty which  had  proved  fatal  to  the  claims 
set  up  in  Branch  v.  Macon  &  Brunswick 
R.  Co.  (1875),  2  Woods,  3S5.  In  the 
Supreme  Court  Justice  Miller  exposed  the 
unsoundness  of  the  complainant'.s  position 
thus :  "  No  foreclosure  snit  can  be  sus- 
tained without  the  State,  because  she  has 
the  legal  title  to  the  property,  and  the 
purchaser  under  the  foreclosure  decree 
would  get  no  title  in  the  absence  of  the 
State.  The  State  is  in  the  natural  posses- 
sion of  the  property,  and  the  court  can 
deliver  no  jjossession  to  the  purchaser. 
The  entire  interest  adverse  to  the  plaintiff 
in  this  suit  is  the  interest  of  the  State  of 
Georgia,  in  the  property  of  which  she  has 
both  the  title  and  possession."  Cunning- 
ham V.  Macon  &  Brunswick  R.  Co.  (1883), 
109  U.  S.  446,  was  fully  approved  in 
Christian  v.  Atlantic  &  North  Carolina  R. 
Co.  (1890),  133  U.  S.  233,  where  the 
holder  of  certain  aid-bonds  issued  by  the 
State  of  North  Carolina  sought  to  have 
the  dividends,  due  upon  the  railroad  stock 
purchased  by  the  State  with  tlie  proceeds 
of  the  bonds,  applied  to  the  payment  of  the 


interest  on  the  bonds,  —  the  company,  the 
person  holding  the  jiroxy  of  the  State,  and 
the  treasurer  of  the  State  being  made  par- 
ties defendant  to  the  bill.  The  court  dis- 
missed the  bill,  taking  occasion  to  remark 
that  anything  which  appeared  to  counte- 
nance the  jiossibility  of  such  a  suit  in 
Swasey  v.  North  Carolina  R.  Co.  (1873), 
1  Hughes,  17,  was  bad  law.  In  Murdock 
V.  Woodson  (1873),  2  Dill.  188,  Judge 
Dillon  held  that  the  Governor  and  Attor- 
ney-General of  the  State  of  ]\Iissouri  might 
be  made  parties  defendant  in  a  suit  by  the 
trustee  of  a  railroad  mortgage  to  enjoin  the 
sale  of  the  road  for  the  satisfaction  of  an 
earlier  statutory  mortgage  in  favor  of  the 
State.  The  State  in  this  case  was  said  to 
be  asserting  merely  the  right  of  the  cred- 
itor or  lienholder,  and  not  any  right  in 
her  sovereign  character.  The  precedent 
most  relied  upon  was  Davis  v.  Gray  (1873), 
16  Wall.  203,  215  ;  but  after  the  criticism 
npon  this  decision  in  Cunningham  v.  Macon 
&  Brunswick  R.  Co.,  supra,  it  seems  ques- 
tionable whether  the  doctrine  of  Murdock 
V.  Woodson  can  now  be  accepted  without 
some  (]ualification. 

2  Young  V.  Montgomery  &  Eufaula  R. 
Co.  (1875),  2  Woods,  606  ;  Kelly  v. 
Trustees  of  Alabama  &  Cincinnati  K.  Co. 
(1880),  58  Ala.  489  ;  s.  c.  21  Am.  Ry. 
Rep.  138. 


470  RAILWAY   BONDS   AND  MORTGAGES.  [CHAP.  XXIV. 

holders  of  the  bonds.  The  failure  of  the  State  to  execute  the  trust 
by  enforcing  the  lien  brings  into  play  the  principle  that  a  court 
of  equity  will  not  suffer  a  trust  to  fail  because  of  the  want  of  a 
trustee  to  execute  it.  The  enforcement  of  such  a  lien  does  not 
require  any  decree  or  judgment  against  the  State,  and  therefore 
the  freedom  of  the  suit  attaching  to  its  sovereignty  is  a  sufficient 
reason  for  dispensing  with  its  presence  as  a  party .^ 

§  474.  The  United  States  as  a  Party  Defendant.  —  The  rule  that 
a  sovereign  body  cannot  be  made  a  party  without  its  consent  ap- 
plies to  the  United  States  also.^ 

§  475.  If  a  State  or  the  United  States  become  Parties  to  a  Suit, 
they  are  as  much  bound  by  the  Decree  as  the  other  Parties."^ 

§  476.  Intervention  of  Parties  materially  interested.  —  The  prin- 
ciple that  all  those  who  are  materially  interested  in  the  subject  of 
the  suit  must  be  brought  before  the  court,  if  the  decree  will  affect 
their  rights,  involves  the  corollary  that,  if  any  such  persons  are 
not  joined,  they  may  be  made  parties  on  their  own  motion.  Thus 
judgment  creditors  wlio  assert  their  lien  to  be  superior  to  that  of 
a  mortgage  may  intervene  in  a  suit  to  foreclose  it,  and  contest  its 
priority.* 

A  simple  contract  creditor  may  intervene  in  a  foreclosure  suit 
if  he  has  any  equities  in  respect  to  the  property,  whether  prior  or 
subsequent  to  those  of  the  complainant,  and  can  secure  their 
determination  and  protection.^ 

Rival  creditors  may  contest  the  validity  of  their  claims  and  the 
priority  of  their  respective  liens  in  foreclosure  suits,  but  in  subor- 
dination to  the  general  object  and  purpose  of  the  suit  in  wliich 
they  are  allowed  to  intervene,  and  not  to  defeat  that  object  and 
purpose,  or  to  interpose  obstacles  to  the  progress  of  the  suit.^ 

1  Forrest's  Exrs.  v.  Luddington  (1880),  Co.  (1880),  13  S.  C.  467  ;  United  States 
68  Ala.  1  ;  s.  c.  12  Am.  &  Eiig.  R.  R.  Cas.     v.  Flint  (1876),  4  Sawyer,  58. 

330.     A    similar   decision    was    made   in  *  Scott  i\  Mansfield,  Coldwater,  &  Lake 

Stewart  v.  Chesapeake  &  Ohio  Canal  Co.  Michigan  R.  Co.  (1877),  2  Flip.  15.     The 

(1880),  1  Fed.  Ri'p.  361.  court  expressly  said  that  to  allow  this  in- 

2  Case  V.  Terrell  (1870),  11  Wall.  199  ;  tervention  was  simjjly  the  enforcement  of 
Carr  v.  United  States  (1878),  98  U.  S.  433,  the  general  practice  in  chancery  of  making 
437;  H;iwes  on  Parties,  §  40.  In  Meier  f.  all  lieiiholders  defendants,  where  one  of 
Kaii.sas  R.  Co.  (1877),  4  Dill.  378,  the  them  lirings  suit  npon  his  own  lien, 
method  by  which  the  United  States  was  "  Lombard  Inv.  Co.  et  al.  v.  Seaboard 
made  a  party  was  by  directing  a  notice,  Mannfg.  Co.  (1896),  74  Fed.  Rep.  325, 
under  the  .seal  of  the  court,  to  the  Attor-  326  ;  Hollins  r.  Brierfield  Iron  &  Coal  Co. 
ney-General  of  the  United  States,  .stating  (1893),  150  U.  S.  371  ;  s.  c.  14  Sup.  Ct. 
that  a  suit  had  been  instituted  against  the  Rep.  127. 

United    States,    and    rcfjucsting   him    to  ^  Forbes  v.  Memphis,  Kl   Paso,  &  Pac. 

appear.      For  other  suggested  methods,  see  R.  Co.  (1872),  2  Woods  323  ;  s.  c.  9  Fed. 

Haw.-s  on  Parties,  §  11.  Cas.  408,  No.  4926. 
"  Hand  I'.  Savannah  &.  Charleston  R. 


§§  477,  478.]  PARTIES   IN   SUITS,   ETC.  471 

Such  intervention,  however,  is  not  permissible  in  the  case  of  a 
general  creditor  having  no  specific  lien,  especially  where  the 
cause  has  passed  to  an  appellate  court.^ 

Where,  in  a  foreclosure  suit,  the  company  has  answered  and 
been  represented  by  the  counsel  of  the  trustee,  and  consented  to  a 
receivership  and  a  decree  by  which  the  receiver  is  authorized  to 
take  possession  of  all  the  company's  personal  property  not  covered 
by  the  mortgage,  thus  shielding  it  from  the  general  creditors,  such 
a  decree  will  bo  treated  as  a  void  and  collusive  one  to  that  extent ; 
and  while  general  creditors  might  intervene  in  the  foreclosure 
suit,  it  is  their  right  instead  to  file  an  original  bill  to  have  the 
property  not  covered  by  the  mortgage  administered  for  their 
benefit  by  an  extension  of  the  receivership  in  the  foreclosure  suit 
to  a  receivership  in  their  bill.^ 

(As  to  intervention  of  parties  in  interest  who  are  not  formal 
parties  to  suits  instituted  by  individual  bondholders  or  the  trustee, 
see  Art.  II.,  post.} 

Article  II.  —  Parties  in  Suits  by  or  against  the  Trustees 
OR  Representative  Bondholders. 

§  477.  Introductory.  —  The  operation  of  the  subsidiary  rule  of 
equity  practice,  that  numerous  parties  having  a  common  interest 
may  be  represented  in  a  suit  affecting  that  interest  by  one  or 
more  of  their  number,  and  when  so  represented  are  bound  by  the 
action  of  their  representative,  whether  the  suit  is  brought  by  or 
against  them,^  may,  for  the  purposes  of  the  present  treatise,  be 
conveniently  considered  in  its  application  (1)  to  cases  in  whicli 
one  or  more  of  the  bondholders  act  as  representative  of  the  rest  ; 
(2)  to  cases  in  which  the  bondholders  as  a  body  are  represented 
by  the  trustee  named  in  the  mortgage,  or  substituted  in  one  of 
ways  already  discussed  in  Chapter  VII.,  above. 

§  478.  Representation  of  Bondholders  by  one  or  more  of  their 
Number.  —  It  is  well  Settled  that  the  bondholders  secured  by  a 
trust  mortgage  in  the  usual  form  may  themselves  set  the  machineiy 
of  the  law  in  motion  for  the  protection  of  tlieir  interests,  making 
the  trustees  defendants  whenever  the  trustees  iiave  either  refused 
to  institute  a  suit  for  that  purpose,^  or  have  been  guilty  of  some 

1  Bronsonv.  Railroad  Company  (1862),  ^  See  generally  Daniell's  Cli.  Pr.,  pp. 

2  Black,  524.  238  ct  scq.,  and  pp.  278  d  scq. 

^  Alabama    Nat.    Bank   v.    ]\lnry   J,ee  *  Alexander    v.    Central    R.-iilrosid    of 

Coal  &  Railway  Co.   et  al.  (Ala.),  19  So.  Iowa  (1874),  3  Dill.  487  :  s  r.  1  Fe.l.  Cns. 

Rep.  404  (1896).  863,  Case  No.   166  ;  Coal  Co.    v.   Blalch- 


472 


RAILWAY   BONDS   AND    MORTGAGES.  [CHAP.  XXIV. 


active  misconduct,^  or  have  acquired  interests  adverse  to  those  of 
the  bondholders,  and  are  consequently  incapable  of  maintaining 
the  rights  of  the  latter  without  attacking  their  own.^ 

The  same  right  of  independent  suit  necessarily  exists  for 
the  bondholders  when  the  removal  of  the  trustee  is  the  object 
of  the  suit,  or  where  it  is  sought  to  obtain  the  appointment  of 
new  trustees  after  the  original  ones  have  abandoned  their 
trust.^ 

In  proceedings  instituted  by  individual  bondholders  in  any  of 
the  allowable  cases  just  mentioned,  one  or  more  of  their  number 
may  sue  for  the  benefit  of  the  whole  body,*  such  representative 
or  representatives  being  under  the  obligation  of  acting  with  the 
utmost  fairness  and  good  faith  in  procuring  a  final  decree,  which 
is  to  be  binding  upon  all  parties  in  interest." 

Several  classes  of  bondholders  may  properly  be  represented  by 
persons  who  hold  bonds  of  the  different  classes.     This  fact  does 


ford  (1870),  11  Wall.  172  ;  Weetgen  v.  Vib- 
bard  (1875),  5  Hun,  265  ;  Campbell  v.  Rail- 
road Co.  (1871),  1  Woods,  368;  First 
National  Fire  Ins.  Co.  v.  Salisbury  (1881), 
130  ilass.  303  ;  s.  c.  4  Am.  &  Eng.  R.  R. 
Cas.  480;  De  Betz's  Petition  (1878),  9 
Abb.  N.  C.  246  ;  Owens  v.  Ohio  Central 
R.  Co.  (1884),  20  Fed.  Rep.  10,  13;  Beek- 
nian  v.  Hudson  River  West  Shore  R.  Co. 
(1888),  35  Fed.  Rep.  3  ;  Seibert  v.  Min- 
iieai.olis  &  St.  L.  R.  Co.  (1893),  52  Minn. 
148  ;  s.  c.  53  N.  W.  Rep.  1134  ;  57  Am. 
&  Eng.  R.  R.  Cas.  208  ;  Chicago  &  Vin- 
cennes  R.  Co.  j;.  Fosdick,  106  U.  S.  47, 
68  ;  s.  c.  7  Am.  &  Eng.  R.  R.  Cas.  427  ; 
Barry  v.  Missouri,  K.  &T  R.  Co.  (1886),  27 
Fed.  Rep.  1  ;  s.  c.  36  Fed.  Rep.  228  (1888); 
Central  Trust  Co.  v.  Charlotte,  C.  &  A.  R. 
Co.  (1895),  65  Fed.  Rep.  264  ;  MoFadden 
V.  May's  Landing  &  Egg  Harbor  City  R. 
Co.  (1891),  49  N.  J.  Eq.  176;  Beden  v. 
Burke  (1893),  72  Hun,  51. 

A  provision  in  the  mortgage  th;it  no 
indejiendent  action  to  foreclose  shall  be 
brougiit  by  a  bondholder,  until  the  trus- 
tee ha.s  refused  to  comply  with  the  requi- 
sition of  a  certain  percentage  of  the  bond- 
hnMers,  is  reasonable  and  valid.  Seibert 
V.  .Minneapolis  &  St.  Louis  R.  Co.  (1893), 
52  Minn.  U8  ;  s.  c.  53  N.  W.  Re]).  1131; 
57  Am.  &  Eng.  R.  R.  Cas.  208.  Tlu;  bill 
of  a  l)ondliolder  wlio  brings  suit  to  enforce 
any  of  bis  rights  under  the  mortgage  must 


allege  the  refusal  or  neglect  of  the  trustee 
to  institute  proceedings,  or  such  other 
cause  as  is  relied  on  to  justify  his  claim  to 
become  dominus  litis,  and  if  the  answer 
of  the  railroad  company  is  such  as  to 
make  the  unfitness  of  the  trustee  an  issue 
in  the  case,  and  he  neither  appears  volun- 
tarily nor  is  served  with  process,  the  bill 
will  be  dismissed,  ilorgan  v.  Kansas  Pa- 
cific Ry.  Co.  (1882),  15  Fed.  Rep.  55  ; 
Barry  v.  Missouri,  K.  &T.  Ry.  Co.  (1884), 
22  Fed.  Rep.  631. 

1  Weetjeu  v.  Vibbard  (1875),  5  Hun, 
265  ;  Western  Railroad  Co.  v.  Nolan 
(1872),  48  N.  Y.  513  ;  Central  Trust  Co. 
V.  Charlotte,  C.  &  A.  R.  Co.  (1S95),  65 
Fed.  Rep.  264. 

2  Webb  V.  Vermont  Central  R.  Co. 
(1881),  9  Fed.  Rep.  793  ;  American  Tube, 
etc.  Co.  V.  Kentuck}',  etc.  Co.  (]8.)3),  52 
Fed.  Rep.  826. 

3  Stevens  v.  Eldridge  (1876),  4  Cliff. 
348. 

4  Campbell  v.  Railroad  Co.  (1871),  1 
Woods,  368  ;  Wilnier  v.  Atlanta  &  Rich- 
mond Air  Line  Ry.  Co.  (1875),  2  Woods, 
447;  March  v.  Eastern  R.  Co.  (186-2), 
40  N.  H.  518  ;  Mnson  v.  York  &  Cumber- 
land R.  Co.  (1861),  52  Me.  82;  Fnrmers' 
Loan  &  Trust  Co.  r.  Winona  &  S.  W. 
Ry.  Co.  (1893),  59  Fed.  Rep.  957. 

"  '^  Campbell    v.   Railroad  Co.  (1871),   1 
Woods,  368. 


§§  479-481.]  PARTIES   IN   SUITS,   ETC.  473 

not  constitute  such  an  antagonism  of  interest  as  to  prevent  the 
application  of  the  usual  rulc.^ 

§  479.  Bondholder  allowed  to  sue  when  Trusteeship  of  Foreign 
Corporation  is  vacant.  —  Where  the  subjcct-matter  of  the  suit  liis 
in  one  State,  and  the  mortgagor  corporation  was  oi'ganized  in 
another,  a  court  in  the  former  State  will  not  compel  a  person 
holding  a  majority  of  the  bonds  to  apply  to  the  courts  of  the  latter 
to  1111  a  vacancy  in  the  office  of  trustee,  but  will  allow  such  bond- 
holder to  carry  on  a  foreclosure  suit  in  his  own  name.  Especially 
will  this  course  be  allowed  when  the  trust  deed  exj)ressly  i)i'o- 
vides  that  the  remedies  therein  specified  are  "  cumulative  to  all 
other  remedies  allowed  by  law,  and  that  the  same  shall  not  be 
deemed  in  any  manner  whatever  to  deprive  the  trustee  or  the 
beneficiaries  under  the  trust  of  any  legal  or  equitable  remedy  by 
judicial  proceedings."  ^ 

§  480.  Bondholder  allowed  to  sue  when  Trustee  is  Non-resident. 
—  One  of  two  bondholders  protected  by  a  trust  mortgage  may 
bring  an  action  for  the  foreclosure  of  the  mortgage  in  his  own 
name,  where  the  trustee  is  absent  in  a  foreign  country,  and  the 
bondholder  has  sufficient  reason  to  believe  that  he  has  become 


insane 


§  4<:'il.  Suit  by  Representative  Bondholder,  w^hen  not  permissible. 
—  Where  the  mortgage  is  executed  to  the  bondholders  by  name, 

1  Galveston  Eailroad  v.  Cowdrey  (1871),  laid  down  b}-  Judge  Story  (Eq.  PL,  §  l.';8), 
11  Wall.  459,  478.  The  court  said  (pp.  that  it  is  sufficient,  in  a  suit  liy  incum- 
478,  479)  :  "They  are  no  more  antago-  brancers,  to  file  the  bill  on  behali  of  all 
nistic  to  each  other  than  the  several  bond-  the  creditors  and  incumbrancers,  thus 
holders  of  the  same  class  are.  It  is  the  making  them  all,  in  a  sense,  parties  to 
interest  of  each  bondholder  to  have  as  few  the  extent  of  asserting  their  own  lights, 
prior  claims  to  his,  and  as  few  partici-  or  of  enabling  them  to  contest  the  mat- 
pants  with  him,  as  possible.  Every  co-  ter  before  a  master,  and  proceeded  thus  : 
bondholder  is  in  one  sense  an  antagonist.  "  But  the  case  before  us  is  much  stronger 
But  the  objection  is  entirely  without  foun-  than  this.  The  complainants  inust  set  out 
dation.  The  complainants  do,  in  fact,  their  own  claims  under  the  ditierent  mort- 
hold  bonds  of  the  three  different  classes,  gages,  and  it  would  be  impossible  to  make 
and  they  have  a  perfect  right  to  state  that  all  the  bondholders  of  either  class  jiarties, 
fact  in  their  bill,  and  to  ask  for  relief  for  they  could  not  be  discovered  ;  and  the 
suitable  to  the  fact,  and  no  possible  harm  rights  of  all  are  piotected  by  tlie  oppor- 
or  inconvenience  can  arise  in  their  suing  tunity  given  to  all  to  contest  the  claim  of 
in    behalf    of    themselves   and    all    other  any." 

bondholders   in   each   class   according   to  ^  Wheelwright  r.  St.    Louis,   X.  O  & 

their   several   priorities.     If  any  class  of  0.  Canal   Transportation   Co.    (i8'J;j),  6G 

bondholders  wish  to  contest  the  preced-  Fed.  Rep.  164. 

ence  of  a  prior  mortgage  they  have  a  per-  ^  Ettlinger  v.    Per.sian   Rug  &  Carpet 

feet  right    to  intervene  in  the  suit,   and  Co.  (1894),  142  N.  Y.  189  ;  s.  c.  36  X.  E. 

file  a  cross-bill  setting  up  the  objection."  Iteji.  1055. 
The  court  then  referred  to  the  doctrine 


474  RAILWAY  BONDS   AND   MORTGAGES.  [CHAP.  XXIV. 

and  expressly  declares  the  interest  of  each  of  them,  it  comes 
under  the  rule  that  a  suit  upon  a  written  instrument  must  be 
brought  in  the  name  of  all  who  are  formal  parties  thereto  and 
retain  an  interest  therein ;  and  if  a  single  one  of  the  bondholders 
secured  by  such  a  mortgage  brings  suit  to  foreclose  it,  the  bill 
will  be  dismissed  for  defect  of  parties.^  Nor  is  it  competent  for 
one  of  several  joint  owners  of  bonds,  without  joining  the  other 
owners  as  plaintiffs,  to  institute  a  suit  thereon,  the  purpose  of 
which  is  to  upset  judicial  decrees,  charge  trusts,  and  fasten  sup- 
posed liens  in  consequence  of  joint  interests.  Since  the  decree  in 
such  a  suit  must  be  for  the  benefit  of  all,  and  binding  upon  all, 
the  real  parties  in  interest  must  appear.  The  fact  that  the  bonds 
are  payable  to  bearer,  and  that  the  plaintiff  has  manual  possession 
of  them,  does  not  entitle  him  to  maintain  the  suit.^ 

§  482.  Participation  of  Bondholders  in  Suit  begun  by  a  Portion  of 
their  Number.  —  Where  a  suit  is  brought  upon  an  ordinary  trust 
mortgage  by  any  number  of  the  bondliolders  less  than  the  whole, 
it  is  not  necessary  that  the  others  should  be  joined  as  parties, 
either  plaintiff  or  defendant ;  for  their  interests  are  represented 
not  only  by  the  complainants,  but  by  the  trustee,  who  is  neces- 
sarily made  a  party  defendant  (see  above).  They  may,  how- 
ever, come  in  at  any  stage  of  the  proceedings,  and  become 
parties  plaintiff,  or  they  may  propound  their  claims  before  a 
master.^ 

The  privilege  of  intervention  is  open  to  them  even  after  the  suit 
has  passed  to  the  appellate  court  and  been  remanded  to  the  lower 
court.^ 

An  order  made  in  a  federal  court  allowing  all  the  bondholders 
to  come  in  and  be  made  complainants  in  a  suit  instituted  by  a 
bondholder  must  be  limited   to   bondholders  who  are   not   citi- 

1  Raih'oad  Co.  v.  Orr  (1873),  18  Wall,  he  may  make  timely  arrangements  to  se- 

471.     The  court  said:  "  The  adequacy  of  cure   a   sale   of  the    property   at   its   full 

the  security  of  the  mortgage  to  pay  all  the  value." 

bonds  being  doubtful,  it  is  the  interest  of  '-^  Sahlganrd  v.  Kennedy  (1882),  13  Fed. 

every  bondholder  to  diminish  the  debt  of  Eep.   242,  244  ;   Krojihollcr  v.  St.    Paul, 

every  other  bondholder.     In  so  far  as  he  Minneapolis,  k  Manitoba  Ry.  Co.  (1880), 

succeeds  in  doing  that  he  adds  to  his  own  3  Fed.  Kep.  302,  on  demurrer.     Compare 

se(;urity.     Each  holder  should  be  present  Messchaert    v.    Kennedy    (1882),    4    Mc- 

to  defend  his  own  claim,  and  that  he  may  Crary,  133. 

attack   the   other  claim   should  there  be  8  WiUmer  i'.  Atlanta  &  Riehmond  Air 

just  occasion  for  it.     If,  upon  a  fair  ad-  Line  R.  Co.  (187.^)),   2  Woods,    447,   4.51  ; 

justnicnt  of  the   amount   of  the   claims,  Ilaekensack  Water  Co.  v.  De  Kay  (1  883), 

there  should   be   a   deficiency  in   the  se-  3(5  N.  J.  Kq.  b\S,  citing  Daniell's  Ch.  Pr. 

curity,    real    or   apjireliended,    every   one  217. 

interested  .should  liave  notice  in  advance  *  Li    re    Chickering    (1883),    56    Vt. 

of  the  time,  place,  and  mode  of  sale,  that  82. 


§  483.]  PARTIES   IN   SUITS,    ETC.  475 

zens  of  the  State  with  which  the  district  is  wholly  or  partially 
coterminous.^ 

Boudholders  and  not  coupon-holders,  declining  to  come  in  as 
parties  plaintitf,  may  be  joined  as  defendants.- 

§  483.  Representative  Position  of  Trustee  in  Suits  affecting  the 
Trust  Property  generally.  —  From  tlie  fact  that  the  trustee  and  the 
cestuis  que  trust  arc  the  owners  of  the  whole  interest  in  the  trust 
estate,  it  follows  from  the  fundamental  rule  of  equity  in  regard  to 
parties  that,  in  suits  relating  to  the  estate  brought  by  or  against 
strangers,  both  the  trustee  and  the  cestuis  que  trust  are,  under 
ordinary  circumstances,  necessary  parties.^ 

Upon  this  rule,  however,  there  have  been  engrafted  several 
exceptions.* 

One  of  these,  in  the  case  of  railroad  mortgages,  may  almost  be 
said  to  overshadow  the  rule  itself.  The  doctrine  now  universally 
accepted  is  that  the  trustee  is,  in  the  absence  of  some  special 
consideration,  the  only  necessary  party  in  suits  to  enforce  or 
defend  the  rights  of  bondholders.  This  doctrine  may  be  referred 
to  two  principles :  (1)  The  bondholders  usually  constitute  a 
numerous  class  having  a  common  interest,  and  therefore  suits  by 
or  against  them  fall  into  the  category  of  those  in  which  appear- 
ance by  a  representative  is  permissible.  (2)  The  natuj-e  of  the 
contract  is  such  that  the  bondholders,  in  purchasing  their  securi- 
ties, may  reasonably  be  assumed  to  have  agreed  that  the  trustee 
should,  under  ordinary  circumstances,  be  that  representative. 

In  some  of  the  cases  the  inconvenience  and  unnecessary 
expense  which  would  be  caused  by  an  adherence  to  the  general 
rule  as  to  joining  all  parties  in  interest  is  emphasized  in  some 
of  the  cases  which  sustain  this  doctrine.^     In  others  stress  is 

^  Jackson  &  Sharp  Mfg.   Co.    v.    Bur-  shows  that  this  principle  was  deemed  to 

lington  &  L.  R.  Co.  (1887),  29  Fed.  Rep.  be  properly  applied,  whether  the  trustee 

474.  be  a  nominal  or  an  active  one.     In  this 

2  Hotel  Company  v.  Wade  (1877),  97  respect  the  case  is  in  conflict  with  Bards- 
U.  S.  13.  town  &  Louisville  R.  Co.  v.  Metcalf  (1 862), 

3  Perry  on  Trusts,  §  873  ;  Daniell's  Ch.  4  Mete.  (Ky.)  199,  where  it  was  held 
Pr.,  pp.  220  fl'.  and  256  ff.  that  a  statutoi-y  provision  declaring  that, 

*  See  Perry  on  Trusts,  §  873  ;  Wood's  "  where  the  question  is  one  of  common  or 
Ey.  Law,  1630.  general  interest  of  many  persons,  or  where 
^  Williiik  V.  Morris  Canal  &  Bkg.  Co.  the  parties  are  numerous,  and  it  is  im- 
(1843),  4  N".  J.  Eq.  377  ;  Murdock  v.  practicable  to  bring  them  all  before  the 
Woodson  (1873),  2  Dill.  188  ;  Shaw  v.  court  within  a  reasonable  time,  one  or 
Norfolk  County  R.  Co.  (1855),  5  Gray  more  may  sue  for  the  benefit  of  all,"  docs 
(Mass.),  162.  not  apply  to  a  naked  trustee.  It  was  con- 
In  the  first  case  the  court  based  its  sidered,  however,  that  as  the  morfgag*^  in 
opinion  exjiressly  on  the  ground  that  the  question  conferi'ed  upon  the  trustee  the 
parties  were  numerous,  and  its  language  power  "to  proceed  by  due  course  of  law" 


476 


RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  XXIV. 


laid  rather  upon  the  nature  of  the  contract,  and  the  understand- 
ing of  the  parties  as  gathered  from  its  terms,  that  tlie  bondliolders 
will  be  bound  by  what  is  done  by  the  trustee.^ 

The  rule  as  to  the  representative  functions  of  a  trustee  applies 
to  an  ex  officio  trustee,  such  as  a  State  treasurer,  to  whom  the 
conveyance  is  made  by  virtue  of  a  statute.^ 

The  title  and  interest  of  trustees  are  sufficiently  alleged  where 
they  are  described  in  the  bill  as  "  trustees  for  divers  parties " 
and  others,  as  "  certain  holders  of  said  coupon  bonds  and  cestuis 
que  trust "  of  the  trustees,  and  the  stating  part  of  the  bill  alleges 
the  execution  of  the  mortgage  by  which  they  were  constituted 
trustees.^ 


to  sell  the  railroad  property  upon  default 
in  the  payment  of  the  interest  or  princi- 
pal of  the  bonds,  he  was  more  than  a 
naked  trustee,  and  that  this  fact  took  the 
case  out  of  the  ordinary  rule  of  equity 
practice  which  requires  a  trustee,  under  a 
mortgage  to  secure  payment  of  monej'  to 
others,  to  join  his  cestuis  que  trust  iu  a 
suit  for  foreclosure  and  sale. 

1  "  Under  some  circumstances,"  said 
Chief  Justice  Waite  in  Kerrison  v.  Stew- 
art (1876),  93  U.  S.  155,  160,  "a  trustee 
may  represent  his  beneficiaries  in  all 
things  relating  to  their  common  interest 
in  the  trust  property.  He  may  be  in- 
vested with  such  powers  and  subject  to 
such  obligations,  that  those  for  whom  he 
holds  .  .  .  will  be  bound  by  him.  The  dif- 
ficulty lies  in  asceitaining  whether  he 
occupies  such  a  position,  not  in  determin- 
ing the  effect  if  he  does.  If  he  has  been 
made  such  a  representative,  it  is  well 
settled  that  his  beneficiaries  are  not  neces- 
sary parties  to  a  suit  by  him  against  a 
stranger  to  enforce  the  trust,  or  to  one  by 
a  stranger  against  him  to  defeat  it  in 
whole  or  in  part."  In  Farmers'  Loan  & 
Trust  Co.  V.  Central  Railroad  of  lf)wa 
(1877),  4  Dill.  533  ;  s.  c.  8  Fed.  Cas.  1037, 
Case  No.  4663,  Judge  Dillon  used  very 
similar  language  :  "  Under  a  railway  njort- 
gage,  where  it  is  contemplated  that  bonds 
to  a  large  number  will  be  executed  and 
negotiated,  and  wiiere  the  holders  of  these 
bonds  may  be  scattered  over  the  whole 
face  of  the  earth,  it  becomes  very  im- 
portant to  ajjpoint  a  trustee,  and  the 
trust  deed  for  that  ])Urpose  usually  pre- 
Kf"nV>es  tlie  jiowers  and  duties  of  tlie  trus- 
tee.     Now  all  the  purchasci-.s  of  the  Ijonds 


must  take  under  the  rights  which  that 
instrument  gives  them,  and  the  etfect  of 
this  is  that  the  trustee,  while  acting  in 
the  line  of  his  duty,  and  witliin  the  scope 
of  his  powers,  is  a  representative  of  all  the 
bondholders."  So  also  in  Campbell  v. 
Railroad  Co.  (1871),  1  Woods,  368,  Jus- 
tice Bradley  considered  that  the  very  fact 
that  trustees  are  interposed  to  receive  and 
hold  the  mortgage  given  to  secure  an 
issue  of  bonds  amounting  to  hundreds  and 
thousands,  and  transferable  by  deliver}^ 
shows  that  it  is  the  intent  and  under- 
standing of  all  parties,  unless  the  contrary 
appears,  that  the  trustees  are  to  represent 
the  bondholders  in  all  matters  of  litiga- 
tion respecting  their  common  and  general 
rights. 

This  view  of  the  matter  had  been 
anticipated  by  the  Irish  Court  of  Chan- 
cery many  years  previous  in  dealing  with 
an  objection  on  the  non-joinder  of  the 
cestuis  qtie  trust,  under  a  trust  deed  to 
raise  arrears  of  an  annuity,  Hart,  L  C. , 
laying  down  the  general  rule  that  "  when 
it  appears  on  the  face  of  the  contract  that 
it  was  the  intention  of  the  parties  to  ex- 
clude the  cestuis  que  trust  from  the  neces- 
sity of  taking  any  part  in  the  transactions 
relating  to  the  management  of  trust,  a 
court  of  equity  will  dispense  with  their 
being  made  parties  to  the  suit.  Bifield  v. 
Taylor,  1  Beaty,  92  ;  s.  c.  1  Moll.  192, 
cited  in  Kerrison  v.  Stewart,  supra. 

2  BostoTi  &  New  York  Air  Line  R.  C<i. 
I'.  Coffin  (1882),  50  (^onn.  150;  s.  c.  12 
Am.  &  I<:ng.  R.  R.  Cas.  375. 

8  Savannah  &  Memjiliis  R.  Co.  v.  Lan- 
caster (1878),  62  Ala.  555. 


§  484.]  PARTIES   IN   SUITS,    ETC.  477 

As  to  whether  it  is  necessary  that  the  trustee  who  brings  suit 
without  joining  his  cestui  que  trust  sliould  state  upon  the  face  of 
his  bill  that  they  are  numerous  and  cannot,  without  great  incon- 
venience, be  brought  before  the  court,  the  authorities  are  at 
variance.  In  New  Jersey  it  has  been  held  that  no  such  aver- 
ment is  necessary,  as  the  mortgage  itself,  when  set  out  in  the 
bill,  sufficiently  discloses  the  character  of  the  transaction.' 

In  Kentucky  it  has  been  held  that  even  where  the  trustee 
has  the  power  to  "  proceed  by  due  course  of  law  "  to  have  the 
railroad  property  sold,  he  cannot  sue  without  joining  his  cestuis 
que  trust,  unless  he  alleges  and  shows  that  they  are  numerous, 
and  that  it  is  impracticable  to  bring  them  before  the  court 
within  a  reasonable  time.^ 

When  thus  suing  as  the  representative  of  the  bondholders, 
for  a  breach  of  the  contract  of  the  mortgage,  a  trustee  must  be 
treated  as  a  real  party  plaintiff  for  purposes  of  jurisdiction  as 
between  the  Federal  and  State  courts.^ 

A  foreclosure  suit  may  be  maintained  by  one  of  three  trustees, 
where  one  of  the  others  is  dead,  and  the  third  is  interested  in 
the  property  and  assets  of  another  company  which  has  purchased 
the  property  mortgaged.*     (Compare  §  490,  post.) 

It  is  at  least  doubtful  whether  a  trustee  who  has  commenced 
a  suit  on  the  theory  that  he  has  received,  in  accordance  with  a 
provision  of  the  mortgage,  a  request  from  the  holders  of  a  certain 
proportion  of  the  bonds,  can,  upon  its  being  shown  that  a  suffi- 
cient number  of  bondholders  have  not  joined  in  the  request, 
maintain  the  suit  by  virtue  of  a  discretionary  power  which  he 
has  under  the  mortgage  to  take  action  whenever  he  deems  it  to 
be  for  the  interest  of  the  bondholders  and  all  concerned.^ 

§  484.  Request  to  begin  Suit  must  come  from  Owners,  not 
merely  Holders  of  Bonds.  —  Proceedings  to  enforce  a  mortgage 
cannot  be  instituted  by  virtue  of  a  provision  authorizing  the 
trustee  to  apply  to  a  court  for  foreclosure  and  sale  upon  receiving 
a  request  to  that  effect  from  the  holders  of  a  certain  amount  of 
the  bonds,  unless  the  parties  so  requesting  are  not  only  holders 
but  owners  of  the  bonds.  A  request  from  an  agent  who  holds 
the  bonds  subject  to  the  order  of  the  real  owners  will  not 
authorize  the  trustee  to  take  action.*^ 

^  Willink  V.  Morris  Canal  &  Bkg.  Co.  *  Eoliinson  v.  Alabama  &  Georgia  Mfg. 

(1843),  4  N.  J.  Eq.  377.  Co.  (1891),  48  Fed.  Rep.  12. 

2  Bardstown&  Louisville  R.  Co.  (1862),  ^  Farmers'  Loan  &  Trust  Co.   v.    Kew 

4  Mete.  (Ky.)  199.  York  &  Northern  R.  Co.  (N.  Y.,    1896), 

8  Knapp  V.  Railroad  Company  (1873),  44  N.  E.  Rep.  1043. 

20  Wall.   117  ;  Coal  Company  v.  Blatcli-  ^  ii,ij_ 
ford  (1870),  11  \VaU.  172. 


478 


RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  XXIV. 


8  485.  Suits  in  -which  the  Trustee  is  the  Proper  Party  Plaintiff.  — 
From  the  above  principles  it  follows  that,  under  ordinary  circum- 
stances, the  trustees  are  the  proper  parties  to  institute  a  suit  for 
the  foreclosure  of  the  mortgage ;  ^  or  to  maintain  and  defend  the 
trust  fund  against  wrongful  attack  or  injury  tending  to  impair  its 
safety  or  amount ;  ^  or  to  apply  for  an  injunction  to  restrain  an 
alleged  illegal  proceeding  which  will  injure  the  value  of  the 
bonds  and  cast  a  cloud  upon  the  security ;  or  to  bring  suit  to 
have  a  controverted  priority  or  lien  settled  before  an  irredeem- 
able sale  is  made  under  another  mortgage  which  is  claimed  to 
rank  above  the  one  made  to  the  petitioners;^  or  to  secure  from 
the  company  an  accounting  where  it  has  neglected  to  apply 
the  earnings  to  the  mortgage  debt.* 

§  486.  Bill  filed  by  or  against  Trustees  alone  not  demurrable  for 
Defect  of  Parties.  —  Where  the  trustees  unite  in  brin<iin<'-  a  fore- 


1  Willink  V.  Morris  Canal  &  Bkg.  Co. 
(1843),  4  X.  J.  Eq.  377  ;  Shaw  v.  Norfolk 
County  R.  Co.  (1855),  5  Gray  (ilass.), 
162  ;  Bardstown  &  Louisville  R.  Co.  v. 
Metcalfe  (1862),  4  Mete.  (Ky.)  199  ; 
Campbell  v.  Railroad  Co.  (1871),  1  Woods, 
368  ;  Credit  Co.  i'.  Arkansas  Central  R. 
Co.  (1882),  15  Fed.  Rep.  46,  52;  McHenry's 
Petition  (1878),  9  Abb.  N.  C.  256  ;  Hale 
V.  Nashua  &  Lowell  R.  Co.  (1880),  60 
N.  H.  833;  Barnes  v.  Chicago,  Milw. 
&  St.  Paul  Ry.  Co.  (1887).  122  U.  S.  1  ; 
Savannah  &  ileniphis  K.  Co.  v.  Lancaster 
(1878),  62  Ala.  555. 

2  Western  Kailroad  Co.  v.  Nolan  (1872), 
48  N.  Y.  513  ;  Union  Trust  Co.  v.  Illinois 
Midland  Ry.  Co.  (1886),  117  U.  S.  434, 
455. 

8  Murdockv.  AVoodson  (1873),  2  DiU. 
188. 

*  Morgan  v.  Kansas  Pacific  R.  Co. 
(1882),  15  Fed.  Rep.  55  ;  Barry  v.  Mis- 
souri, R.  &  T.  Ry.  Co.  (1884),  22  Fed. 
Rep.  631  ;  Mercantile  Trust  Co.  v.  Port- 
land &  Ogdensburg  R.  Co.  (1882),  10 
Fed.  Kep.  004. 

This  principle  has,  liowever,  been  held 
not  to  be  ap{)]icable  where  it  is  stipulated 
that  the,  bonds  are  to  bear  such  interest 
as  the  directors  fix  in  accordance  with  the 
provisions  of  a  tni.st  mortgage  pledging 
the  net  earnings  to  the  j)ayment  of  the 
principal  nnd  interest,  and  the  riglit  of 
action  is  based  on  tlie  allegations  that 
the  directors  liave  fraudulently  conspin-d 
to  compel  the   boiidljoldcrs   to  surrender 


their  bonds,  have  fraudulently  withheld 
net  earnings  payable  thereon,  and  have 
made  false,  fraudulent,  and  fictitious  ascer- 
tainments of  the  income.  An  action  may, 
it  is  said,  be  maintained  by  a  bondholder, 
under  such  circumstances,  for  ascertain- 
ment and  payment  of  the  amount  due, 
and  the  trustee  is  not  a  necessary  party. 
The  reason  assigned  was  that  such  a  pro- 
ceeding is  merely  an  attempt  to  compel 
tlie  defendant  to  fulfil  its  agreement  fairly 
and  honestly  without  resorting  to  the  se- 
curity provided  by  the  deed  of  trust. 
There  being  no  foreclosure  of  the  mort- 
gage asked  for,  but  simply  an  endeavor 
to  collect  a  debt  due  to  the  bondliolder, 
the  trustee  could  not  bring  the  suit,  nnd 
had  no  interest  in  it.  The  first  two  cases 
cited  in  the  present  note  were  distinguislied 
on  the  ground  that  the  remedy  sought  in 
them  could  be  obtained  onlv  thrnngh  tlie 
trustee.  Spies  v.  niicaco  &  E  I.  R.  Co. 
(1887),  30  Fed.  Rep.  397,  398.  The  di.s- 
tinction  here  drawn  seems  to  be  of  very 
dubious  soundness.  The  earnings  ydedired 
by  the  mortgage  in  question  can  only  be 
regarded  as  a  portion  of  the  trust  prop- 
erty, and  it  is  difficult  to  see  how  the  ap- 
plication of  such  earnings  to  the  interest 
on  the  bonds  can  be  enfoi-ced  except 
tlirongh  the  person  whose  title  as  grnritee 
under  the  mortgage  is  the  sole  foundation 
of  the  bondholder's  claim.  The  inqiuta- 
tioii  of  fraud,  it  is  snbniitte<l,  is  not  a 
siidicinit  ground  for  breaking  in  upon  the 
general  rule. 


§  486.]  PARTIES   IN   SUITS,    ETC.  479 

closure  suit ;  the  mortgagor  cannot  demur  to  the  bill  on  the 
ground  that,  because  the  bondholders  are  not  joined,  there  is  a 
defect  of  parties.  Shaw  v.  Norfolk  County  R.  Co.^  is  perhaps  tiie 
leading  American  case  on  this  point.  There  Judge  Bigelow,  after 
referring  to  the  general  rule  which  requires  all  parties  to  be  joined 
who  are  materially  interested  in  the  subject-matter  of  the  suit, 
and  reviewing  some  of  the  cases  illustrating  the  exception  made 
to  that  rule,  where  there  are  numerous  parties  having  a  common 
interest,  proceeded  as  follows :  "  The  case  at  bar  clearly  comes 
within  the  principles  on  which  these  decisions  rest.  The  bond- 
holders for  whose  benefit  the  mortgage  set  out  in  the  bill  was 
made  are  very  numerous,  and  the  bonds  being  assignable,  it 
would  be  very  difficult,  if  not  wholly  impracticable,  to  ascertain 
with  accuracy  at  any  given  time  who  were  the  owners  of  them, 
so  as  to  make  them  all  parties  to  a  suit  in  equity.  Nor  is  it 
necessary  that  any  of  them  should  be  joined  to  represent  their 
own  rights  and  interests  and  those  of  the  other  cestiiis  que  trust 
under  the  indenture.  Tlie  main  purpose  of  the  instrument  was 
to  vest  the  property  in  the  trustees,  with  full  power  and  authority 
to  act  as  the  representatives  of  the  cestuis  que  trust  in  all  tilings 
relating  to  their  common  rights  and  interests.  The  sole  object  of 
the  bill  is  to  secure  and  protect  these  rights  and  interests.  The 
trustees  have  no  adverse  claims  against  their  cestuis  que  trvst.  On 
the  contrary,  they  only  seek,  as  the  representatives  of  the  bond- 
holders, to  enforce  the  trusts  created  for  their  benefit,  and  in 
which  they  all  have  a  common  interest.  It  is  sufficient,  therefore, 
that  the  court  have  before  them  those  who  are  the  full  representa- 
tives of  the  parties  beneficially  interested  in  the  property,  so  that 
those  interested  will  be  bound  by  the  decree."  For  the  purposes 
of  tliis  rule  it  makes  no  difference  that  some  of  tlie  bondholders 
hold  bonds  of  the  corporation  issued  before  the  date  of  the  mort- 
gage. So  far  as  they  claim  any  benefit  or  interest  under  the 
indenture,  they  are  as  fully  represented  by  the  trustees  as  those 
whose  bonds  were  acquired  after  the  execution  of  the  mortgage.^ 

1  5  Gray,  162  (1855).  bondholders,  even  those  who  had  actuary 

2  Shaw  V.  Norfolk  County  E.  Co.  been  joined  in  a  former  suit  to  which  the 
(1855),  5  Gray  (Mass.),  162.  This  case  present  one  was  in  a  manner  suiiplen.'cn- 
was  followed  in  Cheever  v.  Rutland  &  tary,  but  that  they  were  admissible  as 
Biirlinnrton  R.  Co.  (Vt.,  1869),  4  Ann.  parties,  and  their  joinder  served  the  pnr- 
Ry.  Rep.  291,  where  the  trustees  under  a  pose  of  assuring  the  coui't  that  there  was 
first  mortffage  filed  a  suit  for  foreclosure  siudi  publicity  to  tlie  suit  as  would  shut 
of  their  lien,  making  the  trustees  under  a  the  door  to  collusion,  and  secure  as  full  a 
second  mortgage,  and  some  of  the  bond-  defence  as  the  facts  would  warrant.  The 
holders,  defendants.  The  court  said  that  cases  in  which  bondholders  apyily  to  be 
it  was  not  necessary  to  join   any  of   the  admitted  as  parties  raise  questions  as  to 


480  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  XXIV. 

Proceedings  under  cross-bills  to  which  the  trustees  arc  made 
parties  defendant  will  not  be  invalid  for  the  reason  that  some 
bondholders  who  may  have  intervened  after  the  cross-bills  were 
filed  have  not  been  made  parties  thereto.^ 

§  487.  Defences  available  against  the  Bondholders  are  available 
against  the  Trustee.  —  Since  bondholders  are  the  real  parties  in 
interest,  every  defence  available  against  them  is  available  in  a 
suit  brought  by  the  trustee  in  their  behalf.  Thus,  where  a  com- 
pany, holding  the  bonds  of  another  company,  goes  into  possession 
of  the  property  of  the  latter  under  a  lease,  agreeing  to  apply  the 
net  income  to  the  payment  of  the  interest  on  the  bonds,  the  mort- 
gagor has  a  valid  defence  to  a  trustee's  suit  to  foreclose  the 
mortgage  for  default  in  the  payment  of  the  interest  coupons,  if 
he  can  show  that  the  net  income  has  been  sufficient  to  dischai-ge 
the  sum  due  upon  such  coupons. ^ 

§  488.  Trustee  as  Party  Defendant  generally.  —  The  principles 
illustrated  in  the  preceding  sections  are  equally  applicable  where 
the  interests  of  the  bondholders  as  a  class  are  attacked.  In  such 
a  case  the  trustees  are  necessary  parties  defendant.  Thus  the 
trustees  of  mortgages  on  a  road  which  the  majority  of  the  stock- 
holders sell  by  means  of  an  amicable  foreclosure  suit,  in  which 
all  the  trustees  and  the  corporation  are  parties,  must  be  joined 
as  defendants  in  a  subsequent  suit  against  the  purchasers,  in 
which  the  dissenting  stockholders  seek  to  set  aside  the  sale.^ 

So  also  the  trustees  under  a  second  mortgage  are  necessary 
parties  defendant  to  a  bill  filed  by  the  holder  of  bonds  secured  by 
a  first  mortgage  on  a  part  of  the  road  and  a  second  mortgage  on 
the  rest  of  it,  for  the  purpose  of  having  an  accounting  of  the 
earnings  of  the  different  portions  of  the  road.* 

the  fitness  of  the  trustee  to  act  as  theii"  may  be  called  upon  to  refund,  and  cotn- 

representative,  not  as  to  the  sufficiency  of  pelled  to  do  so.     A  question  wouhl  also 

the  parties,  and  will  be  considered  below,  arise   whether   the   consideration    of    the 

To  the  same  effect  see  Lambertville  Nat.  agreement  under  which  the  fixed  amount 

Bank  V.  McCready  Bag  &  Paper  Co.  (N.  J.  of  bonds  was  paid   had   not   failed,    and 

E(i.,  1888),  15  Atl.  Rep.  388.  whether  all  the   bondholders  and    share- 

1  Muller  V.  Dows  (1877),  94  U".  S.  444.  holders  who  participated  in  the  distribu- 

2  Chamberlain  J.  Connecticut  Central  tion  of  the  proceeds  of  the  sale  should  not 
R.  Co.  (1887),  54  Conn.  472  ;  s.  c.  9  Atl.  be  required  to  refund.  If  either  or  lioth 
Rep.  244.  were  too  numerous  for  all  to  be  brought 

8  Ribon    i;.    Railroad    Co.    (1872),    16  before  the  court,  some  might   have  been 

Wall.  446.     There  the  Supreme  Court,  in  made  parties  in  their  own  behalf,  and  as 

sustaining  the  dismissal  of  the  bill  for  <le-  the   representatives   of    the   otliers."     To 

feet  of  parties,  said  :   "  If  the  sale  should  the  same  effect  see  Harwood  v.  Railroad 

be  annulled,  they  might  be  in  the  situa-  Co.  (1872),  17  Wall.  78. 
tion  of  tile  plaintiff  who  collects  a  judg-  *  Mercantile  Trust  Ci\  v.   Pdrtlnml  & 

nicnt  which  is  afterwards  reviewed.     Ho  Ogdensburg  R.  Co.  (18S2),  10  Fed.   Rep. 


§§  489,  490.]  PARTIES   IN   SUITS,    ETC.  481 

But  it  is  not  necessary  that  a  trustee  who  has  been  substituted 
by  the  voluntary  act  of  the  parties,  and  without  the  sanction  of 
the, court,  during  the  pendency  of  a  suit  to  enforce  the  trust 
should  be  brought  in  as  a  party.^ 

The  same  rule  holds  good  where  the  substitution  is  made  by 
the  consent  of  the  court.^ 

§  489.  Joinder  of  Non-resident  Trustee  as  Defendant.  —  The  fact 
that  a  railroad  trustee  is  non-resident  does  not  obviate  the  neces- 
sity of  joining  him  as  a  defendant  to  a  foreclosure  suit  in  a  court 
of  any  jurisdiction  where  a  statute  is  in  force  which,  like  the 
federal  statute  of  1875,  provides  that  indispensable  parties  may 
be  brought  into  court  by  publication,  if  the  suit  be  one  to  en- 
force any  legal  or  equitable  lien  upon,  or  claim  to,  or  remove  an 
incumbrance  or  lien  or  cloud  upon  the  title  to  real  or  personal 
propei'ty  within  the  district  where  such  suit  is  brought.  See  cli. 
137,  §  8,  U.  S.  Rev.  Stat.^ 

But  where  there  are  five  trustees,  and  four  of  tliem  have  been 
served  with  process,  the  presence  of  the  fifth,  if  a  non-resident, 
may  be  dispensed  with.  The  cestuis  que  trust  are  fully  repre- 
sented in  such  a  case  by  the  majority  of  the  trustees.  In  fact, 
if  but  a  single  one  of  the  trustees  is  in  court,  the  cestuis  que  trust 
are  sufficiently  protected  against  any  possible  harm  from  an 
adverse  decree.^ 

§  400.  Trustee's  Control  of  Suits  afifecting  the  Trust  Property. — 
The  principle  that  the  trustee  is  the  proper  party  to  protect  the 

604.  In  Willink  v.  Morris  Canal  &  Bkg.  be  particularly  applicable  to  a  trustee  sub- 
Co.  (1843),  4  N.  J.  Eq.  377,  an  objection  sthnted  pendente  lite. 
that  the  trustee  of  a  second  mortgage  was  ^  Mobile  &  Cedar  Point  R.  Co.  v.  Tal- 
not  made  a  party  defendant  was  overruled  man  (1849),  15  Ala.  472. 
on  tlie  ground  that  the  property  subject  ^  Mercantile  Trust  Co.  v.  Portland  & 
to  the  mortgage  was  small,  and  the  cestuis  Ogdensburgh  R.  Co.  (1882),  10  Fed.  Piep. 
que  trust  were  themselves  before  the  604  ;  Massachusetts  Mut.  Life  Ins.  Co.  v. 
court.  Cliicago  &  A.  R.  Co.  (1882),  13  Fed.  Rep. 

1  Morton  v.  New  Orleans  &  Selma  R.  857. 
Co.  (1885),  79  Ala.  590.     The  court  con-  *  Stewart  v.  Chesapeake  &  Ohio  Canal 

sidered  that  the  Alabama  statute  authoriz-  Co.  (1880),  1  Fed.  Rep.  361.     The  court 

ing  amendments  at  any  time  before  final  said  :  "  The  absent  trustee  has  no  interest, 

decree,  by  "striking  out  or  adding  new  He  is  a  mere  trustee  for  the  purpose  of 

parties,"  was  not  to  be  construed  as  au-  doing  a  duty  upon  a  certain  contingency, 

thorizing,  in  every  case,  as  a  matter  of  He  holds  a  public  trust.     He  has  no  title 

right,  the  introduction  by  amendment  of  to  anything.     He  has  no  legal  estate   in 

new  parties  who  by  purchase  or  assign-  any  property.     His  claim  for  compensa- 

ment  pendente   lite  have  acquired  an   in-  tion,    even    in    the    event    of    his    being 

terest  in  the  svibject-matter  of  the  suit,  called  upon  to  exercise  the  trust  reposed 

The   rule   that   a   purchaser   of   proiierty  in  liim,  is  a  matter  not  fixed  by  law,  but 

pendente  lite  takes  it  subject  to  the  haz-  is   altogether   within  the  discretion  of  a 

ards  of  the  pending  suit  was  considered  to  court  of  equity." 

31 


482  RAILWAY   BONDS   AND    MORTGAGES.  [CHAP.  XXIV, 

interest  of  the  bondholders  as  a  body  is  deemed  to  involve 
the  conclusion  that,  under  ordinary  circumstances,  individual 
bondholders  will  not  be  permitted  to  take  part  in  litigation  by  or 
against  their  trustee  in  regard  to  the  trust  property.^ 

In  this  respect,  it  will  be  observed,  there  is  an  important  differ- 
ence between  the  position  of  a  trustee  representing  the  whole 
body  of  bondholders  and  of  a  representative  bondholder  acting 
for  his  co-bondholders.  In  the  latter  case  the  bondholders  not 
named  in  the  bill  may  come  in  as  a  matter  of  right,  since  the 
suit  is  instituted  expressly  for  the  benefit  of  such  as  do  come  in. 
(See  §  482,  ante.} 

The  incapacity  of  the  bondholders  to  act  independently  will, 
of  course,  be  more  strongly  inferred,  if  special  powers  are  con- 
ferred on  the  trustee  in  regard  to  litigation  for  the  enforcement 
of  the  security.  Thus  where  the  trustees,  and  not  the  bondholders, 
have  the  option  of  declaring  the  principal  due  upon  default  in  the 
interest,  a  bondholder  who  dissents  from  a  funding  scheme  sanc- 
tioned by  the  majority  on  the  ground  that  it  contemplates  a 
diversion  of  the  trust  funds,  cannot  come  into  a  court  of  equity 
and  ask  for  a  foreclosure,  without  a  demand  being  made  on  the 
trustees  in  any  form,  but  is  entitled  to  be  made  a  party  to  a  suit 
already  commenced  by  the  trustees  for  possession.  When  this  is 
done,  it  will  be  for  the  court  to  consider  what  his  equities  are, 
and  how  far  they  have  been  impaired,  if  at  all,  by  the  acts  of  the 
trustees.^ 

To  entitle  bondholders  to  intervene  in  a  trustee's  suit  for  the 
purpose  of  taking  an  active  part  in  the  proceedings,  it  must  be 
shown  that  the  trustee  has  exceeded  his  authority,  or  is  for  some 
reason  an  unfit  person  to  have  charge  of  their  interests.  Thus 
holders  of  a  majority  in  amount  of  the  bonds,  who  contend  that 
under  a  proper  construction  of  the  mortgage  there  can  be  no 
foreclosure  without  permission  of  a  majority,  should  be  permitted 
to  come  in  as  defendants  in  a  foreclosure  suit  instituted  by  the 
trustees  at  the  instance  of  the  minority  of  the  bondholders.-^ 

So  a  case  in  wliich  intervention  is  permissible  and  proper 
arises  wlien  it  appears  tliat  tlie  trustee  is  also  trustee  under 
another  mortgage  on  tlic  same  property,  for  which  ])riority  is 
claimed,  as  against  the  one  on  which  the  suit  is  being  brought;* 
or  that  his  interests  have  ceased  in  some  other  way  to  be  identical 

^  Siige  V.  Centnil  IJailroad  Co.  of  Iowa  "  Tolor  v.  East  Tcnnessei.',  Y;i.    &  Ga. 

(1870),  93  U.  S.  412.  Ily.  Co.  (1894),  07  Fed.  Rep.  168. 

2  Stern  V.    Wisc'07isin  Central    R.   Co.  *  Morcnntilc  Trust  Co.  v.  Lanioillo  V;il- 

(1879),  1  Fed.  Rep.  555  ;  8.  c.  8  Reji.  488.  ley  R.  Co.  (1S70),  16  Blatch.  324. 


§  490.] 


PARTIES   IN   SUITS,   ETC. 


483 


with  those  of  the  bondholders,^  as,  for  example,  that  the  proper 
amount  of  his  allowance  has  become  a  contested  question  in  the 
suit  ;2  or  that  the  trustee  has  done,  or  contcm}>lates  doing,  in  the 
proceedings  some  act  which  will  be  detrimental  to  the  interest  of 
such  bondholder  or  set  of  bondholders ;  ^  or  that  he  is  not  respon- 
sible, or  is  likely  to  prove  unfaithful  to  his  trust ;  *  or  is  negligent 
and  incompetent  in  the  discharge  of  his  duties.^ 


1  Skiddy  v.  Atlantic,  Miss.  &  Ohio  R. 
Co.  (1878),  3  Hughes,  320,  329  ;  s.  c.  22 
Fed.  Cas.  274,  Case  No.  12,922,  which 
holds  that  the  fact  of  the  bondholders 
being  divided  as  to  the  proper  course  to 
take,  and  the  trustees  acting  in  accordance 
with  the  wishes  of  one  of  these  factions, 
does  not  make  tlie  interest  of  the  trustees 
adverse  to  those  of  the  other  faction  in  such 
a  sense  as  to  entitle  the  latter  faction  to 
intervene  personally  in  the  suit.  The  court 
said  in  answer  to  the  point  thus  raised : 
"  There  is  but  one  class  of  bondholders 
under  this  mortgage.  The  interests  of  each 
bondholder  are  identical.  Some  of  the 
bondholders  have  moved  the  actions  of  the 
trustees,  and  others  have  not.  The  one 
are  active  bondholders  and  the  other  are 
inactive.  Some  of  them  are  represented 
by  one  committee  and  others  are  repre- 
sented by  another  ;  but  this  does  not  con- 
stitute a  class  of  bondholders.  Their 
interests  are  identical,  and  one  might  as 
well  say  that,  because  bondholders  under 
the  name  mortgage  were  represented  in 
court  by  different  counsel,  that  constituted 
them  a  different  class  of  bondholders,  and 
that  they  were,  because  represented  by 
different  persons,  entitled  to  be  parties  to 
this  suit." 

In  Phinizy  v.  Augusta  &  K.  R.  Co. 
(1894),  55  Fed.  Rep.  445,  it  was  argued, 
as  a  ground  for  allowing  the  intervention 
of  a  committee  of  bondholders  of  a  number 
of  boiuls  issued  by  several  of  the  companies 
composing  a  large  system,  that  the  interests 
represented  by  the  trustee  were  conflicting  ; 
but  the  court  replied  that,  if  those  interests 
were  so  conflicting  as  to  render  it  imju-oper 
for  the  trustees  to  act,  it  must  follow  that 
the  petitioners  themselves,  for  the  same 
reason,  would  also  be  incapacitated  to  act. 

2  Williams  V.  Morgan  (1884),  111  U.  S. 
684.  696. 

3  Skiddy  ?^  Atlantic,  Miss.  &  Ohio  R. 
Co.  (1879),  3  Hughes,  320,  351.      There 


the  court,  in  refusing  an  application  of 
bondholders  to  be  allowed  to  intervene, 
said  :  ' '  The  moment  a  petition  is  presented 
to  this  court  by  any  jiarty  interested  in  the 
conduct  or  result  of  the  suit,  which  alleges 
that  these  trustees  are  derelict,  incompe- 
tent, or  partial  in  any  action  they  propose 
to  the  court,  that  petition  shall  be,  a.s  it  is 
entitled  to  be,  respectfully  heard  ;  ami  if, 
after  consideration  of  the  proof,  it  shall  be 
ascertained  that  the  petitioner  is  correct, 
the  trustees  will  be  removed,  and  the  bond- 
holders allowed  to  conduct  the  suit  in  their 
own  waj',  without  the  intervention  of 
trustees  except  so  far  as  they  may  be  nom- 
inal parties  to  it." 

The  provision  thus  made  for  the  inter- 
ests of  the  dissatisfied  bondholders  was 
deemed  to  answer  all  the  purposes  of  the 
petition  whereby  they  were  seeking  to  be- 
come parties  to  suit,  except  that  the  bond- 
holders represented,  or  alleged  to  be 
represented,  by  the  signers  of  that  petition 
might  not  have  the  right  of  appeal  from 
any  decree  of  the  court  which  they  thought 
unfavorable  to  their  specific  and  personal 
interests,  unless  made  parties  to  the  record. 
In  regard  to  this  possible  objection  it  was 
observed:  "  Under  those  circumstances, 
when  they  arise,  we  think  any  bondholder 
who  feels  that  his  rights  are  injured  b}'  the 
action  of  the  trustees  or  of  the  court  has 
the  right  to  be  put  in  such  position  either 
as  plaintiff  or  defendant  as  will  enable  him 
to  have  them  adjudicated  by  an  appellate 
court."  It  was  considered  also  by  Judge 
Hughes  that  the  bondholders  who  did  not 
unite  in  directing  the  trustees  to  move  for 
foreclosure  might  of  mere  right  be  made 
parties  defendant  to  the  suit. 

*  Coe  r.  Columbus,  Piqua,  &  Indi.ir"- 
apolis  R.  Co.  (18.59).  10  Ohio  St.  372; 
Winslow  V.  Minnesota  &  Pacific  R.  Co. 
(1860),  4  Minn.  313. 

5  Richards  r.  Chesapeake  &  Ohio  R.  Co. 
(1875),  1  Hughes,  28. 


484  EAILWAY    BONDS    AND   MORTGAGES.  [CHAP.   XXIV. 

A  minority  of  the  bondholders  who  object  that  they  have  been 
unjustly  discriminated  against  by  the  trustee  in  regard  to  a 
reorganization  scheme,  and  that  he  has  awarded  the  receiver 
improper  compensation  and  extravagant  amounts  for  expenditure, 
should  be  allowed  to  become  parties  so  far  as  to  permit  an  exami- 
nation of  these  charges.^ 

So  also,  as  the  minority  bondholders  may  institute  proceedings 
for  the  removal  of  a  trustee  for  breach  of  trust,  the  trustee 
cannot  bring  an  action  in  the  same  court,  and  on  the  theory  that 
such  bondholders  are  improperly  resisting  a  scheme  of  reorganiza- 
tion to  which  a  large  majority  of  the  bondholders  have  assented, 
and  which  is  for  the  best  interest  of  all,  obtain  an  injunction 
perpetually  staying  the  action  for  such  removal.  That  the  trustee 
in  seeking  the  injunction  offers  to  perform  such  parts  of  his 
trust  as  he  is  charged  with  having  omitted  or  neglected  cannot 
affect  the  application  of  this  rule,  for  the  very  question  involved 
in  the  first  action  is  whether  he  shall  be  allowed  to  act  at  all  as 
trustee,  —  whether,  in  other  words,  he  has  not  forfeited  all  au- 
thority to  act  in  his  representative  character.^ 

§  491.  The  Proper  Way  for  a  Bondholder  to  raise  the  Question  of 
the  Trustee's  Unfitness  to  conduct  the  Suit  is  to  apply  to  be  admitted 
as  a  party  thereto  for  the  purpose  of  having  that  question  deter- 
mined. A  bill  filed  by  him  in  an  independent  suit,  in  which  he 
complains  that  the  trustee  has  in  various  ways  violated  his  trust, 
and  asks  for  a  foreclosure  of  the  mortgage,  will  be  dismissed, 
inasmuch  as  it  would  be  an  anomaly  to  have  pending  at  the  same 
time  in  the  same  court  two  suits  in  which  the  relief  asked  for  in 
regard  to  the  property  rights  of  the  bondholders  is  identical.^ 

This  rule,  however,  is  applicable  only  to  cases  in  which  the 
bondholder  files  his  suit  in  a  court  of  the  same  sovereignty.  The 
pendency  of  proceedings  for  foreclosure  in  a  State  court,  at  the 
instance  of  the  trustee,  is  no  bar  to  another  suit  in  a  federal 
court  by  one  of  the  bondholders  asking  both  for  the  foreclosure  of 
the  mortgage  and  the  removal  of  the  trustee.* 

1  DeBetz's    Petition    (1878),    9    Abb.  suit  in  which  the  trustees  are  the  actual 

N.  C.  (N.  Y.)  246.  plaintiiTs,  are  not  represented  by  him  to 

*  Farmers'  Loan  &  Trust  Co.  v.  Mc-  such  an  extent  that,  when  he  brinj;;s  suit, 
Henry  (1878),  9  Abb.  N.  C.  235.  they  become  parties  thereto,  whether  they 

8  Stern  v.   Wisconsin    Central    II.   Co.  will  or  not ;  accorriin<T  to  the  doctrine  of 

(1879),  1  Fed.  Rep.  fK,:,.  Stanton   v.   Emery,  93  U.  S.   .548,   which 

*  Mercantile  Trust  Co.  v.  I/amoille  lays  down  the  f^eneral  rule  that  the  pen- 
Valley  H.  Co.  (1879),  16  Blatch.  324.  In  dency  of  a  suit  ujjwrswam  in  a  State  court 
tliatcii.se  the  court  based  its  ruling,  par-  is  no  bar  to  a  similar  suit  between  the  same 
ti.illy  at  least,  uyion  the  ground  tliat  the  parties. 

l)i)iidlioldfi-s,   altliougli  r/uasi  parties  to   a 


'§§  492,  493.]  PARTIES   IN   SUITS,   ETC.  485 

Whether  the  cestui  que  trust  shall  be  allowed  to  intervene  in  a 
suit  in  which  he  is  already  represented  by  the  trustee  is  a  matter 
which  lies  in  the  discretion  of  the  trial  judge  ;  and  the  appellate 
court  will  not  interfere  with  the  exercise  of  that  discretion  unless 
it  is  abused.^ 

The  same  principle  holds  where  the  pending  trustee's  suit  is  in 
a  sister  State.^ 

§  492.  Proper  Time  to  intervene.^  —  The  general  rule  is  that 
the  bondholders,  being  quasi  parties  in  a  trustee's  suit,  may,  if 
adequate  cause  is  shown,  intervene  and  make  themselves  actual 
parties  as  long  as  the  proceedings  are  in  fieri,  and  not  definitely 
closed  by  the  course  and  practice  of  the  court.*  But  at  the  same 
time  it  is  necessary  that  bondholders  who  are  discontented  with 
the  conduct  of  the  trustees  must  act  with  due  diligence  in  assert- 
ing their  alleged  rights,  and  take  upon  themselves  the  resjtonsi- 
bility  for  the  consequences  of  the  litigation.  After  a  period  of 
sixteen  months  has  elapsed,  during  which  the  trustee  has  been 
recognized  as  the  representative  of  the  bondholders,  and  the  court 
is  about  to  close  the  case  finally,  a  bondholdei-  will  not  be  allowed 
to  appear  for  the  railroad  company  to  open  and  prolong  the  litiga- 
tion, to  the  apparent  injury  of  all  concerned,  without  an  offer  on 
his  part  to  assume  the  responsibility  for  what  might  result  from 
his  interference.^ 

§  493.  Bondholder  allo^ved  to  intervene  only  to  enforce  Rights 
accruing  under  the  Mortgage. —  A  bondholder  can  intervene  in  a 
foreclosure  suit  brought  by  a  trustee  only  to  procure  the  enforce- 
ment of  rights  which  he  possesses  by  virtue  of  the  provisions  of 
the  mortgage  itself.     Hence  the  personal  claim  of  a  bondholder 

^  Winslow  V.  Minnesota  &  Pacific  R.  trust  funds,  the  case  came  under  the  prin- 

Co.  (1860),  4  Minn.   313.      In   a  federal  ciple  that  a  bondholder  has  a  right  to  take 

court,  even  for  the  same  relief,  it  seems  to  independent  action  whenever  his  interests 

be   scarcely   necessary   to   rely   upon   the  become  antagonistic  to  those  of  the  trustee, 

special  reason  here  put  forward.     See  also  The  court  remarked  that  it  would  be  little 

the  following  note.  less  than  repulsive  to  one's  sense  of  justice 

2  HoUister  y.  Stewart  (1889),  111  N.  Y.  to  hold  that  the  trustee  represented  the 
644 ;  s.  c.  19  N.  E.  Rep.  782  ;  38  Am.  &  complaining  bondholder  in  a  suit  the 
Eng.  R.  R.  Cas.  599.  In  this  case  there  object  of  which  was  virtually  to  have  his 
was  said  to  be  a  still  stronger  objection  to  violation  of  the  trust  condoned, 
the  position  that  the  pendency  of  the  other  ^  See  above  as  to  the  time  during  which 
suit  debarred  the  bondholder  from  seeking  intervention  in  a  suit  brought  by  a  bond- 
relief  ;  viz.,  that  he  was  not  a  party  to  the  holder  is  allowed. 

proceedings  in  the  court  of  the  sister  State,  *  Campbell  v.   Railroad  Co.   (1871),  1 

and  had  a  full  right  to  pursue  his  remedy  Woods,  368. 

in  his  chosen  tribunal.     The  api)lication  *  Central   Trust    Co.    v.    Texas   &  St. 

of  the  plaintiff  being  based  upon  the  alle-  Louis  R.  Co.  (1885),  24  Fed.  Rep.  153. 
gation  that  the  trustee  had  misapplied  the 


486 


RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  XXIV. 


arising  out  of  an  outstanding  equity  against  the  company,  cannot 
be  adjusted  in  the  foreclosure  suit,  nor  his  demand  attaclied  to 
the  foot  of  the  mortgage,  for  the  purpose  of  enabling  him  to  reach 
the  unappropriated  balance  of  the  lien.^ 

§  494.  Intervention  by  Trustee  in  Bondholder's  Suit.  —  The  trus- 
tee's right  to  control  the  proceedings  is  not  lost  merely  because 
he  has  refused  at  first  to  bring  suit.  He  may  answer  a  bond- 
holder's bill  in  which  such  refusal  is  alleged,  and  ask  to  be  made 
complainant ;  and  unless  there  is  some  additional  reason  why  he 


1  Vose  V.  Bronson  (1S67),  6  Wall.  452. 
There  bonds  were  issued  to  a  material-man 
in  payment  for  railroad  iron,  the  transac- 
tion being  consummated  on  the  assump- 
tion that  they  were  worth  eighty  per  cent 
of  their  face  value.  To  guard  against  loss 
by  depi'eciation  of  the  securities  it  was 
agreed  that,  if  the  company  should  sell 
any  of  their  bonds  to  any  one  during  a 
certain  time  named,  at  a  less  rate  than 
eighty  per  cent  of  the  face  value,  the  ma- 
terial-man should  receive  so  many  addi- 
tional bonds  as  would  pay  for  the  iron  in 
full,  estimating  the  bonds  already  given, 
and  those  to  be  given,  at  the  lowest  rate  at 
which  any  bonds  had  been  sold.  The 
price  of  the  bonds  fell  to  forty  per  cent  of 
their  face  value,  and,  as  the  decree  had 
determined  the  actual  amount  due  on  the 
whole  issue  to  be  considerably  less  than 
the  amount  secured  by  the  mortgage,  the 
assignee  of  the  claim  of  the  material-man 
applied  to  be  allowed  to  have  the  benefit 
of  this  unappropriated  lien.  In  approving 
of  the  refusal  of  the  lower  court  to  grant 
this  application,  the  Supreme  Court  said  : 
"  To  do  this  there  must  be  a  power  some- 
where to  enlarge  the  mortgage,  and  where 
is  it  lodged  ?  Certainly  not  with  the 
trustees,  for  their  duty  is  to  see  that  the 
security  held  by  them  for  their  ceshii  que 
trusts  is  enforced  according  to  the  terms 
of  the  deed.  They  could  neither  enlarge 
the  mortgage  nor  consent  to  its  enlarge- 
ment. The  court  could  not  do  it,  nor  the 
La  Crosse  Company,  as  it  ha<l  covenanted 
with  the  trustees  in  behalf  of  the  bond- 
holders that  it  would  only  issue  four  mil- 
lions of  dollars  in  bonds.  The  rights  of 
the  bomlhoMers  were  fixed  by  the  terms 
of  the  mortgage.  The  value  of  the  bonds 
as    an    investment  depended    in    a    great 


measure  on  the  number  to  be  issued,  and 
doubtless  each  purchaser,  before  he  bought, 
had  information  of  the  character  of  the 
security  on  which  he  relied.  The  property 
might  be  very  well  a  safe  security  for  four 
millions  of  dollars,  and  very  unsafe  for  any 
additional  amount.  The  doctrine  con- 
tended for  would  utterly  destroy  the  mar- 
ketable value  of  all  corporate  securities. 
No  prudent  man  would  ever  buy  a  bond 
in  the  market  if  the  provisions  made  for 
its  ultimate  redemption  could  be  altered 
without  his  consent.  But  it  is  said,  as  the 
court  rendered  a  decree  for  less  than  the 
face  of  the  bonds,  equity  will  step  in  and 
allow  the  appellant  to  apply  the  vacuum 
of  principal  secured  by  the  mortgage  to 
liquidate  his  claim.  The  answer  to  this 
is,  that  it  does  not  concern  the  appellant 
whether  the  court  rightfully  or  otherwise 
reduced  a  portion  of  the  bonds.  The 
bondholders,  whose  bonds  were  thus  re- 
duced, are  the  only  parties  in  interest 
who  could  have  any  just  cause  of  com- 
plaint against  the  action  of  the  court ;  and 
if  they  did  not  feel  aggrieved,  no  other  per- 
son has  any  right  to  complain.  The  se- 
curity of  the  mortgage  extended  to  four 
millions  of  bonds  onlj',  and  whatever 
amount  the  court  should  ascertain  was  due 
on  those  four  millions  was  the  amount  se- 
cured and  no  more. 

"  If  Vose  had  been  made  a  party  defend- 
ant to  the  foreclosure  suit,  the  decree 
would  have  been  the  same.  But  he  was 
not  a  necessary  party  to  that  suit.  The 
trustees,  as  the  representatives  of  all  the 
bondholders,  acted  for  him  as  well  as  the 
others.  It  would  be  impracticable  to  make 
the  bondhol(hMS  yiarties  in  a  suit  to  foreclose 
a  railroad  mortgage,  and  there  is  no  rule 
in  equity  which  requires  it  to  be  done." 


§  495.] 


PARTIES   IN   SUITS,   ETC. 


487 


should  not  be  permitted  to  exercise  his  representative  functions, 
the  cause  will  be  prosecuted  thereafter  in  his  narae.^ 

The  result  of  their  being  thus  permitted  to  avail  themselves  of 
the  suit  already  begun  is  that  in  legal  effect  the  suit  becomes  their 
suit,'-^  and  thenceforth  thc}'  become  charged  with  its  conduct.^ 

§  495.  Action  of  Trustees,  to -wrhat  Extent  binding  on  Bondholders 
generally.  —  The  general  rule  is  well  settled  that,  in  the  absence 
of  fraud,  the  beneficiaries  in  railway  mortgages  are  bound  by 
whatever  is  done  by  their  trustees  in  suits  instituted  by  the  latter 
for  the  protection  of  the  interests  of  such  beneficiaries.* 

An  order  or  decree  in  proceedings  to  which  a  trustee  is  made  a 
party  as  defendant  is  equally  conclusive,  —  a  principle  most  fre- 
quently applied  where  it  is  sought  to  cut  off  the  lien  of  bondholders 
secured  by  a  junior  mortgage.^ 


1  Alexander  v.  Central  Railroad  of 
towa  (1874),  3  Dill.  487  ;  s.  c.  1  Fed. 
Cas.  363,  Cas.  No.  166  ;  Chesapeake  &  Ohio 
R.  Co.  (1877),  1  Hughes,  28. 

2  Pacific  Railroad  v.  Ketchum  (1879), 
101  U.  S.  289,  299. 

3  Richards  v.  Chesapeake  &  Ohio  R. 
Co.  (1876),  1  Hughes,  28.  In  this  case 
the  trustees  had  commenced  proceedings 
in  a  State  court,  and  were  admitted  as 
parties  in  a  suit  afterwards  begun  by  the 
bondholders  in  a  federal  court.  Having 
thus  obtained  control  of  the  suit,  the 
trustees  asked  that  the  bill  be  dismissed 
in  the  latter  court,  so  that  the  first  one 
might  proceed,  the  ground  assigned  for 
the  request  being  that  it  was  for  the  ad- 
vantage of  all  the  parties  in  interest  that 
prior  as  well  as  subsequent  incumbrancers 
should  be  made  parties  to  the  proceedings, 
in  order  to  realize  the  full  value  of  the 
premises ;  and  that  this  could  not  be  done 
in  the  federal  court  for  the  reason  that  a 
trustee  under  a  prior,  and  a  trustee  under 
a  subsequent,  mortgage  were  citizens  of 
the  same  State  as  the  petitioners.  The 
court  acceded  to  this  request,  and  refused 
to  permit  the  bondholders  who  objected 
to  the  dismissal  of  the  bill  to  file  a  new 
bill,  making  the  proper  parties,  and  re- 
lating back  to  the  time  of  filing  the  one 
dismissed.  It  was  declared  that,  as  the 
trustees  had  undertaken  to  foreclose  the 
mortgage,  no  bondholder  had  a  right  to 
proceed  in  his  own  name  for  the  same 
purpose. 

*  Young  V.  Montgomery,  etc.  R.  Co. 


(1875),  2  Woods,  606  ;  Credit  Co.  v.  Ar- 
kansas  Cent.  R.  Co.  (1882),  15  Fed. 
Rep.  46;  Richter  v.  Jerome  (1887),  123 
U.  S.  233 ;  Kerrison  v.  Stewart,  93  U.  S. 
155  ;  Shaw  v.  Railroad  Co.  (1879),  100 
U.  S.  605 ;  Corcoran  v.  Chesapeake  & 
Ohio  Canal  Co.  (1876),  94  U.  S.  741  ; 
First  National  Bank  of  Cleveland  v.  Shedd 
(1887),  121  U.  S.  74  ;  Beals  v.  111.,  Miss. 
&  Tex.  R.  Co.  (1890),  133  U.  S.  290  ; 
Campbell  v.  Railroad  Co.  (1871),  1  Woods, 
368  ;  Farmers'  Loan  &  Trust  Co.  v.  Kan- 
sas City,  W,  &  N.  W.  R.  Co.  (1892),  53 
Fed.  Rep.  182  ;  PoUitz  v.  Farmers'  Loan 
&  Trust  Co.  (1892),  53  Fed.  Rep.  210  ; 
Huntington  v.  Little  Rock  &  Fort  Suiilli 
Ry.  Co.  (1882),  16  Fed.  Rep.  906;  Fann- 
ers' Loan  &  Trust  Co.  v.  Central  Railroad 
of  Mont.  (1877),  4  Dill.  533  ;  Kent  v. 
Lake  Superior  Sliip  Canal,  Iron,  &  Coal 
Co.  (1892),  144  U.  S.  75. 

5  McElrath  v.  Pittsburgh  &  Steuben - 
ville  R.  Co.  (1871),  68  Pa.  St.  37  ,  s.  c. 
1  Am.  Ry.  Rep.  139  ;  First  National  Fire 
Ins.  Co.  V.  Salisbury  (1881),  130  Mass. 
303  ;  s.  c.  4  Am.  &  Eng.  R.  R.  Cas.  480; 
Board  of  Supervisors  v.  Mineral  Point  R. 
Co.  (1869),  24  Wis.  93  ;  Wallace  v.  Loo- 
mis  (1877),  97  U.  S.  146;  Union  Trust 
Co.  V.  Illinois  Midland  Ry.  Co.  (1886), 
117  U.  S.  434;  Cheever  v.  Rutland  & 
Burlington  R.  Co.  (1869),  4  Am.  Ry. 
Rep.  291  ;  Campbell  v.  Railroad  Co. 
(1871),  1  Woods,  368  ;  Union  Trust  Co. 
V.  Illinois  Midland  Ry.  Co.  (1886),  117 
U.  S.  434,  455  :  Beals  v.  111.,  Miss.  & 
Tex.  R.  Co.  (1886),  27  Fed.  Rep.  721. 


488 


RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  XXIV. 


As  regards  the  rights  of  the  bondholder  so  secured,  the  con- 
clusiveness of  a  decree  is  not  impaired  by  the  fact  that  the  trustee 
happens  to  be  also  the  trustee  of  the  first  mortgage,  and  was  made 
defendant  in  that  capacity  in  a  suit  brought  by  coupon-holders  for 
the  foreclosure  of  the  mortgage.^ 

Even  if  the  trustee  has  been  guilty  of  fraud,  a  decree  annulling 
the  bonds  cannot  be  set  aside  after  the  railroad  property  has 
passed  by  virtue  of  the  judicial  sale  into  the  bands  of  a  purchaser 
without  notice  of  the  fraud.^ 

The  decree  of  a  federal  court  in  one  district  in  a  suit  in  which 
the  trustees  represent  the  bondholders  will  be  a  bar  to  an  action 
by  one  of  a  minority  to  whom  the  trustee's  course  was  not  accept- 
able, instituted  in  another  district  for  the  purpose  of  having  his 
bonds  collected  according  to  the  terms  of  the  mortgage,  provided 
the  interests  of  the  minority  have  been  duly  protected  by  the  first 
court,  and  no  fraud  on  the  part  of  the  trustee  is  shown.^ 


1  Corcoran  v.  Chesapeake  &  Ohio  Canal 
Co.  (1876),  94  U.  S.  741  ;  affirming  s.  c. 
Macarthur,  358  (1874).  In  this  case  the 
bondholders,  after  the  rendition  of  a  de- 
cree in  the  State  court  in  the  suit  of  the 
coupon-holders,  instituted  proceedings  in 
the  federal  court,  contending  that,  as  be- 
tween the  mortgagor,  the  State,  and  the 
tru.stees,  who  had  all  been  made  defend- 
ants, no  issue  was  raised  by  the  plead- 
ings, and  no  adversary  proceedings  were 
had.  In  answer  to  this  argument  the 
court  said :  "  In  chancery  suits,  where 
parties  are  often  made  defendants  because 
they  will  not  join  as  plaintiffs,  who  are 
yet  necessary  parties,  it  has  long  been 
settled  that  adverse  interests,  as  between 
co-defendants,  may  be  passed  upon  and 
decided  ;  and  if  the  parties  have  had  a 
hearing  and  an  opportunity  of  asserting 
their  rights,  they  are  concluded  by  the  de- 
cree, as  far  as  it  affects  rights  presented  to 
the  court  and  passed  upon  by  its  decree." 
"  The  very  object  of  that  suit  in  the  State 
court  was  to  determine  the  order  of  dis- 
tribution of  the  revenues  of  the  mortgagor 
canal  coin])any,  and  these  trustees  were 
made  defendants  for  no  other  purpose  than 
that  they  might  be  bound  l)y  that  decree." 
The  complainant  also  contended  that  he 
was  only  a  y>arty  in  his  representative  ca- 
pacity of  trustee,  and,  as  he  was  now  su- 
ing in  his  individual  capacity,  w.as  not 
boun<l  by  the  decree.     The  court  disposed 


of  this  theory  as  follows  :  "  But  why  is 
he  not  bound  I  It  was  his  duty  as  trustee 
to  represent  and  protect  the  holders  of 
these  bonds  ;  and  for  that  reason  he  was 
made  a  party,  and  he  faithfully  discharged 
that  duty.  It  would  be  a  new  and  very 
dangerous  doctrine  in  the  equity  [iractice 
to  hold  that  the  cestui  que  trust  is  not 
bound  by  the  decree  against  his  trustee  in 
the  very  matter  of  the  trust  for  which  he 
was  appointed.  If  this  complainant  owned 
any  of  those  bonds  and  coupons,  then  he 
is  bound  because  he  was  representing  him- 
self. If  he  had  bought  them  since,  he  is 
bound  as  privy  to  the  person  who  was 
represented." 

In  Sahlgaard  v.  Kennedy  (1882),  13 
Fed.  Rep.  242,  the  court  did  not  decide, 
but  intimated,  that  complainant,  a  bond- 
holder, who  had  asked  and  was  allowed 
to  intervene  in  a  State  court,  and  resist 
the  confinnation  of  a  sale  of  the  railroad 
property  by  the  trustee  under  foreclosure, 
on  alleged  charges  of  unfaithfulness  to  the 
tiiist  on  the  part  of  the  trustee,  would  l>e 
estopped  thereby  as  to  asking  the  Tlnited 
States  court  on  such  grounds  to  .set  aside 
the  decree  of  sale  of  the  State  court. 

2  Reals  V.  111.,  Miss.  &  Tex.  R.  Co. 
(18Sfi),  27  Fed.  Rep.  721  ;  on  appeal 
(1890),  1S3  U.  S.  290. 

3  I\)]litz  V.  Farmers*  Loan  &  Trust  Co. 
(1893),  53  Fed.  Rep.  210. 


§§  496,  497.]  PARTIES   IN   SUITS,   ETC.  489 

§  496.  The  Binding  Effect  of  the  Trustee's  Acts  extends  to  Acts  of 
Discretionary  Character.  —  'J'his  occurs  where  he  decides  that  it  is  for 
the  interests  of  the  bondholders  to  begin  suit,  —  especially  if  in 
doing  so  he  is  backed  by  the  opinion  of  the  majority  of  the  bondhold- 
ers ;^  or  releases  errors  in  the  foreclosure  proceedings  and  decree, 
and  waives  the  right  of  appeal  ;2  or  by  appearing  in  a  suit  in  which 
he  is  made  defendant,  has  waived  defects  in  the  service  of  process ;  ^ 
or  has  decided  that  the  interests  of  the  bondholders  will  be  best 
subserved  by  not  having  a  sale  until  an  appeal  from  the  decree 
has  been  determined ;  ^  or  it  is  agreed  between  the  trustees  of  sev- 
eral mortgages  that  it  will  be  for  the  best  interests  of  the  bond- 
holders represented  by  them  that  the  property  shall  be  sold  as  an 
entirety.^  So  also,  if  the  terms  of  the  mortgage  put  no  restraint 
upon  the  amount  which  the  trustee  may  bid  at  the  foreclosure 
sale  in  the  exercise  of  the  power  conferred  upon  him  of  buying  in 
the  property  for  the  bondholders,  an  order  issued  in  the  course  of 
the  proceedings  with  the  consent  of  an  intervening  bondholder, 
whereby  the  trustee  is  directed  to  bid  "up  to"  a  certain  sum,  will 
not,  as  against  that  bondholder,  be  construed  as  limiting  the  dis- 
cretion which  the  mortgage  allows  him  in  regard  to  the  price 
which  he  may  offer.^ 

So  bondholders  under  a  second  mortgage  cannot  maintain  a 
bill  to  set  aside  a  sale  of  the  property  under  foreclosure  of  the 
first  mortgage,  and  annul  a  plan  of  reorganization  of  the  first- 
mortgage  bondholders,  where  they  charge  no  collusion  by  or  un- 
faithfulness of  the  trustee  under  the  two  mortgages  in  making  the 
sale  under  the  first  mortgaged 

§  497.  In  -what  Matters  Trustee  cannot  bind  Bondholders.  — 
The  bondholders  are  not  represented  by  the  trustee  in  an 
application  for  leave  to  invest  the  trust  fund  in  a  way  not  au- 
thorized by  the  trust,  deed,  at  least  to  such  an  extent  that  they 
would  be  bound  by  a  judgment  changing  the  investment  without 
being  actual  parties  to  the  proceedings,  and  having  an  opportunity 


1  Sliaw   V.    Railroad   Co.    (1879),    100  cal  points  must  still  more  clearly  be  con- 
U.  S.  605,  612.  elusive  upon  tliem. 

2  Elwell  V.  Fosdick  (1890),  134  U.  S.  *  Farmers' Loan  &  Trust  Co.  v.  Central 
500  ;   s.  0.  43  Am.  &    Eng.   R.   R.   Cas.  Railroad  Co.  of  Iowa  (1877),  4  Dill.  533. 
450.  6  First  National  Bank  of  Cleveland  v. 

8  Cheever  v.  Rutland  &  Burlington  R.  Shedd  (1887),  121  U.  S.  74. 
Co.  (1869),   4  Am.    Ry.    Rep.   291.     The  ^  James  v.    Cowing  (1880),   82  N.  Y. 

court  remarked  that,  if  the  trustee  suffi-  449  ;    s.  c.  2   Am.  &   Eng.    R.    R.    Cas, 

ciently  represents  the  bondholders  to  make  336. 

his   defence   upon    the   merits   conclusive  "^  Robinson  v.  Iron  Railway  Co.  (1890), 

upon  them,  his  defence  upon  mere  techni-  135  U.  S.  522. 


490  RAILWAY   BONDS   AND    MORTGAGES.  [CHAP.  XXIV. 

to  contest  the  propriety  of  granting  the  relief  asked  for  by  the 
trustee.^ 

Nor  are  the  bondholders  obligated  by  the  result  of  a  suit 
brought  to  adjudge  mortgage  void,  in  which  the  trustee  alone  is 
served  with  process.  There  is  nothing  in  the  relation  of  the 
trustees  and  the  bondholders  which  makes  the  former  general 
agents  or  attorneys  of  the  latter  as  to  all  matters  affecting  tlie 
bonds.  The  right  to  defend  the  validity  of  the  bonds  is  per- 
sonal to  the  owners  of  the  bonds,  and  whenever  that  right  is 
assailed  they  are  entitled  to  protect  their  interests  in  their  own 
persons  and  by  their  own  counsel.  ^ 

§  498.  Action  of  Trustee  inures  to  Benefit  of  the  Bondholders.  — 
The  bondholders  receive  the  advantages  as  well  as  the  disadvan- 
tages of  the  principle  that  the  trustee  is  their  representative. 
Hence  the  commencement  of  a  suit  by  him  will  have  the  effect  of 
stopping  the  running  of  the  Statute  of  Limitations.^ 

§  499.  Remedies  of  Dissatisfied  Bondholders  after  Rendition  of  the 
Decree.  —  The  propriety  of  a  trustee's  action  cannot  be  tested  by  a 
bill  of  review.  The  complaining  bondholders  must  bring  an  action 
directly  against  the  trustee.*  Nor  can  the  bondholder  commence 
an  independent  and  original  suit  to  foreclose  as  long  as  the  decree 
remains  in  force.^  His  proper  remedy,  where  the  decree  or  the 
sale  thereunder  is  in  fraud  of  his  rights,  is  by  a  direct  proceed- 
ing to  set  aside  the  sale  or  the  decree.^ 

Such  a  proceeding  may  take  the  form  of  an  application  to  be 
allowed  to  intervene  and  become  actual  parties  to  the  former  suit, 
the  court  being  then  asked  for  such  relief  as  it  is  competent  for 
parties  to  make  in  the  same  suit ;  or  the  bondholder  may  effect 
his  purpose  by  instituting  such  other  auxiliary,  reversionary,  or 
supplemental  proceedings  as  a  party  to  the  suit  may  institute.'' 
The  bondholder  who  seeks  for  this  relief  must  use  due  diligence. 
He  will  not  be  allowed  to  become  a  party  to  the  original  suit  for 
the  purpose  of  impeaching  the   decree,  when  he  has  remained 


1  Clark  V.  St.   Louis,  Alton,   &  Terre  *  Shaw  v.   Railroad   Co.    (187P),    100 
Haute   K.  Co.   (1879),  58  How.    Pr.    21  ;  U.  S.  605,  612. 

Fidelity  Ins.  Trust  &  Safe  Deposit  Ins.  Co.  5  i^i^hter  v.  Jerome  (1887).  12.'?  TJ.  S. 

V.  United   New  Jersey  Railroad  &  Canal  233.  247  ;  Campbell  ij.  Railroad  Co.  (1871), 

Co.    (1883),   36  N.   J.    Eq.   405  ;  .s.  C.   12  1  Woods.  368. 
Am.  &  Eur.  II.  R.  Cas.  404.  «  Ric.hter  v.  Jerome  (1887),  123  U.  S. 

2  Ajipeal    of   Harrisburg   R.    Co.    (Pa.  233,  247. 

St.,  Oct.,   1888),  36  Am.  &  Eng.  R.  R.  ^  Campbell  v.  Railroad  Co.  (1871),   1 

Cas.  219.  Woods,  368. 

»  In  re  Ciiick.-ring  (1883),  56  Vt.  82  ; 
8.  c.  20  Am.  &  Kiij;.  R.  R.  Cas.  646. 


§  499.]  PARTIES   IN   SUITS,   ETC.  491 

inactive  during  five  years  of  litigation,  and  not  only  has  the  sale 
been  confirmed,  but  the  purchasers  have  been  reorganized  as  a 
new'  corporation,  and,  as  such  corporation,  have  issued  bonds  to 
bona  fide  holders.^ 


1  Wetmore  v.  St.  Paul  &  Pac.  R.  Co. 
(1880),  3  Fed.  Rep.  177,  179.  The  court 
said  there  was  no  principle  or  precedent 
which  would  warrant  granting  a  request 
which  was  tantamount  to  asking  that  the 
petitioners  should  be  made  parties,  and 
then  treated  in  the  double  aspect  of  per- 
sons who  were  parties  to  the  suit,  and  had 
all  the  rights  of  parties  from  the  beginning, 
and  also  in  the  aspect  of  persons  who 
were  not  parties  to  the  suit,  and  whose 
rights  had  not  been  foreclosed. 

Besides  those  cases  already  cited  upon 
the  question  of  parties,  see  the  following 
instructive  cases :  Craft  v.  Indianapolis, 
D.  &  W.  R.  Ry.  Co.  (1897),  46  N.  E.  Re}.. 
1132  ;  In  re  The  Continental  Oxygen  Co., 
Limited  (1897),  76  L.  T.  R.  N.  S.  229; 
Roberts  v.  Denver,  L.  &  G.  R.  Co.  (1896), 
46  Pac.  Rep.  880. 


Also,  upon  the  subject  of  the  right  of 
intervention,  see  an  article  entitled  "  Inter- 
ventions in  the  Federal  Courts,"  in  31  Am. 
Law  Review,  at  page  377 ;  Wiltsie  on 
Mortgage  Foreclosure  ;  and  the  following 
cases  :  Hymau  v.  Cameron,  46  Miss.  726  ; 
Lacroix  v.  Menard,  15  Am.  Dec.  161; 
Brown  v.  Saul,  16  Am.  Dec.  177  ;  Gould 
V.  Mortimer,  16  Abb.  Pr.  448;  Schenck  v. 
Ingraham,  5  Hun,  397  ;  People  v.  Albany 
&  Vermont  Ry.  Co.,  77  N.  Y.  232  ;  Doe  v. 
Childress,  21  Wall.  642  ;  Horn  v.  Volcano 
Water  Co.,  13  Cal.  62;  Speyer  v.  Ihmels, 
21  Cal.  280  ;  Gradwohl  v.  Harris,  29  Cal. 
154  ;  Farmers'  Loan  &  Trust  Co.  v.  Central 
Ry.  Co.,  17  Fed.  Rep.  758  ;  Farmers'  Loan 
&  Trust  Co.  V.  Miss.,  I.  &  N.  Ry.  Co.,  21 
Fed.  Rep.  264 ;  French  v.  Gapen,  105 
U.  S.  509  ;  Williams  v.  Morgan,  111  U.  S. 
685,  698,  699. 


492 


RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  XXV. 


CHAPTER  XXV. 


CONTROL   AND    DISPOSITION     OF    THE    MORTGAGED    PROPERTY   WHILE 
THE    COMPANY   IS    IN   POSSESSION. 


Art.  I.  —  Control  of  the  Corpus  of  the 
Property. 
§  500.    Control  usually  left  by  Mortgage 
to  the  Piailway  Company. 

501.  Power   to  mortgage  Property  al- 

ready   charged     by     Way     of 
"  Floating  Security." 

502.  Liability  of  the  Mortgaged  Prop- 

erty to  be  levied  on. 

503.  Power  of  Judgment  Creditor  to 

sell  the  Mortgagor's  Equity  of 
Redemption. 
Art.  II.  —  Control  and  Disposition  of 
THE  Income. 

504.  Company    generally   entitled    to 

dispose   of    Income,    even    if 
pledged. 

505.  Same  Rule  as  against  Holders  of 

Income  Bonds. 


§  506.   Specific    Appropriations    of    the 
Income. 

507.  Stockholder's  Right  to  a  Dividend 

when  complete  or  agaiust  the 
Mortgagor. 

508.  Attachment     of     Income     while 

Mortgagor  is  in  Possession. 

509.  AVhen  the  Mortgagee's  Right  to 

the  Income  becomes  absolute 
in  Suits  for  Possession. 

510.  When  the  Mortgagee's  Right  to 

the  Income  becomes  absolute  in 
Suits  for  Foreclosure. 

511.  Effect  of  the  Divestiture  of  the 

Company's  Control  by  the  Suit 
of  a  Party  other  than  the  one 
claiming  the  Earnings. 


Article  I.  —  Control  of  the  Corpus  of  the  Property. 

§  500.  Control  usually  left  to  Mortgagor  by  Terms  of  Mortgage. — 
The  management  and  control  of  the  property  subject  to  an  ordi- 
nary trust  mortgage  is  by  the  terms  of  the  instrument  usually  left 
in  tlie  grantor  until  condition  broken.  Where  this  is  the  case  the 
company,  and  not  the  trustee,  is  the  proper  plaintiff  in  an  action 
to  enforce  rights  in  regard  to  land  embraced  by  the  mortgage.^ 


1  Southern  Pacific  R.  Co.  v.  Doyle 
(1882),  11  Fed.  Rep.  253.  This  case  was 
decided  with  reference  to  the  California 
Cod*;,  which,  it  was  contended,  changed 
the  rule  that  the  mortgagee  is,  until  posses- 
sion taki-n,  oidy  the  owner  in  a  very  lim- 
ited scns<!.  The  court,  however,  said  that, 
altliough  a  trust  is  necessarily  raised,  where 
a  power  of  sale  is  conferred  on  any  person 


other  than  the  parties  secured,  it  does  not 
necessarily  follow  that  the  trustee  lias  a 
right  of  possession,  at  least  until  condition 
broken.  Even  if  the  instrument  in  ques- 
tion were  strictly  a  trust  deed  ratlier  tlian 
a  mortgage,  the  result  would  be  the  same  ; 
for  no  right  was  conveyed  by  it  to  the 
possession,  etc.  of  the  land  until  after 
default  and  a  demand  by  the  bondholders. 


§§  501,  502.]       DISPOSITION    OF    MOUTUAGED    PROPERTY.  493 

Where,  in  addition  to  the  ordinary  provision  by  which  the  un- 
disturbed possession  of  the  premises  conveyed  is  reserved  to  the 
mortgagor,  it  is  also  stipulated  that  nothing  in  tlic  deed  "  shall  be 
construed  so  as  to  prevent  the  corporation  from  improving  the 
real  estate  or  making  leases  of  such  parts  thereof  as  they  may 
desire  and  have  an  opportunity  to  make,  any  lease  made  by  the 
mortgagor  will  remain  valid  as  long  as  the  condition  of  the  mort- 
gage is  performed  by  the  payment  of  interest,  but  will  cease  to 
have  any  validity  against  the  mortgage  after  condition  broken, 
while  a  lease  not  made  till  after  condition  broken  is  altogether 
unauthorized. 1 

§  501.  Right  to  mortgage  Property  already  charged  by  "Way  of 
"  Floating  Security."  —  Debenture-holders  for  whose  protection  tlie 
whole  property  of  a  company,  both  present  and  future,  is  charged 
"  by  way  of  floating  security,"  the  company  having  the  right  to 
deal  with  the  property  until  after  the  continuance  of  a  default  of 
the  interest  for  three  mouths,  will  be  postponed  to  bondholders, 
secured  by  a  mortgage  executed  while  the  company  is  still  in  con- 
trol of  the  property,  although  there  has  been  a  three  montlis' 
default  in  the  interest.  Even  after  the  expiration  of  that  period 
the  security  of  the  debenture-holders  remains  a  floating  security 
merely,  until  they  take  some  steps  to  enforce  it  and  stop  the  com- 
pany from  carrying  on  its  business.  Otherwise  the  consequence 
would  follow,  that  the  debenture-holders  could,  if  they  chose,  allow 
the  company  to  go  on  after  the  three  months,  allow  debts  to  be 
contracted,  and  then  say  that  none  of  them  shall  be  paid,  although 
the  company  is  still  carrying  on  its  business.^ 

§  502.  Liability  of  the  Mortgaged  Property  to  be  levied  on.  — 
The  extent  of  the  protection  afforded  to  the  mortgagee's  interest 
by  the  mortgage  clearly  depends  upon  the  scope  of  the  lien,  and 
upon  the  validity  of  the  transaction  by  which  it  is  created,  and 
must  therefore  be  determined  by  an  examination  of  the  cases  re- 
viewed in  another  part  of  this  treatise.  (See  Chapter  Vll.,  etc.) 
The  existence  of  the  mortgage  lien  necessarily  involves  the  conse- 
quence that  the  rights  of  the  bondholders  should  not  be  allowed 
to  suffer  any  prejudice  from  legal  proceedings  to  enforce  later 
claims.  But  the  authorities  are  scarcely  in  harmony  as  to  the 
proper  method  for  rendering  this  protection  practically  effective.^ 

The  fact  that  the  mortgagor  is  a  corporation  does  not  in  any 
way  limit  the  right  of  a  judgment  creditor  to  subject  the  mort- 

1  Haven  v.  Adams  (1862),  4  Allen,  v.  Manila  R.  Co.  L.  Pv.  (1895),  2  Cli. 
80.  551. 

2  Governments  Stock  Invest.,  etc.  Co.  ^  gee  Chap,  XX.  (preventive  remedies) 


494  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  XXV. 

gaged  property  to  the  payment  of  his  claim,  for  property  which  a 
debtor  has  a  right  to  dispose  of  by  a  voluntary  alienation  must 
necessarily  be  liable  to  involuntary  alienation,^ 

Questions  arising  under  this  head  must  be  carefully  distin- 
guislied  from  those  in  which  the  corporate  property  is  deemed 
to  be  protected  by  the  fact  of  its  being  essential  to  the  exercise 
of  the  franchises,  and  not  by  the  fact  of  its  being  mortgaged.  As 
railroad  mortgages  ordinarily  run,  all  the  property  entitled  to  pro- 
tection for  the  former  reason  is  also  entitled  to  protection  for  the 
latter  reason.  The  distinction  is  important  in  so  far  that,  where 
the  former  reason  is  relied  upon,  the  question  of  immunity  from 
levy  can  be,  and  in  most  if  not  all  of  the  cases  has  been,  raised 
by  the  company  itself,  while  the  extent  of  the  protective  power  of 
the  mortgage  concerns  only  the  mortgagee  and  the  levying  creditor. 
A  discussion  of  the  first  class  of  cases  does  not  fall  within  the 
legitimate  scope  of  a  treatise  dealing  with  the  rights  and  liabili- 
ties arising  out  of  the  mortgage  contract  itself. 

§  503.  Po-wrer  of  the  Judgment  Creditor  to  sell  the  Mortgagor's 
Equity  of  Redemption. —  Whatever  may  be  the  extent  and  character 
of  the  protection  afforded  by  the  mortgage  as  regards  the  property 
itself,  it  is  clear  that  a  judgment  creditor  may  always  reach  the 
mortgagor's  equity  of  redemption,  either  by  proceedings  of  an 
equitable  'nature,  or  hy  execution  where  that  is  permitted  by  the 
practice  of  the  court.^ 

A  railroad  company  cannot  defeat  this  right  of  a  creditor  by 
executing  a  deed  of  trust  with  a  long  time  to  run.  To  hold  this 
would  amount  to  "  a  recognition  of  a  right  in  the  company  to 
secure  itself  in  the  possession  and  enjoyment  of  its  property,  and 
compel  all  who  become  its  creditors  to  resort  to  the  means  pro- 
vided by  that  instrument  for  their  payment,  and  not  to  those 
given  by  the  law  to  all  who  choose  to  invoke  its  aid  against  a 
defaulting  debtor."  ^ 

1  Ludlow  D.  OlintonLineR.  Co.  (1861),  long  period  of  time,  however  desirable  it 
1  Flip.  25;  s.  c.  15  Fed.  Cas.  1099,  Case  may  be  to  have  the  arrangement  carried 
No.  8600.  out,    may   be   disappointed    owing   to   ati 

2  See  Freeman  on  Executions,  §§  117,  imperfection  incident  to  such  an  arrange- 
382.  ment,  —  an  im])erfection  resulting  from  tlie 

*  Vicksbnrg  &  Meridian  R.  Co.  v.  Mc-  policy  of  the  law,  —  that  yiarties  cannot  bo 

Cutchen  (1876),  52  Miss.  645.     This  case  permitted  to  retain  indefinitely  tlie  use  and 

was  d(!eided  more  esjiecially  in  reference  to  enjoyment  of  property  by  simply  giving  a 

the  Mississippi  Code  ;  but  the  reasoniiig  of  security  upon  it  for  the  payment  of  their 

the  court  is  quite  general,   the  following  debt.      The  property  must  be  subject  in 

language  of   the   Ohio   court  being  cited  .';ome  form  to  the  first  claims  of  the  party 

wiMi  approval  :    "  Those  wlio  take  ji  mort-  snlisc(jti('ntly   arising,    and    this  will    fie- 

gage  upon  property  to  secure  a  loan  for  a  qucntly  and  necessarily  lead  to  an  inter- 


§  504.]  DISPOSITION   OP   MORTGAGED    PROPERTY.  495 

This  Mississippi  statute  referred  to  in  the  note  indicates  what 
is  uudoubtudly  the  proper  procedure  for  the  practitioner,  whctlier 
the  legislature  has  expressly  prescribed  it  or  not,  fur  the  cases 
cited  in  chapter  on  preventive  remedies  show  tliat  the  litigation 
will  always  be  drawn  into  a  court  of  equity  by  the  bondholders  if 
their  interests,  as  is  usually  the  case,  are  endangered  by  the  levy. 
To  resort  to  a  court  of  law  under  such  circumstances  is  simply  to 
run  the  risk  of  incurring  useless  expense. 

Besides,  it  is  manifest  that,  for  the  same  reasons  which  have  led 
courts  of  equity  to  assume  jurisdiction  of  trustees'  suits  for  posses- 
sion (see  the  chapter  on  that  subject),  those  courts  offer  the  only 
suitable  forum  for  the  adjustment  of  the  manifold  rights  which 
will  be  affected  by  an  execution  sale  of  the  residuum  of  the  mort- 
gagor's interest;  and  even  if  the  bondholders  should  not  think  fit 
to  interfere,  a  much  more  satisfactory  settlement  can  be  obtained 
by  applying  for  equitable  relief  in  the  first  instance. 

Article  II.  —  Control  and  Disposition  of  the  Income. 

§  504.  Company  entitled  to  dispose  of  the  Income  -while  it  is  in 
Possession,  even  though  such  Income  is  expressly  pledged.  —  The 
riglits  of  the  mortgagee  in  regard  to  the  avails  of  the  mortgaged 
property  stand  upon  a  different  footing  from  his  rights  in  regard 
to  the  property  itself.  So  long  as  the  mortgagor  is  allowed  to 
remain  in  possession  he  is  entitled  to  receive  and  apply  to  his  own 
use  the  income  and  profits  of  the  mortgaged  estate. 

If,  therefore,  a  mortgagor  corporation  has  leased  a  portion  of 
the  property,  it  can  contract  as  it  chooses  in  regard  to  the  rents 
with  an  assignee  of  the  lease. ^ 

It  has  been  strenuously  contended  in  several  instances  that  the 
insertion  in  the  mortgage  of  a  provision  by  which  the  income  of  the 
property  is  specifically  pledged  supersedes  the  common-law  rule. 
But  this  theory  has  been  discredited  in  almost  every  court  in 
which  it  has  been  presented,  and  it  is  now  well  established  that, 
if  the  mortgagor  company  is  given,  either  expressly  or  by  im|)li- 
cation,  the  right  to  remain  in  possession  of  the  estate  until  a 

ruption    and    disappointment   in   a   prior  the  Chancery  Court  shouki  have  exchisive 

arrangement  as  to  the  time  within  which  jniisdiction  in  all  cases  when  that  eqnity 

it  is  to  be  performed."     Coe  v.  Cohimbus,  is  sought  to  be  sold. 

Pi(iua,  &  Indianapolis  R.   Co.   (1859),  10  i  Frank   v.  New   York,    Lake  Erie,  & 

Ohio  St.  372,  401.  AVestern  R.  Co.   (1891),  122  N.   Y.   197  ; 

The  equity  of  redemption  was  made  by  s.  c.  25  N.  E.  Rep.  335  ;   46  Am.  &  Eng. 

the  Mississippi  Code  subject  to  execution  E.  K.  Cas.  356. 
(§  2295);  but  a  later  statute  provided  that 


496 


RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  XXV. 


default  occurs,  it  is  entitled  to  control  the  use  of  the  earnings,  as 
long  as  the  mortgagees  allow  its  possession  to  continue.  In  a 
case  where  a  mortgage  of  this  description  was  under  review  the 
Supreme  Court  of  the  United  States  said  :  "  It  is  clearly  implied 
in  these  mortgages  that  the  railroad  company  should  hold  pos- 
session and  receive  the  earnings  until  the  trustees  should  take 
possession  or  the  proper  judicial  authority  should  interpose.  Pos- 
session draws  after  it  the  right  to  receive  and  apply  the  income. 
Without  this  the  road  cannot  be  operated,  and  no  profit  could  be 
made.  Mere  possession  would  be  useless  to  all  concerned.  The 
right  to  apply  enough  of  the  income  to  operate  the  road  will  not 
be  questioned.  The  amount  to  be  so  applied  was  within  the  dis- 
cretion of  the  company.  The  same  discretion  extended  to  the 
surplus.  It  was  for  the  company  to  decide  what  should  be  done 
with  it.  In  this  condition  of  things  the  whole  fund  belonged  to 
the  company ;  it  was  subject  to  its  control.  It  was,  therefore, 
liable  to  the  creditors  of  the  company,  as  if  the  mortgages  did  not 
exist.  If  the  mortgagees  were  not  satisfied,  they  had  the  remedy 
in  their  own  hands,  and  could  at  any  moment  invoke  the  aid  of 
the  law,  or  interpose  themselves  without  it."  ^ 


1  Oilman  v.  Illinois  &  Miss.  Tel.  Co. 
(1875),  91  U.  S.  603;  s.  p.  Galveston 
Railroad  v.  Cowdrey  (1870),  11  Wall.  459  ; 
American  Bridge  Co.  v.  Heidelbach  (1876), 
94  U.  S.  798  ;  United  States  Trust  Co.  v. 
Wabash  &  Western  R.  Co.  (1893),  150 
U.  S.  287  ;  Kountze  v.  Omaha  Hotel  Co. 
(1882),  107  U.  S.  378  ;  Teal  v.  Walker 
(1884),  111  U.  S.  241  ;  Central  Trust  Co. 
V.  Wabash,  St.  Louis,  &  Pac.  R.  Co.  (1887), 
30  Fed.  Rep.  332  ;  Fosdick  v.  Schall 
(1879),  99  U.  S.  235  ;  Mercantile  Trust 
Co.  V.  Missouri,  K.  &  T.  R.  Co.  (1888), 
36  Fed.  Rep.  221.  See  also  Oibert  v. 
WashiufTton  City,  Va.  Midi.  &  Ort.  South- 
ern R.  Co.  (1880),  33  0ratt.  645  ;  Newport 
&  Cincinnati  Bridge  Co.  v.  Douglass 
(1877),  12  Bush  (Ky.),  673;  s.  c.  18 
Am.  Ry.  Rep.  233.  The  rule  as  to  other 
corporations  is  the  same.  Freed  man's 
Savings  &  Trust  Co.  v.  Shepherd  (1888), 
'  127  U.  S.  494.  In  view  of  these  rulings 
the  statement  of  the  court  in  Douglass  v. 
Cline  (1877).  12  Bush  (Ky.),  608,  that  a 
mortgagee  who  has  no  specilic  pledge  of 
the  jinifits  of  the  mortgaged  premises  can- 
not cl;iim  them  as  a  l(;gai  incident  or  a  legal 
right  growing  out  of  his  mortgage,  seems 


to  be  unduly  cautious,  even  to  the  extent 
of  implying  an  erroneous  doctrine. 

The  decisions  in  two  Iowa  cases — Jessup 
V.  Bridge  (1861),  11  Iowa,  572,  and  Dun- 
ham V.  Isett  (1863),  15  Iowa,  284  —  are  to 
the  effect  that  a  positive  stipulation  of  this 
character  gives  the  mortgagees  a  specific 
lien  on  the  net  earnings,  which  can  be 
enforced  against  other  creditors.  These 
rulings  were  made  before  the  doctrine  of 
the  Supreme  Court  of  the  United  States 
and  of  other  courts  had  been  established 
by  the  cases  referred  to  above,  and  can 
hardly  be  deemed  authorities  outside  the 
State  of  Iowa  itself.  The  clause  allowing 
the  com]iauy  to  remain  in  possession  till 
after  default  has  been  regarded  in  another 
case  as  an  affirmative  covenant,  which, 
whatever  may  be  the  efi"ect  of  tlie  grant- 
ing clauses,  amounts  to  a  re-demise,  and 
therefore,  as  respects  the  necessary  expenses 
of  ojieration,  gives  the  comjiany  the  riirht 
to  contract  for  articles  reipured  to  keep  up 
the  road  as  a  going  concern.  Parkhuist  v. 
Northern  Central  R.  Co.  (1862),  19  Md. 
472.  Tiiis  is  an  eai-ly  case,  and,  in  view 
of  later  decisions,  needlessly  circumscribed 
iu  its  scoiie. 


§  505.]  DISPOSITION   OF   MORTGAGED   PROPERTY.  497 

The  usual  clause  giving  the  trustee  a  right  to  take  possession 
of  the  property  after  default  is  merely  intended  to  "  define  and 
point  out  the  manner  in  which  the  pledge  of  the  tolls  and  income 
is  to  be  carried  into  effect ; "  ^  and  as  the  terms  of  the  mortgage 
thus  explicitly  declare  the  mode  in  which  the  mortgagees  may 
reach  and  control  the  use  of  the  corporate  property  and  franchises, 
and  appropriate  the  income  thereof,  no  lien  or  priority  of  claim 
upon  such  income  can  be  acquired  in  any  other  modc.^ 

The  mere  fact  that  the  mortgage  makes  it  the  duty  of  the  com- 
pany to  apply  the  income,  after  paying  the  current  expenses,  to 
the  liquidation  of  the  interest  does  not  create  an  obligation  which 
"  of  its  own  force  carries  title  to  the  particular  money  received  as 
income,  any  more  than  the  obligation  to  pay  a  debt  in  ordinary 
cases  carries  to  the  creditors  a  title  to  the  money  in  the  debtor's 
pocket.  The  fact  that  the  mortgagor  is  in  possession,  operating 
the  road,  renders  it  indispensable  that  he  shall  pay  current  ex- 
penses and  necessary  repairs  and  improvements,  and  that  he  shall 
exercise  his  judgment  and  discretion  as  to  the  extent  to  which 
repairs  and  improvements  shall  be  made ;  and  this  can  only  be 
paid  out  of  the  income.  It  is  inconsistent  with  such  control  over 
the  income  that  it  shall  be  the  property  of  the  trustees."  ^ 

Possibly  the  doctrine  of  the  cases  cited  in  tliis  section  may  be 
arrived  at  more  directly  by  considering  that  the  possession  to 
which  the  mortgagee  is  entitled  is,  as  regards  the  corpus  of  the 
property,  merely  prospective  and  dependent  upon  certain  contin- 
gencies, and  that,  in  the  absence  of  words  clearly  evincing  a  con- 
trary intention,  the  same  principle  of  construction  ought  to  be 
applicable  to  the  rents  and  profits.  To  deduce  such  an  intention 
from  words  which  merely  give  the  trustee  the  rights  of  a  common- 
law  mortgagee  under  certain  circumstances,  would  obviously  be  a 
very  strained  construction  of  the  contract. 

§  505.  Same  Rule  as  against  Holders  of  Income  Bonds.  —  The 
holders  of  income  bonds  the  interest  of  which  is  payable  out 
of  the  "net  earnings"  remaining  after  satisfying  the  operating 
expenses  and  prior  claims  in  each  interest  period,  cannot  object 
to  the  management  of  the  road  in  the  usual  manner,  accord- 
ing to  the  discretion  and  judgment  of  the  directors.  The  mort- 
gage contract,  therefore,  does  not  prevent  the  mortgagor  from 

1  Galveston  Railroad  v.  Cowdrey  United  States  Express  Co.  (1876),  81  111. 
(1870),  11  Wall.  459,   483.  534.     Similar  reasoning  may  l^e  found  in 

2  Ellis  V.  Boston,  Hartford,  &  Erie  R.  De  Graff  v.  Thompson  (1878),  24  Minn, 
Co.  (1871),  107  Mass.  1.  452  ;  s.  c.  5  Rep.  561. 


8  Miss.  Valley  &  Western  Ry.  Co.  v. 


32 


498  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  XXV. 

leasing  the  road  to  another  company,  even  though  the  arrange- 
ment involves  a  reduction  in  the  amount  available  for  the  payment 
of  the  interest  on  the  bonds.^ 

§  506.  Specific  Appropriation  of  the  Income,  ■which  will  prevail 
against  all  other  Claims.  —  This  may,  of  course,  be  effected  by  the 
terms  of  the  instrument  creating  the  lien.  Such  was  the  effect 
of  the  Missouri  statute  which  authorized  St.  Louis  County  to  issue 
county  bonds  in  aid  of  the  Pacific  Railroad  Company.  It  was 
held  that  a  provision  in  that  statute  declaring  that  the  official  who 
should  have  charge  of  the  funds  of  the  company  was  to  pay  into 
the  county  treasury  every  month  a  specific  portion  of  the  earnings, 
created,  when  the  benefits  of  the  statute  were  accepted,  an  equi- 
table lien  to  that  extent  upon  those  earnings,  and  that  this  lien 
was  enforceable  not  only  against  the  receiver  appointed  in  a  sub- 
sequent foreclosure  suit  instituted  by  another  incumbrancer,  but 
also  against  the  purchaser  under  the  decree  in  that  suit,  and  any 
one  who   might  hold  the   property  or  have   the  custody  of  its 


earnino-s 


2 


§  507.  Stockholder's  Right  to  a  Dividend  w^hen  complete  as 
against  the  Mortgagor.  —  Dividends  can  be  paid  only  out  of  net 
profits  ;  and  the  right  to  declare  a  dividend  depends  on  the  state  of 
the  company's  finances  at  the  time  when  the  dividend  is  declared. 

The  control  of  the  income  by  the  company  involves  a  right 
to  distribute  a  portion  of  the  surplus  funds  remaining  after  the 
expenses  and  the  interest  on  the  bonds  and  other  debts  have  been 
paid  ;  and  if  the  directors,  in  the  exercise  of  a  proper  discretion, 
have  once  declared  and  set  apart  a  dividend  in  such  a  manner  as 
to  constitute  an  equitable  assignment  of  the  money,  it  ceases  to 
be  a  part  of  the  corporate  assets,  and  therefore  cannot  be  reached 
by  the  bondholders.  Thus,  if  the  directors  have  deposited  in  a 
bank  a  sufficient  sum  to  pay  a  dividend  previously  declared,  the 
appropriation  of  the  money  to  the  stockholders  is  complete,  and 
the  right  of  a  stockholder  to  draw  his  proportion  thereof  at  any 
time  will  not  be  defeated  by  the  subsequent  appointment  of  a 
receiver.^ 

1  Dii}'  V.  Og(lensbur;;h  &  Lake  Cham-  cally  appropriating  the  net  earnings  to  the 
plain  R.  Co.  (1888),  107  N.  Y.  129  ;  s.  c.  payment  of  interest,  and  thus  prechiding 
13  X.  E.  Eep.  7G5  ;  35  Am.  &  Eng.  R.  R.  any  h;vy  on  such  earnings  until  their  para- 
Caa.  102,  reversing  s.  c.  {188G),  42  Hun,  mount  claim  had  been  satisfied,  see  Mac- 
654  ;  H.  c,  1  Ry.  &  Corp.  L.  J.  70.  Alcster's  Admr.  v.   Maryland  (1885),  114 

2  Kctchuni  V.  St.  Louis  (1879),  101  U.  S.  598;  s.  c.  5  Sup.  Ct.  Rep.  1065  ; 
U.  S.  ;JOG.  r,ra(ly  v.  State  (186(i),  26  Md.  290. 

For  other  cases  in  which  the  efTect  of  a  ^  In  the  Matter  of  Le  Blanc  (1878),  14 

statute  declaring  a  lien   in   favor  of  the     Ilun,  8  ;  allirmcd  without  comment  iu  75 
State  was  held  to  have  the  ed'ect  of  specili-     N.  Y,  598. 


§  508.]  DISPOSITION   OF   MORTGAGED   PROPERTY.  499 

§  508.  Income  of  Road  may  be  attached  or  levied  upon  by  Cred- 
itors while  the  Mortgagor  is  in  Possession.  —  The  mortgagor's  right 
to  control  the  income  while  in  possession  carries  with  it  the  usual 
incident  of  ownership,  viz.,  that  it  may  be  subjected  to  the  pay- 
ment of  his  debts.  A  creditor,  therefore,  by  attaching  the  avails 
of  the  property  in  the  hands  of  the  mortgagor  will  ordinarily  ob- 
tain a  lien  thereon  which  is  paramount  to  that  of  the  mortgage. ^ 

The  rights  of  the  creditor  are  fixed  when  judgment  is  recovered 
and  execution  sued  out,  and  the  mortgagee  obtains  no  title  to  a 
fund  derived  from  this  source  merely  for  the  reason  that  a  re- 
ceiver is  appointed  before  the  creditor  has  actually  appropriated 
the  amount  due  to  him.^ 

The  right  of  creditors  with  claims  coming  under  the  head  of 
operating  expenses  to  attach  the  earnings  is  sometimes  strength- 
ened by  provisions  in  the  mortgage.  Thus  where  the  company  is 
expressly  authorized  to  remain  in  possession  until  default,  and  to 
apply  any  of  the  income  or  personal  property  to  the  construction 
or  repair  of  the  road,  or  to  its  current  expenses,  or  payment  of 
debts,  and  to  pay  dividends  out  of  the  net  profits,  afLer  deducting 
enough  for  interest  and  a  sinking  fund,  the  implication  is  that 
the  receipts  of  the  road  do  not  come  under  the  lien  of  the  mort- 
gage until  the  net  profits  have  been  ascertained.  Before  default, 
therefore,  a  creditor  whose  claim  comes  under  the  head  of  cur- 
rent expenses  may  attach  tolls  belonging  to  the  road.^ 

^  Oilman  v.  Illinois  &  Miss.  Tel.  Co.  return  of  ?tMZ/«  ?w?i«,  undertook  to  levy  an 
(1875),  91  U.  S.  603,  616  ;  De  Graff  v.  attachment,  according  to  the  provisions  of 
Thompson  (1878),  24  Minn.  452  ;  Smith  the  Kentucky  Code  of  Practice  (§  474), 
V.  Eastern  Railroad  Co.  (1888),  124  Mass.  by  serving  on  the  president  of  the  com- 
154;  Merchants'  Bank  v.  Petersburg  Rail-  pany  a  copy  of  the  process,  on  which  was 
road  Co.  (1877),  12  Phil.  482  ;  Mississippi  indorsed  the  object  of  the  action,  viz.,  to 
Valley  &  Western  Ry.  Co.  v.  U.  S.  Express  appropriate  "the  income,  etc."  to  the  pay- 
Co.  (1876),  81  111.  534;  Ellis  v.  Boston,  ment  of  the  judgment.  It  was  held,  how- 
Hartford,  &  Erie  R.  Co.  (1871),  107  Mass.  ever,  that  a  notice  of  this  kind  did  not 
1  ;  Gibert  v.  "Washington  City,  Va.  J\Iidl.  affect  the  power  of  the  officers  of  the  com- 
&  Grt.  Southern  R.  Co.  (1880),  33  Gratt.  pany  to  exercise  a  reasonable  and  proper 
645  ;  s.  C.  1  Am.  &  Eng.  R.  R.  Cas.  512  discretion  as  to  the  order  in  which  debts 
(1881)  ;  Parkhurst  y.  Northern  Central  R.  should  be  paid.  At  all  events,  the  de- 
Co.  (1862),  19  Md.  472.  livery  of  the  summons  to  the  president 

2  Gibert  v.  Washington  City,  Va.  Midi,  was  but  equivalent  to  service  on  the  com- 

&  Grt.  Southern  R.  Co.  (1880),  33  Gratt.  pany  itself,  and  there  was  no  section  of 

645  ;  s.  c.  1  Am.  &  Eng.  R.  R.  Cas.  512.  the  code  providing  that  an  attachment  lien 

In  Nevpport  &,  Cincinnati  Bridge  Co.  v.  on  intangible  property  might  be  created 

Douglass  (1877),  12  Bush  (Ky.),  673  ;  s.  c.  by  the  service  of  any  character  of  process 

18  Am.  Ry.  Rep.  221,  one  of  the  general  on  the  judgment  defendant  alone, 
creditors,  the  Western  Bank,  had  recovered  ^  Clay   v.    East   Tenn.,  Va.   &  Ga.   R. 

ajndgment  against  the  company  before  tlie  Co.   (1871),  6  Heisk.   421;  s.  c.  12  Am. 

appointment  of  the  receiver,  and,  upon  a  Ry.  Rep.  38. 


500  EAILWAT  BONDS   AND   MORTGAGES.  [CHAP.  XXV. 

The  creditors  of  the  company  may  reach  by  garnishment  pro' 
cess  all  income  accruing  prior  to  default,  even  when  it  has  passed 
into  the  hands  of  the  mortgagees,  if  the  latter  have  appropriated 
it  without  the  consent  of  the  company .^ 

§  509.  When  the  Mortgagee's  Right  to  the  Income  becomes  abso- 
lute in  Suits  for  Possession.  —  Under  a  mortgage  of  the  ordinary 
form  entitling  the  trustee  to  take  possession  upon  a  default,  the 
possession  of  the  company  is  unlawful  from  the  time  when  it  fails 
to  comply  with  a  demand  of  the  trustee  to  surrender  the  property, 
and  cannot  thereafter  furnish  a  foundation  for  any  rights  which 
are  dependent  on  its  legality.  The  trustee  is,  therefore,  entitled 
to  all  earnings  which  accrue  after  a  demand  for  possession,  and 
the  institution  of  a  suit  for  possession  is  equivalent  to  a  demand. 
It  is  immaterial  that  no  receiver  is  appointed  for  some  time  after 
the  commencement  of  tlie  proceedings.  The  company  itself  is  to 
be  treated  in  all  respects  from  the  time  the  suit  is  begun  as  a 
receiver  of  the  property,  holding  it  for  the  benefit  of  whomsoever 
it  may  in  the  end  be  found  to  concern.^ 

After  the  possession  of  the  trustees  is  perfected,  they  are  en- 
titled to  receive  all  sums  earned  through  the  operation  of  the 
road ;  as  the  rentals  of  a  leased  line,^  and  moneys  due  for  carry- 
ing the  mails  collected  by  an  agent  of  the  company.^ 

Whatever  net  earnings  are  found  in  the  possession  of  the 
trustee  at  the  time  of  the  foreclosure  are  properly  applied  to 
the  reduction  of  the  mortgage  indebtedness.^ 

If  necessary,  the  earnings  will  be  apportioned  between  the 
trustee  and  an  attaching  creditor.  Thus  where  the  trustee  takes 
possession  during  the  currency  of  a  month,  at  the  end  of  which 
the  companj'  is  to  be  entitled  to  receive  a  sum  of  money,  as  com- 
pensation for  services  performed  under  a  contract,  entered  into 
after  the  execution  of  the  mortgage  and  not  covered  by  it,  the 
money  will  be  apportioned  so  as  to  give  an   attaching  creditor 

^  De    Graff  v.    Thompson    (1878),    24  "the  bill  itself  did  not  contain  any  alle- 

Minn.  4.52  ;  s.  c.  17  Am.  Ry.  Rep.  183.  gation  of  such  a  demand." 

2  Dow  V.  Memphis  &  Little   Rock    R.  ^  Kinrr  y.  Housatonic  R.  Co.  (1877),  45 

Co.  (1888),  124  U.  S.  652  ;  .s.  c.  33  Am.  &  Conn.  226. 

Eng.  R.  R.  Cas.  12.      Compare  Galveston  *  Murray  v.   Deyo  (1877),  10  TTun,  3. 

Railroad  v.  Cowdrey  (1870),  11  Wall.  459,  There  the  agent  for  collection  undertook 

where  the  Supreme  Court  of  the   Cnited  to  hold  the   money  collected  as  a  .set-off 

States,  in  uj)hoidihg  the  right  of  a  creditor  against   a    claim    which    he  had   against 

to  levy  on   tlie  earnings  accruing  before  the  company  ;    but  the  court  refused  to 

suit  brought,  saiil  that  it  did  not  "appear  allow  liim  to  do  .so. 

that    the   complainants  or   their  trustees  ^  Wood  u.  Whelon  (1879),   93  111.  153 

ma<le  any  demand  for  the  tolls  and  income  (not  a  railroad  case). 
till  they  filed  the  present  bill,"  and  that 


§§  510,  511.]        DISPOSITION   OF   MORTGAGED   PROPERTY.  601 

the  part  wliich  was  earned  during  the  time  which  elapsed  be- 
tween the  beginning  of  the  month  and  the  entry  of  the  trustee.^ 

The  principle  that  the  trustees  are  entitled  to  the  income  after 
taking  or  demanding  possession  necessarily  involves  the  corollary 
that  money  earned  by  the  operation  of  the  road,  while  they  are 
actually  or  constructively  in  possession,  cannot  be  reached  by 
garnishment  in  the  hands  of  the  debtor  by  a  creditor  of  the 
latter.2 

§  510.  When  the  Mortgagee's  Right  to  the  Income  becomes  abso- 
lute in  Suits  for  Foreclosure.  —  Ordinarily  the  assumption  of 
control  by  a  receiver  in  a  foreclosure  suit  has  the  effect  of  se- 
questrating the  earnings  for  the  benefit  of  the  mortgagee  from 
that  time  onward. ^ 

But  the  terms  of  the  mortgage  may  be  such  as  lead  to  the 
conclusion  that  the  bondholders  have  no  right  to  the  earnings 
until  actual  entry  by  the  trustee.  In  this  case  even  the  appoint- 
ment of  a  receiver  in  a  foreclosure  suit  instituted  on  their  behalf 
does  not  give  them  any  priority  of  claim  as  regards  the  earnings 
thereafter  accruing* 

The  possession  of  the  receiver  for  the  purpose  of  cutting  off 
the  right  to  levy  on  the  earnings  is  not  complete  until  he  has 
given  the  required  security  for  the  faithful  discharge  of  his 
duties.^ 

§  511.  Effect  of  the  Divestiture  of  the  Company's  Control  in  a  Suit 
brought  by  a  Party  other  than  the  one  claiming  the  Earnings.  —  To 
entitle  a  mortgagee  to  income  accruing  after  the  control  of  the 
company  ceases,  it  is  not  necessary  that  such  control  should  have 

1  Emerson  v.  European  &  North  Ameri-  the  receipt  thenceforward  of  the  income 
can  R.  Co.  (1877),  67  Me.  387.  hy  the  trustees,  and  also  declared  that,  on 

2  Galena  &  Chicago  Union  R.  Co.  v.  taking  possession,  they  should  file  a  writ- 
Menzies  (1861).  26  111.  121.  This  case  ten  notice  of  the  fact  in  the  office  of  the 
has  sometimes  been  cited  as  countenancing  secretaries  of  State  in  the  three  States 
the  broader  proposition  that  income  specifi-  over  which  the  railroad  extended.  The 
cally  pledged  is  no  longer  under  the  con-  court  thought  that  this  explicit  language 
trol  of  the  mortgagor  ;  but  in  a  later  case  exchided  the  possibility  of  ac([uiring  a  lien 
in  the  same  court  (Mississippi  Valley  &  on  the  income  in  any  other  mode  than  the 
Western   Ry.   Co.    v.   U.    S.    Express   Co.  one  stated. 

(1876),  81  111.  534)  the  possession  of  the  ^   Frayser's  Admrs.   v.  Richmond  &  A. 

trustees  was  stated  to  be  the  distinguish-  R.    Co.    (1886).    81  Va.    388,    relying  on 

ing  feature  which  determined  the  rights  Edwards  v.   Edwards   (2  L.  R.   Ch.  Div. 

of  the  parties.  291),   where  it  was  held  that  a  levy  on 

^  Newport  &  Cincinnati  Bridge  Co.  i>.  goods  before  the  receiver  had  given  se- 
Douglass  (1877),  12  Bush  (Ky.),  673  ;  18  curity  or  taken  possession  was  not  a  con- 
Am.  Rv.  Rep.  221.  tempt  of  court.     Such   also  seems  to  be 

*  Ellis  V.   Boston,  Hartford,  &  Erie  R.  the  rule  in  Maine  :  Noyes  v.  Rich  (1861), 

Co.  (1871),  107  Mass.  1.     There  the  trust  52    Me.    115;  though   the   point  is  only 

deed  provided  for  entry  after  default,  and  passed  on  by  implication. 


502  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  XX7. 

been  terminated  at  his  own  instance,  provided  his  own  right  be 
superior  to  that  of  the  party  actually  moving  in  the  matter,  and 
he  has  taken  active  steps  to  enforce  his  claim.  Thus  if  a  senior 
mortgagee  is  made  a  party  to  a  suit  brought  by  a  junior  incum- 
brancer to  foreclose  his  lien,  and  a  receiver  is  appointed  upun  the 
application  of  the  latter,  the  senior  mortgagee  may  obtain  an 
order  directing  the  receiver  to  hold  for  and  to  pay  to  them  so 
much  of  the  net  earnings  as  are  covered  by  their  mortgages.^ 

On  the  other  hand,  if  a  receiver  has  been  appointed  at  the 
instance  of  a  judgment  creditor  for  the  protection  of  his  own 
interests,  and  not  for  the  interests  of  the  trustees,  bondholders, 
and  other  creditors,  the  trustees  cannot  have  the  net  earnings  of 
the  property,  while  in  the  hands  of  such  receivers,  applied  to  the 
dischai'ge  of  the  bondholders'  claims,  unless  they  have  previously 
demanded  possession  or  intervened  in  the  suit.^ 

So,  also,  where  a  receiver  has  been  appointed  in  a  suit  to  fore- 
close a  general  mortgage  covering  a  system  composed  of  several 
divisions,  some  of  which  are  subject  to  prior  underlying  mort- 
gages and  others  are  not,  the  bondholders  secured  by  underlying 
mortgages  cannot  object  to  the  disposition  of  the  income  prior  to 
the  time  when  they  commence  proceedings  to  enforce  the  lien, 
and  have  the  money  used  for  the  payment  of  preferential  claims 
taxed  by  receivers'  certificates,  or  in  some  other  way,  upon  the 
earnings  of  the  divisions  upon  which  there  are  no  prior  liens. 
Especially  must  such  relief  be  denied  them  after  the  rendition  of 
a  decree  to  which  their  trustees  have  assented.^ 

There  is  some  authority  for  carrying  this  principle  still  further, 
and  holding  that  the  mortgagee's  contingent  right  to  the  income 
matures  immediately  after  the  possession  of  the  company  is  ter- 
minated by  the  institution  of  proceedings  by  any  of  the  creditors, 
although  the  mortgagee  does  nothing  to  assert  his  right,  and 
allows  the  assignees  of  the  corporate  property  to  go  on  i-eceiving 
the  income  for  several  years  before  attempting  to  enforce  his 
lien.  Thus  it  has  been  held  that  where  a  portion  of  a  road  is 
subject  to  a  mortgage  which  embraces  income,  and  a  later  mort- 

1  .SeiV)ert  u.  Minneapolis  &  St.  Louis  II.  based  u|)on  the  circumstances  presented 
Co.  (18'j3),  52  Minn.  246  ;  s.  c.  53  N.  W.  for  review,  Judge  Brewer  based  his  ruling 
Ilep.  1151.  on    the  broad    ground    that    such    relief 

2  Sage  V.  Metnphis  &  Little  Rock  R.  "would  not  be  right  ;  because  the  mort- 
Co.  (18S3),  125  U.  S.  361  ;  s.  c.  35  Am.  gagor  has  by  the  settled  law  of  this  coun- 
&  Eiig.  R.  H.  Cas.  40.  try  absolute  control  of  the  income  of  his 

*  .Central    Trust   Co.    v.    Wabash,    St.     property  prior  to  the  legal  proceedings  iu- 
Loiiis,  &  Pac.  R.  Co.  (1887),  30  Fed.  R(^p.     stituted  by  the  mortgagee." 
.3  52.     Apnrt  from  certain  special  reasons 


§  511.]  DISPOSITION    OP   MORTGAGED    PROPERTY.  603 

gage  on  the  whole  property  is  foreclosed,  and  the  property  sold, 
subject  to  the  divisional  lien,  the  purchaser  will  hold  the  income 
derived  from  the  section  covered  by  the  prior  mortgage  in  trust 
for  those  protected  by  it,  and  upon  being  brought  in  as  a  defend- 
ant in  a  suit  long  afterwards  instituted  by  the  representative  of 
the  senior  mortgagees,  may  be  compelled  to  account  for  that 
income  for  the  period  between  the  date  at  which  he  took  posses- 
sion and  that  at  which  the  second  suit  was  instituted.^ 

1  Pullan  V.  Cincinnati  &  Chicago  Air  those  in  which  it  is  operated  by  an  as- 

Line  R.  Co.  (1873),  5  Biss.  237  ;  s.  c.  20  signee.     In  either  event  the  earnings  are 

Fed.  Gas.  38,  Case  No.  11,462.     It  seems  essential  for  the  purpose  of  carrying  on. 

very  doubtful  whether,  in  view  of  the  sub-  the  business,  and  the  mortgagee  secured 

sequent  decisions  of  other  courts,  this  rul-  by  the  income,   if  he  takes  no  steps   to 

ing  can  be  sustained.    There  is  apparently  assert   his   rights,   must  be   presumed   to 

no  valid  reason  why  any  distinction  should  have  assented  to  the  control  of  those  earn- 

be  made  between  the  cases  in  which  the  ings  by  the  party  in  possession  at  the  time 


road  is  operated  by  the  mortgagor,  and    being. 


504 


RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  XXVI. 


CHAPTER  XXVI. 

APPOINTMENT,   REMOVAL,    AND   DISCHARGE   OF   RECEIVERS. 


§  512.  Introductory. 
Art.  I.  —  Appointment    of    Receivers 

GENERALLY. 

§  513.  For  what  Objects  a  Receiver  is 
appointed. 
614.  Reluctance  of  the  Courts  to  ap- 
point a  Receiver. 

515.  Jurisdiction  to  appoint  a   Re- 

ceiver. 

516.  Who  should  be  appointed  Re- 

ceiver. 

517.  Necessity  of  Notice  to  Parties 

who  will  be  affected  by  the 
Appointment. 

518.  The  Court  will  not  go  into  the 

Merits   of    the   Case   on   the 
Hearing  of  an  Application. 

519.  A  Full  and  Fair  Denial  of  the 

Allegations   of  the  Bill  will 
prevent  Appointment. 

520.  When  the  Mortgagor  Company 

may  obtain  the  Appointment 
of  a  Receiver. 

521.  At  whose   instance   a   Receiver 

may  be  appointed,  generally. 

522.  When  the  Mortgagor  Company 

may  obtain  the  Appointment 
of  a  Receiver. 

523.  Receiver  not  usually  appointed 

at    the    Instance    of    General 
Creditors. 

524.  Successive  Applications  for  Re- 

ceivers   in    tlie    same   Court, 
how  treated. 

525.  Appointment  of  Additional  Re- 

ceivers in  other  States  or  Dis- 
tricts. 

Art.  II.  —  ClltCUM.STANCE.S   UNDER  WHICH 

A  Rkceiver  will  or  will 

NOT    BE   appointed. 

§  626.  General  l'riiici])k's  on  which  Re- 
ceivers are  appointed. 


§  527.  Limits  to  the  Discretionary  Pow- 
ers of  the  Courts  in  appoint- 
ing Receivers. 

528.  The  Appointment  of  a  Receiver 

not  justifiable  merely  because 
convenient. 

529.  No    Receiver    appointed  unless 

Appointment  will  give  Effec- 
tual Relief. 

530.  Existence   or   Non-existence    of 

Danger  to  the  Fund  deter- 
mines whether  Receivership 
shall  be  granted  or  denied. 

531.  Adequacy     of     Legal     Remedy 

Reason  for  Refusal  to  ap- 
point. 

532.  Default  of  Mortgagor  alone  not 

sufficient  to  justify  Appoint- 
ment. 
633.  No   Receiver   appointed    if    the 
Existence    of    a    Default    is 
doubtful. 

534.  Prevention  of  Fraud. 

535.  Prevention  of  Waste. 

536.  A  Long-continued  and  Hopeless 

Condition  of  Insolvency. 

537.  Dissensions     among    Corporate 

Officers. 

538.  Indisposition    of    Company    to 

pay  its  Debts  to  the  Extent 
of  its  Ability. 

539.  Wrongful  Failure  to  apply  Rev- 

enues to  Bonded  Debt. 

540.  Danger   to    Fund   arising   from 

ilismanagement  of  the  Cor- 
porate Property. 

541.  Numerous  Executions  threaten- 

ing Integrity  of  Property. 

542.  Circumstances    under    which    a 

Judgment  Creditor  will  be 
granted  a  Receivership  of 
Mortgaged  Property. 


§§  512,  513.]        APPOINTMENT,   ETC.,    OF   RECEIVERS. 


505 


Right  to  Receiver  lost  by  Laches. 

Effect  of  Provision  in  Mortgage 
authorizing  Trustee  to  take 
Possession. 

Last  Subject  continued. 

Appointment  of  a  Receiver  after 
Rendition  of  Foreclosure  De- 
cree, when  proper. 
Art.  IIL  —  Removal,  Substitution,  and 
Final  Discharge  of  Re- 
ceivers. 

Generally. 

Power  of  Removal. 

Jurisdiction  to  remove  Ancillary 
Receivers. 

Questions  which  will  not  be 
decided  on  Applications  for 
Removal. 


§543. 
544. 


545. 
546. 


§547. 

548. 
549. 

550. 


§  551.  Removal  on  Account  of  Circum- 
stances existing  at  the  Time 
of  the  Appointment. 

552.  Removal  of  Receivers  ajjpointed 

ex  2^urte. 

553.  Right  to  object  to  Appointment 

lost  by  Delay. 

554.  Removal  on  Account  of  Circum- 

stances arising  after  Appoint- 
ment. 

555.  Termination     of     Receiverships 

generally. 

556.  No  Formal  Discharge  necessary 

to  terminate  Receivership. 

557.  Receiver  himself  cannot  be  heard 

in  Opposition  to  a  Motion  for 
his  Discharge. 

558.  Effect  of  the  Discharge. 


§  512,  Introductory. — As  a  receiver  is  almost  invariably  asked 
for  in  proceedings  for  the  enforcement  of  railroad  mortgages, 
and  the  peculiar  nature  of  the  property  of  which  the  court  thus 
assumes  control  has  developed  some  distinctive  and  novel  appli- 
cations of  the  familiar  principles  by  which  this  branch  of  equity 
practice  is  governed,  it  is  necessary  to  review  the  cases  in  which 
the  appointment  and  functions  of  receivers  in  railway  foreclosures 
have  been  considered  in  order  to  a  systematic  treatment  of  the 
questions  connected  with  railway  bonds,  although  the  subject  of 
receiver  has  been  fully  treated  in  numerous  other  works. 


Article  I.  —  Appointment  of  Receivers  generally.^ 

§  513.  "With  what  Object  a  Receiver  is  appointed.  —  A  receiver 
is  an  indifferent  person  between  parties  appointed  by  the  court 
to  receive  the  rents,  issues,  or  profits  of  land  or  other  things  in 


1  See  Receivership  of  Corporations,  by 
George  A.  Mercer,  3  Ga.  Bar  Association, 
121  ;  Receivers  of  Railways,  by  Leonard  A. 
Jones,  4  So.  L.  Rev.  N."  S.  18  ;  Railroad 
Receiverships,  by  M.  M.  Kohn,  19  Am.  L. 
Rev.  400  ;  Railway  Receivership,  note,  20 
Am.  L.  Rev.  749  ;  The  Courts  as  Railway 
Managers,  by  Lawrence  Gookin,  32  Alb. 
L.  J.  45 ;  Receivers  in  Mortgage  Fore- 
closure, by  James  M.  Kerr,  23  Am.  L.  Rev. 
56  ;  The  Wabash  Receivership,  note,  21 
Am.  L.  Rev.  798  ;  Railway  Receiverships, 
24  Am.  L.  Rev.  668  ;  The  Court  Manage- 


ment of  Railroads,  hj  Seymour  D.  Thomp- 
son, 27  Am.  L.  Rev.  481  ;  Jurisdiction  to 
appoint  a  Receiver  on  Petition  of  Debtor, 
note,  28  Am.  L.  Rev.  925;  Federal  and  State 
Jurisdiction  ;  Appointments  of  Receivers, 
note,  27  Am.  L.  Rev.  615  ;  The  Commer- 
cial Basis  for  Railway  Receivershii)S,  by 
Thomas  L.  Greene,  33  Am.  Law  Reg.  & 
Rev.  417  ;  Railroad  Receiverships  in  the 
Federal  Courts,  address  by  Hon.  Henry 
C.  Caldwell,  Judge  U.  S.  Circuit  Court 
of  Appeals,  8th  Dist.,  30  Am.  L.  Rev. 
161. 


506  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  XXVI. 

question,  pending  the  suit,  where  it  does  not  seem  reasonable  to 
the  court  that  either  party  should  do  it.^ 

He  is  appointed  for  the  benefit  of  all  the  parties  interested, 
and  not  for  the  benefit  either  of  the  plaintiff  or  defendant,  or  of 
any  individual  litigant,  where  there  are  several  on  one  or  both 
sides.- 

By  means  of  the  appointment  a  court  of  equity  takes  possession 
of  the  property  which  is  the  subject  of  the  suit,  preserves  it  from 
waste  and  destruction,  secures  and  collects  the  proceeds  or  profits, 
and  ultimately  disposes  of  them  according  to  the  rights  and  pri- 
orities of  those  entitled,  whether  regular  parties  to  the  cause,  or 
only  parties  in  interest,  coming  before  the  court  in  a  seasonable 
time  and  due  course  of  proceeding  to  assert  and  establish  their 
pretensions. 3  Such  appointment  is  analogous  to  proceedings  in 
attachment  in  a  court  of  law,  and  has  been  styled  an  equitable 
execution.* 

But  there  is  a  material  distinction  between  the  two  remedies. 
The  appointment  of  a  receiver,  though  a  kind  of  equitable  execu- 
tion, results  in  a  merely  general,  not  a  specific,  appropriation  of 
the  issues  and  profits  of  the  subject-matter.  It  does  not  in  itself 
give  to  the  party  applying  for  it  any  advantage  over  other  claim- 
ants, but  operates  prospectively  upon  the  rents  and  avails  which 

1  Booth  V.  Clarke  (1854),  17  How.  322,  point  a  receiver  and  manager,  though  the 

331  (per  Swayne,  J.,  quoting  Wyatt's  Pac.  interest  is  not  due  and  time  for  payment 

Keg.  355).  has   not   arrived.      Edwards   v.   Standard 

A  holder  of  debentures  covering  all  the  RoUing-Stock  Syndicate  (1893),  3  R.  226  ; 

property  of  a  company  is  entitled   to  a  Thorn  ?;.  Nine  Reefs  (1892),  67  Law  Times, 

receiver  notwithstanding  that  a  creditor's  93  ;   In  re  Victoria  Steamboats,  Limited 

petition  has  been  previously  presented  to  (1896),  L.   R.   1897,   Ch.   Div.  158. 
wind  up.     Strong  v.  Carlyle  Press  (1892),  A    receiver   appointed   generally,    and 

2  R.  283.  directed  also  to  act  as  manager  for  a  lim- 

An  express  provision  in  an  order  of  in-  ited  period,  when  the    period  expires  he 

corporation  that  mortgagees  may  enforce  should  apply  for  an  extension  as  manager 

payment  by  the  aid  of  a  receiver  does  not  only.      Davies  v.   Vale   of  Evesham  Pre- 

preclude  them  from  obtaining  a  winding-  serves  (1895),  73  L.  T.  150. 
up  order.      In   re    Portstewart    Tramway  2  "Williamson  v.   New  Albany,  etc.  R. 

Co.   (1896),   1  Ir.   R.  265.  Co.  (1857),  1  Biss.  198,  205. 

"Where  certain  assets  are  of  an  excep-  8  Beverley  v.  Brooke  (1847),  4  Gratt. 

tional  character,  requiring  a  person  of  spe-  187,  per  Baldwin,  J. 

cial  knowledge  to  deal  satisfactorily  with  *  Jeremy's  Eq.  Jurisp.  219  :  Cincinnati, 

them,   such   a   person  will    be   appointed  Sandu.sky,  &  Cleveland   R.    Co.   v.   Sloan 

receiver   in    respect    thereof,    leaving   the  (1876),  31  Ohio  St.    1.     «' Every  kind   of 

ordinary  a.ssets  to  the  official  receiver  to  property  of  such  a  nature  that,  if  legal,  it 

deal   with.       Industrial   &  Genei-al  Trust  might  be  taken  in  execution,  may,  if  equi- 

17.   South    American    &   M.   Co.    (1894),   7  table,    be   put  into   the    receiver's   posses- 

R.  61  ;  1  Ch.    108.  sion."    Davis  y.  Gray  (1872),  16  Wall.  203, 

AVlierc    debenture-holder's    security    is  217  (per  Swayne,  J.), 
endangered,  the  court  will  sometimes  ap- 


§  514.]  APPOINTMENT,    ETC.,   OF   RECEIVERS.  507 

may  come  into  the  hands  of  the  receiver,  as  a  lien  in  favor  of 
those  interested  therein. ^  A  receiver  may  be  appointed  at  any 
stage  of  a  foreclosure  suit,  even  after  the  fmal  decree.^ 

§  514.  Reluctance  of  the  Courts  to  appoint  a  Receiver.  —  The 
court,  acting  as  it  must  often  of  necessity  do  before  the  merits  of 
the  cause  have  been  fully  developed,  and  not  infrequently  when 
the  proper  parties  in  interest  are  not  all  before  it,  proceeds  with 
much  caution  and  circumspection,  in  order  to  avoid  disturbing 
unnecessarily  or  injuriously  legal  rights  and  equitable  priorities.^ 
To  begin  by  levying  what  is  virtually  an  equitable  execution  on 
the  property,  and  afterwards  determine  who  is  entitled  to  the 
benefit  of  this  quasi  process,  is  plainly  a  reversal  to  a  great  extent 
of  the  ordinary  course  of  justice  in  an  equitable  tribunal.* 

The  reasons  for  proceeding  with  caution  in  the  exercise  of  a 
summary  jurisdiction  of  this  peculiar  sort  are  recognized  to  be 
especially  strong  in  the  case  of  a  railroad  com))any,  a  quasi  public 
corporation  operating  a  public  highway.  The  principle  upon 
which  the  courts  act  is,  that  a  very  strong  case  sliould  be  pre- 
sented before  they  will  grant  a  remedy  so  extreme,  and,  with 
reference  to  the  management  of  the  road,  so  revolutionary  in  its 
character.^ 

"  The  appointment  of  receivers  to  manage  the  affairs  of  a  long 
line  of  railroad  for  five  or  six  years  is  an  exercise  of  judicial 
power  which  can  only  be  justified  by  the  pressure  of  absolute 
necessity."  ^ 

1  Beverley  v.  Brooke  (1847),  4  Gratt.  the  easement  in  such  a  manner  as  to  render 
187.  it  less  valuable  to  the  other.    Erie  Ry.  Co. 

2  Oilman  v.  Illinois  &  Miss.  Tel.  Co.  v.  Delaware,  L.  &  W.  R.  Co.  (1871),  21 
(1875),  91  U.  S.  603.  N.  J.  Eq.  283,  288. 

2  Beverley  v.  Brooke  (1847),  4  Gratt.  A   receiver  will   be   appointed   of  the 

187.  property    of    a    street-railwa}'    company 

*  Ibid.  when  it  appears  neeessarj'  for  the  protec- 

^  Sage  V.  Memphis  &  Little  Rock  R.  Co.  tion  of  all  parties  adversely  claiming  to  be 

(1888),  125  U.  S.  361;  Farmers'  Loan  &  entitled  thereto;   thus  a  mortgagee  of  a 

Trust  Co.  V.  Kansas  City,  W.  &  N.  W.  R.  portion  of  the  railway  and  equipment  is 

Co.   (1892),  53  Fed.  Rep.  182  ;   State  of  entitled  to  the  appointment  of  a  receiver, 

Florida  v.  Jacksonville,   P.  &  M.  R.  Co.  notwithstanding   the  addition  to  the  as- 

(1875),  15  Fla.  201   (p.  286)  ;  Stevens  v.  sets  and  property  by  a  subsequent  trana- 

Bavison  (186S).  18  Gratt.  819  ;  Meyer  v.  feree  of  the  road,   of  new   rolling-stock, 

Johnston    (1875).    53  Ala.  237  ;   s.  c.  15  horses,  etc.      Haley  v.  Halifax  Street  Ry. 

Am.  Ry.  Rep.  467,    The  fact  that  railroad  Co.  (1893),  25  Nova  Scotia,  140. 

companies  are  in  some  sense  public  agen-  ^  Milwaukee  &    Minnesota   K.    Co.   v. 

cies  mav,  however,  in  certain  cases,  be  an  Soutter  (1864),  2  Wall.   524  (\>ev  Miller, 

additional  reason  for  the    assumption    of  J.   .     Compare  Piillan  v.  Cincinnati  &  Chi- 

control  by  the  court,  as  where  two  com-  cago  Air  Line  E.  Co.   (1865),  4  Biss.  35, 

panics  are  tenants  in  common  of  an  ease-  47  ;  Vermont  &  Canada  R.  Co.  v.  Vermont 

ment,  and  it  is  represented  that  one  is  using  Central  R.  Co.  (1877),  50  Vt.  500  ;  Meyer 


508 


RAILWAY   BONDS   AND    MORTGAGES.  [CHAP.  XXVI. 


It  has  been  contended  that  the  appointment  of  a  receiver  to 
manage  a  raih'oad  is  against  public  policy,  but  this  extreme  view 
has  been  expressly  negatived.^ 

But  the  courts,  although  theoretically  unanimous  as  to  the 
drawbacks  of  that  solution  of  continuity  in  the  management  of 
a  railroad  which  a  receivership  entails,  have,  on  the  whole, 
acceded  with  so  much  facility  to  applications  for  receivers,  that 
more  than  one  distinguished  judge  has  deprecated  the  freedom 
with  which  this  relief  has  been  granted. ^ 


V.  Johnston  (1875),  53  Ala.  237;  s.  c.  15 
Am.  Ry.  Rep.  467  ;  Kelly  v.  Trustees,  etc. 
(1877),  58  Ala.  489  ;  21  Am.  Ry.  Rep.  138. 

1  State  V.  Northern  Central  R.  Co. 
(1861),  18  Md.  193. 

2  Justice  Miller,  in  his  dissenting  opin- 
ion in  Barton  v.  Barbour  (1881),  104  U.  S. 
126,  137,  expressed  his  dissatisfaction 
with  the  results  of  placing  railroads  in 
the  hands  of  receivers  for  long  periods,  in 
the  following  vigorous  language:  "The 
rapid  absorption  of  the  business  of  the 
country  of  every  character  by  corporations, 
while  productive  of  much  good  to  the  pub- 
lic, is  beginning  also  to  develop  many  evils, 
not  the  least  of  which  arises  from  their 
failure  to  pay  debts  and  perform  the  duties 
which  by  the  terms  of  their  organization 
they  assumed.  One  of  the  most  efficient 
remedies  for  the  failure  to  pay,  when  it 
arises  from  inability,  is  to  place  the  corpo- 
ration in  the  hands  of  a  receiver,  that  its 
affairs  may  be  wound  up,  its  debts  dis- 
charged, and  the  remaining  assets,  if  any 
there  be,  distributed  among  its  stockhold- 
ers. Of  the  beneficial  results  of  this  rem- 
edy there  can  be  little  doubt.  When  it  is 
applied  with  despatch,  and  the  eff'ects  of 
the  insolvent  corporation  are  faithfully 
used  to  meet  its  liabilities,  and  its  dead 
body  is  buried  out  of  sight  as  soon  as  pos- 
sible, no  objection  can  be  made  to  the 
procedure,  and  all  courts  and  good  citizens 
should  contribute,  as  far  as  they  may,  to 
this  desirable  object.  In  regard,  however, 
to  a  certain  class  of  corporations,  —  a  class 
whose  operations  are  as  im])ortant  to  the 
interests  of  the  community  and  as  inti- 
mately connected  with  its  business  and 
social  habits  as  any  otlier,  —  tlie  aj)poiiit- 
ment  of  receivers,  as  well  as  tlie  power 
conferred  on  them,    and  the  duration   of 


their  office,  has  made  a  progress  which, 
since  it  is  wholly  the  work  of  courts  of 
chancery  and  not  of  legislatures,  may  well 
suggest  a  pause  for  consideration.  It  will 
not  be  necessary  to  any  observing  mind  to 
say  that  1  allude  to  railroad  corporations. 
Of  the  fifty  or  more  who  own  or  have  owned 
the  many  thousand  miles  of  railway  in  my 
judicial  circuit,  I  think  I  speak  within 
limits  in  saying  that  hardly  half  a  dozen 
have  escaped  the  hands  of  the  receiver.  If 
these  receivers  had  been  appointed  to  sell 
the  roads,  collect  the  means  of  the  com- 
panies, and  pay  their  debts,  it  might  have 
been  well  enough.  But  this  was  hardly 
ever  done.  It  is  never  done  now.  It  is 
not  the  purpose  for  which  a  receiver  is 
appointed.  He  generally  takes  the  prop- 
erty out  of  the  hands  of  its  owner,  operates 
the  road  in  his  own  way,  with  an  occasional 
suggestion  from  the  court,  which  he  recog- 
nizes as  a  sort  of  partner  in  the  business  ; 
sometimes,  though  very  rarely,  pays  some 
money  on  the  debts  of  the  corporation,  but 
quite  as  often  adds  to  them,  and  injures 
prior  creditors  by  creating  a  new  and  sujie- 
rior  lien  on  the  property  pledged  to  them." 
Almost  more  sweeping  is  the  following 
expression  of  opinion  by  Judge  Butler : 
"The  modern  practice  of  transferring  cor- 
porate property  to  the  custody  of  the 
courts,  to  be  thus  held  and  managed  for 
an  indefinite  period  of  years,  to  suit  the 
convenience  of  parties,  I  regard  as  a  mis- 
chievous innovation."  Taylor  v.  Phil.  & 
Reading  R.  Co.  (1881),  9  Fed.  Rep.  1. 
See  also  the  report  of  the  case  of  the  South 
Carolina  Railroad  in  11  Chicago  Legal 
News,  8,  where  Judge  Bond  gives  some 
statistics  as  to  the  disastrous  results  of 
some  receiverships.  See  also  27  Am.  Law 
Rev.  481. 


§  515.] 


APPOINTMENT,  ETC.,  OF  RECEIVERS. 


509 


In  England,  where  a  distinction  is  made  between  a  mere  re- 
ceiver of  rents  and  profits  and  a  person  who  acts  as  a  manager  of 
the  business,  it  was  held,  in  a  leading  case,^  that  a  court  of  equity 
would  not  appoint  a  functionary  of  the  latter  description  to  take 
charge  of  the  property  of  a  railroad  company.  In  consequence  of 
this  decision,  a  statute  was  passed  by  which  the  powers  of  the 
courts  of  equity  were  made  virtually  identical  with  those  which 
tiie  courts  of  this  country  have  not  hesitated  to  exercise  without 
any  enabling  act.^ 

§  515.  Jurisdiction  to  appoint  a  Receiver.  —  The  power  of  a 
court  of  chancery  to  ap{)oint  a  receiver  pendente  lite  in  fore- 
closure cases  is  a  part  of  its  incidental  jurisdiction  not  depending 
on  any  statute.^ 

In  some  of  the  United  States  statutes  have  been  passed  author- 
izing the  appointment  of  receivers,  but  it  may  fairly  be  questioned 
whether  any  positive  advantages  have  been  gained  by  these  enact- 
ments. "  There  is  no  reason  why  the  court  of  equity  in  the  exer- 
cise of  its  undoubted  authority  may  not  accomplish  all  the  best 
results  intended  to  be  secured  by  such  legislation."* 


1  Gardner  v.  Eailway  Co.,  L.  R.  2  Ch. 
App.  301. 

2  30  &  31  Vict.,  ch.  127 .  See  also  38  & 
39  Vict.,  ch.  31.  Under  these  acts  a  re- 
ceiver manager  may  be  appointed  of  the 
undertaking  of  a  ti'aniway  company,  as 
well  as  of  a  railwa}',  in  a  suit  to  enforce 
overdue  mortgage  debentures.  Bartlett  v. 
West  Metropolitan  Tramway  Co.  (1893), 
L.  R.  3  Ch.  437.  See  also  Pegge  v. 
Neath  Tramways  Co.  (1895),  L.  R.'  2  Ch. 
509. 

Debenture-holders,  their  security  being 
a  floating  one  on  all  the  assets  of  a  com- 
pany, have  a  right  to  enforce  their  security 
through  the  appointment  of  a  receiver, 
whenever  the  company  ceases  to  be  a 
going  concern.  Hubbuck  v.  Helms  (1887), 
56  L.  T.  N.  S.  232. 

But  a  railway  company  which  has  never 
commenced  to  acquire  the  lands  or  con- 
struct the  railways  authorized  by  its  special 
act  is  not  an  "undertaking"  within  the 
meaning  of  section  4  of  the  former  of  these 
statutes,  as  it  is  a])plicable  by  its  terms 
only  to  a  going  concern.  In  re  Birming- 
ham, etc.  Ry.  Co.  (1881),  L.  R.  18  Ch. 
Div.  155  ;  3  Am.  &  Eng.  R.  R.  Cas.  616. 

The  English  doctrine  as  to  the  impro- 
priety of  a  court's  undertaking,  without 


special  statutory  authority,  to  appoint  a 
receiver  to  supersede  permanently  the 
managers  of  a  railway,  and  to  take  entire 
charge  of  its  affairs,  was  mentioned  with 
approval  in  a  New  Jersey  case.  Delaware, 
Lackawanna,  &  Western  R.  Co.  v.  Erie 
Ry.  Co.  (1871),  21  N.  J.  Eq.  283,  298, 
citing  Russell  v.  East  Anglian  Ry.  Co.,  3 
Mac.  &  G.  125,  and  Fripp  v.  Chard,  etc. 
Ry.  Co.,  11  Hare,  254. 

8  United  States  Trust  Co.  v.  New  York, 
W.  S.  &  B.  R.  Co.  (1886),  101  N.  Y. 
478  ;  s.  c.  5  N.  E.  Rep.  376  ;  25  Am.  & 
Eng.  R.  R.  Cas.  601  ;  Meyer  v.  Johnston 
(1875),  53  Ala.  237;  s.  c.  15  Am.  Ry, 
Rep.  467  ;  Davis  v.  Gray  (1873),  16  Walk 
203,  219  ;  Ford  v.  Kansas  City  &  Indepen- 
dence Short  Line  Ry.  Co.  (1893),  52  Mo. 
App.  439  ;  High  on  Rec,  §§  40,  41.  In 
New  York,  where  it  was  provided  by  stat- 
ute (2  Rev.  Stat.  463,  §  38)  that  a  receiver 
may  be  appointed  in  an  equitable  action 
instituted  by  the  people  for  the  dissolution 
of  a  corporation,  it  has  been  held  that  the 
powers  and  duties  of  such  a  receiver  were 
not  statutory,  but  merely  were  such  as 
devolve  on  them  by  the  orders  of  the 
court. 

4  Davis  V.  Gray  (1873),  16  Wall.  203, 
220. 


510  BAILWAY   BONDS   AND   MORTGAGES.  [CHAP,  XXVI. 

As  a  general  rule  the  power  is  one  to  be  exercised  by  a  trial 
and  not  an  appellate  court ;  ^  and  where  an  appeal  has  been  taken, 
the  appointment  of  a  receiver  should  ordinarily  be  made  by  the 
former.^ 

Under  the  statutes  of  Illinois  the  appointment  of  a  receiver  is 
invalid,  unless  made  during  the  term.^ 

But  an  appointment  made  during  vacation  will  be  good,  if  after- 
wards confirmed  during  term  time.* 

A  United  States  Circuit  Court  sitting  within  the  district  where 
a  national  bank  resides  has  jurisdiction,  without  respect  to  the 
citizenship  of  the  parties,  to  appoint  a  receiver  of  an  insolvent 
railroad  company  in  a  suit  brought  by  such  bank.  This  power  it 
possesses  by  virtue  of  the  general  jurisdiction  of  such  courts  over 
suits  brought  by  or  against  national  banks.^ 

In  the  case  of  the  Northern  Pacific  Railroad,  which  runs  through 
the  districts  of  Wisconsin,  Minuesota,  Illinois,  Nortli  Dakota, 
]\Iontana,  Idaho,  Washington,  and  Oregon,  with  certain  offices  in 
New  York,  and  its  principal  offices  in  Minnesota,  proceedings  in 
the  form  of  a  creditor's  bill  were  originally  instituted  in  the 
Eastern  District  of  Wisconsin,  where  the  company  controlled 
certain  lines  of  road  under  a  long-term  lease,  the  company  ap- 
peared without  objecting  to  the  jurisdiction,  and  the  court  of  that 
district  appointed  receivers.  In  all  the  other  districts  mentioned 
the  courts  appointed  the  same  receivers  in  ancillary  proceediugs. 
The  lease  of  the  roads  in  Wisconsin  was  shortly  afterwards  can- 
celled by  the  lessors  for  non-payment  of  rent.  The  trustee  of  the 
bondholders  filed  in  the  same  court  a  bill  for  foreclosure  of  their 
mortgage,  and  also  ancillary  bills  in  the  courts  of  the  other  dis- 

1  High  onRec,  §  41.  In  Tennessee,  it  destruction.  But  for  the  Supreme  Court 
would  seem  that  the  Supreme  Court  may,  to  pass  such  interlocutory  orders  as  might 
in  a  proper  case,  appoint  a  I'eceiver  pending  be  necessary  would  be  very  inconvenient,  if 
an  apfieal.  Kerr  r.  White  (1874),  7  Baxt.  not  impracticable.  We  know  of  no  instance 
394.  In  Pacific  Railroad  of  Missouri  ^•.  where  it  has  been  done.  The  Circuit  Court 
Ketchum  (1877),  95  U.  S.  1,  tlie  Supreme  acted  with  full  knowledge  of  the  facts  and 
Court  of  the  United  States  declined  to  its  practice  in  such  cases.  True,  the  case 
decide  whether  a  case  might  not  arise  in  was  in  the  Supreme  Court  ;  but  the  ulti- 
which  they  would  exercise  the  ])ower  of  mate  disposition  of  the  property  was  to  be 
appointing  a  receiver,  i)ending  an  appeal,  through  the  Circuit  Court.  We  think  that 
but  were  of  opinion  tliat  they  ought  not  to  court  could  grant  such  an  order  as  it  did." 
do  so  on  the  showing  made  in  the  case.  *  Hammock  v.  Loan  &  Trust  Co.  (1881), 

2  May  V.  Printup  (1877),  59  Ga.  128  ;  105  U.  S.  77. 

8.  c.  6  Kep,  392.      The  court  said  :   "  To  *  Hervey  v.  Illinois  Midi.  R.  Co.  (1884), 

us  it  seems  very  evident  that  either  the  28  Fed.  169. 

Supreme  Court  or  the  Circuit  Court  must  ^  Fifth    Nat.    Bank    of    Pittsburg    v. 

have    power  to  preserve  the    projjerty  in  Pittsburg  &  Castle  Shannon  R.  Co.  (1880), 

litigation,  and  to  prevent  its  waste   and  1  Fed.  Rop.  190. 


§  516.]  APPOINTMENT,    ETC.,    OF   RECEIVERS.  511 

tricts.  The  same  receivers  were  again  appointed  in  all  the  courts. 
Afterwards,  in  the  district  of  Washington,  the  court,  on  a  bill, 
held  that  the  court  in  Wisconsin  had  never  had  or  had  lost  its 
jurisdiction  by  the  cancelling  of  the  lease,  leaving  no  property  of 
the  company  within  its  territory,  and  removed  the  receivers.^ 

By  petition  the  trustee  and  railroad  company  presented  the 
matters  and  questions  involved  to  Circuit  Justices  Field,  Ifarlan, 
Brewer,  and  Brown,  of  the  Supreme  Court.  Their  opinion  and 
judgment,  after  hearing  all  parties  through  their  counsel,  was  thus 
stated  :  "  We  are  of  opinion  that  proceedings  to  foreclose  a  mort- 
gage placed  by  a  railroad  company  upon  its  lines,  extending 
through  more  than  one  district,  should,  to  the  end  that  the  mort- 
gaged property  may  be  effectively  administered,  be  commenced  in 
the  Circuit  Court  of  the  district  in  which  the  principal  operating 
offices  are  situated,  and  in  which  there  is  some  material  part  of 
the  railroad  embraced  by  the  mortgage ;  that  such  court  should 
be  the  court  of  primary  jurisdiction  and  of  principal  decree,  and 
the  administration  of  the  property  in  the  Circuit  Court  of  other 
districts  should  be  ancillary  thereto."  But  under  the  circum- 
stances of  this  case  they  determined  that  the  court  of  the  Eastern 
District  of  Wisconsin  had  jurisdiction  to  proceed  to  a  decree  of 
foreclosure  which  would  bind  the  mortgagor  company  and  the 
mortgaged  property,  and  ought  therefore  to  be  recognized  by  the 
Circuit  Courts  of  every  district  along  the  line  of  the  road  as  the 
court  of  primary  jurisdiction  ;  and  that  proceedings  in  the  latter 
courts,  while  protecting  the  rights  of  local  creditors,  should  be 
ancillary  in  their  character,  and  subordinate  to  the  proceedings  in 
the  court  of  primary  jurisdiction.^ 

As  to  conflicts  of  jurisdiction  in  suits  asking  for  the  appoint- 
ment or  removal  of  receivers,  see  Chapter  XXI. 

As  to  jurisdiction,  so  far  as  it  depends  upon  the  necessary  par- 
ties being  before  the  court,  see  Chapter  XXIV. 

As  to  the  appointment  of  receivers  in  other  States  or  districts, 
see  §  525,  post. 

As  to  the  removal  of  ancillary  receivers,  see  §  549,  post. 

§516.  Who  should  be  appointed  Receiver.^  —  Since  a  receiver 
acts  as  the  representative  of  every  one  who  has  an  interest  in  the 
subject-matter  of  the  suit,  it  is  of  the  first  importance  that  he 

1  Farmers'  Loan  &  Trust  Co.  v.  North-  26,  overruling  Farmers'  Loan  &  Trust  Co. 
ern  Pac.  Ry.  Co.  etal.  (1895),  69  Fed.  Rep.  v.  Xorthern  Pac.  R.  Co.  ct  al.  (1895),  69 
871.           '  Fed.  Rep.  871. 

2  Farmers'  Loan  &  Trust  Co.  v.  North-  ^  See  generally  High  on  Rec,  §§  66  et 
ern  Pac.  R.  Co.  et  al.  (1896),  72  Fed.  Rep.  seq.  ;  "Woods  Ry.  Law,  1652. 


512 


RAILWAY    BONDS    AND    MORTGAGES.  [CHAP.  XXVI. 


should  be  an  impartial  person.  For  this  reason  the  fact  that  the 
proposed  appointee  is  himself  interested  in  the  result  of  the  litiga- 
tion will  usually  be  sufficient  to  cause  his  rejection.  The  general 
rule  is  that,  unless  in  cases  of  imperative  necessity,  no  person 
will  be  appointed  receiver  of  a  railway  company  who  is  a  party  to, 
or  of  counsel  in,  the  cause,  or  who  has  been  an  officer  in,  or  an 
official  of,  the  insolvent  corporation.^ 

A  person  connected  with  a  firm  who  are  counsel  for  complain- 
ant is  ineligible  to  the  appointment  of  receiver.^ 

A  party  defendant  is  an  especially  improper  person  to  act  as 
receiver.^ 

Nor  ought  a  stockholder  or  director  to  be  appointed  under  or- 
dinary circumstances.* 

In  the  case  of  directors,  the  objection  to  their  appointment  is 
based  not  merely  on  the  improbability  of  their  acting  impartially, 
but  also  on  the  common-sense  principle  that  a  person  who  cannot 
with  the  aid  of  others  manage  a  business  successfully,  is  prima 
facie  unfit  to  conduct  it  alone.^ 


1  Finance  Co.  of  Pennsylvania  v. 
Charleston,  C.  &  R.  Co.  (1891),  45  Fed. 
Kep.  436.  In  Meier  v.  Kansas  Pac.  Ry. 
(1878),  5  Dill.  476,  479,  Mr.  Justice 
Miller  made  the  following  remarks  as  to 
the  selection  of  receivers  :  "  A  receiver  is 
strictly  and  solely  the  officer  of  the  court. 
By  reason  of  the  inability  or  neglect  of  the 
officers  of  the  corporation  to  conduct  its 
business  as  it  ought  to  be  done,  the  conduct 
of  that  business  is  taken  charge  of  by  the 
court  and  carried  on  by  its  agent.  It  is 
the  duty  of  that  agent  so  to  conduct  the 
business  as  that  the  lawful  rights  and  legal 
interests  of  all  persons  in  the  property  and 
in  the  business  shall  be  protected  as  far  as 
possible  with  equal  and  exact  justice.  This 
is  much  more  likely  to  be  done  by  a  receiver 
who  has  no  interest  in  the  capital  stock  of 
the  road,  nor  in  its  debts,  and  no  obliga- 
tions to  those  who  have.  Such  a  person 
acting  under  the  control  of  the  court  seek- 
ing its  advice  (as  he  would  be  inclined  to 
do  in  all  ([uestions  of  doubtful  duty),  and 
bound  in  a  sufficient  surety  for  the  faithful 
performance  of  his  duty,  is  in  my  opinion 
the  proper  one  for  such  an  office."  As  to 
fitness  and  eligibility  of  one  appointed  a 
receiver,  see  People  ex  rel.  Gore,  etc.  v. 
Illinois  Building  &  Loan  A.ssn.  (1894), 
50   111.    App.   G12.      See   "Who  may  be 


Receivers,"  note,  23  Am.  L.  Reg.  N.  S. 
582,  589. 

2  State  Trust  Co.  of  New  York  v. 
National  Land  Imp.  &  Manufg.  Co.  et  al. 
(1893),  72  Fed.  Rep.  575;  following  Fi- 
nance Co.  V.  Charleston,  C.  k  C.  R.  Co. 
(1891),  45  Fed.  Rej).  436.  See  also  Phinizy 
V.  Augusta  &  K.  Ry.  Co.  (1893),  56  Fed. 
Eep.  273. 

3  Young  V.  Rollins  (1881),  85  N.  C. 
485  ;  s.  c.  12  Am.  &  Eng.  R.  R.  Cas.  455. 

*  Atkins  V.  Wabash,  St.  L.  &  Pac.  R. 
Co.  (1886),  29  Fed.  Rep.  161,  174. 

5  High  on  Rec,  §  72;  McCullough  i'. 
Merchants'  Loan  &  Trust  Co.  (1878),  29 
N.  J.  Eq.  217.  In  Richards  v.  Chesapeake 
&,  Ohio  R.  Co.  (1875),  1  Hughes,  28,  the 
court  denied  a  request  to  appoint  the  vice- 
president  of  the  road,  saying:  "It  ap- 
jieared  to  the  court  then,  as  it  does  now, 
that  the  Chesapeake  &  Ohio  R.  Co.  is 
overwhelmed  with  debt,  secured  and  unse- 
cured. How  it  came  so  is  not  for  us  to 
determine.  But  the  court,  when  called 
upon  to  appoint  a  receiver  for  a  corpora- 
tion totally  insolvent,  who  is  to  be  the 
mere  servant  of  the  court,  upon  whose 
fidelity  and  ability  to  manage  during  the 
pendency  of  the  suit  the  property  in- 
trusted to  him  the  court  must  rely,  ought 
not  to  be  expected  to  appoint  a  person 


§  516.] 


APPOINTMENT,    ETC.,    OF    RECEIVERS. 


513 


To  induce  the  court  to  appoint  a  former  official  of  the  road,  it 
must  in  any  case  appear  that  the  consent  of  at  least  the  great 
majority  of  the  creditors  has  been  obtained.' 

But  even  tlie  consent  of  all  the  secured  creditors  has  been 
deemed  insufficient  to  warrant  such  an  appointment.'-^ 

Nor  will  the  assent  of  the  creditors  warrant  the  court  in  ])lacing 
the  business  of  the  company  in  the  hands  of  one  of  its  former 
officials,  unless  his  integrity  is  above  suspicion,  and  it  is  shown 
that  the  disasters  which  have  led  to  the  foreclosure  have  not  been 
due  to  liis  recivlcss  management.^ 

Provided  that  the  creditors  give  their  assent,  and  there  are  no 
objections  on  the  score  of  personal  character,  the  court  will  give 
due  weight  to  the  consideration  that  the  knowledge  and  famili- 
arity of  a  particular  person  with  the  estate  to  be  managed  may 
justify  a  departure  from  the  general  rule,* 

The  case  of  a  railway  has  even  been  thought  to  furnish  an 
excej)tionally  strong  illustration  of  the  advisability  of  qualifying 
that  rule,  on  the  ground  that  the  best  intei'ests  of  all  parties  may 
be  promoted  by  the  appointment  of  one  who  has  been  managing 
the  business.^ 

under  whose  charge  and  control  the  re-  Co.  (1875),  1  Hughes,  28,  Hughes,  .!., 
sources  of  the  road  had  been  exhausted,  said :  "  The  receiver  is  not  the  receiver 
its  property  seized  upon  execution,  and  of  the  bondholders  or  secured  creditors, 
the  necessity  of  a  receiver  brought  about."  He  is  the  mere  hand  of  the  court.  The 
1  Farmers'  Loan  &  Trust  Co.  v.  North-  unsecured  creditors,  whose  chances  of  a 
ern  Pacific  R.  Co.  (1894),  61  Fed.  Rep.  dividend  are  remote,  have  a  deep  interest 
546.  In  this  case,  a  former  president  of  in  Ivuowing  that  the  road,  while  its  assets 
the  company  was  made  receiver  at  the  re-  are  being  marshalled,  and  its  creditors, 
quest,  and  on  the  nomination  of,  the  trus-  tlieir  claims  and  priorities,  ascertained,  is 
tees  who  represented  by  far  the  largest  free  from  the  control  of  those  whose  ad- 
part   of  the    bondholders,  and    with,  the  ministration  of  its  affiiirs  ended  in  bank- 


consent  of  those  bondholders  themselves 
and  of  the  company. 

In  Ralston  v.  Washington  &  C.  C.  R. 
Co.  (189.5),  65  Fed.  Rep.  557,  the  court 
ap]iroved  the  nomination  of  a  president 
of  a  railroad  company  as  receiver  by  a 
trustee  who  had  the  power  of  selecting 
one  under  the  provisions  of  the  mortgage. 
There  was  said  to  be  no  inflexible  rule  on 
the  subject. 

lu  Fri])p  V.  Bridgewater  &  Taunton 
Canal,  etc.  Co.  (18.'..3),  11  Hare,  241,  260, 
a  customer,  a  shipper  over  the  canal  com- 
pany, was  held  not  a  proper  person  for  the 
receivership,  as  his  double  position  would 
make  a  conflict  between  his  duty  and 
interest. 

2  Richards  v.   Chesapeake  &  Ohio   R. 


ruiitcy. 

^  Farmers'  Loan  &  Trust  Co.  v.  Korth- 
ern  Pacific  R.  Co.  (1894),  61  Fed.  Rep. 
546. 

*  Sykes  v.  Ha.stings,  11  A'es.  363  ;  New- 
port  V.  Bury,  23  Beav.  30. 

^  Farmers'  Loan  &  Trust  Co.  v.  North- 
ern Pacific  R.  Co.  (1894),  61  Fed.  Rep. 
546.  There  Judge  Jenkins,  in  upholding 
the  propriety  of  appointing  a  former  presi- 
dent of  the  road  to  act  as  receiver,  said : 
"  Railway  management  has  become  a  pro- 
fession. A  railway  is  not  a  toy  that  may 
be  trifled  with.  Its  management  recpiires 
gieat  financial  and  executive  abilit}',  and 
tlie  practical  experience  of  years.  Rail- 
way management  stands  apart  as  a  spe- 
cialty.   The  ablest  men  in  other  jirofessions 


33 


514  >  RAILWAY    BONDS    AND    MORTGAGES.  [CHAP.  XXVI. 

For  reasons  analogous  to  those  which  lead  a  court  to  select  as 
receivers  only  such  persons  as  are  likely  to  represent  impartially 
all  those  who  are  concerned  in  the  issue  of  the  suit,  it  is  held  that 
the  attorney  of  the  plaintiff  should  not  be  authorized  to  act  as 
attorney  for  the  receiver,^ 

A  person  is  not  disqualified  for  the  position  of  receiver  merely 
because  he  is  not  a  railroad  expert  acquainted  with  all  the  details 
of  the  mechanical  work  of  a  railroad  plant,  provided  he  possesses 
integrity  of  character,  business  experience,  a  knowledge  of  affairs, 
a  capacity  for  the  examination  into  and  comprehension  of  ac- 
counts, is  not  a  partisan,  and  has  no  pecuniary  interest  in  any  one 
of  the  classes  of  creditors  whose  claims  come  before  the  court.^ 

From  the  fact  that  a  receiver  is  an  officer  of  the  court  by 
which  he  is  appointed,  it  necessarily  follows  that  he  must  be  some- 
body living  within  the  jurisdiction  of  the  court,^  though  apparently 
the  circumstance  that  he  resides  at  a  distance  from  the  property 
to  be  administered  is  not  an  absolute  disqualification.'* 

§  517.  Necessity  of  Notice  to  Parties  -who  vrill  be  affected  by 
the  Appointment.^  —  In  appointing  a  receiver  a  court  of  equity 
usually  proceeds  u))on  the  fundamental  principle  that  any  person 
whose  rights  will  be  affected  by  judicial  action  ought  to  have  an 
opportunity  of  presenting  his  side  of  the  case.  Thus  the  appoint- 
ment of  a  receiver  to  take  charge  of  corporate  property  will  not 
be  granted  where  the  corporation  itself  is  not  a  party  to  the  bill, 
or  in  court  in  some  other  way,  as  on  notice  for  a  preliminary 
injunction.'' 

and  in  other  walks  of  life  would  probably  such  an  arrangement  is  waiTantable,  un- 

fail  in  tlie  successful  direction  of  the  affairs  less  under  a  very  excei)tional  showing  of 

of  a  railway,  if  the}'  are  wanting  in  that  facts,  it  is  evidently  o])posed  to  the  weight 

knowledg"  of  its  needs  and  requirements  of  authority. 

that  may  only  be  obtained  by  long  expe-  ^  Blair  v.  St.   Louis,   H.  &  K.  E.  Co. 

rience    in    its   practical  management  and  (1884),  20  Fed.  Rep.  348.     In  this  case  it 

operation.     For   the  operation  of  a  vast  was  also  ruled  that  the  receiver's  attorney 

system  like  that  of  the  Northern  Pacific,  ought,  in  the  absence  of  some  special  rea- 

it  seemed  desirable  that  one  of  its  receivers  son,   to  be  a  member  of  the   bar  of  the 

should  be  a  gentleman  familiar  with  the  circuit  in  which  the   receiver  himself  is 

intricate  details  of  its  history,  and  with  appointed. 

the  necessities  peculiar  to  the  system  ;  for  -  Farmers'  Loan  &  Trust  Co.  r.  Cape 

however  well  qualified  one  might  be  witii  Fear  &  Y.  Valley  R.  Co.  (1894),  62  Fed. 

respect  to  railway  management  in  general,  Rejt.  675. 

he  would,  at  least,  for  a  considerable  time,  ^  Meier  v.  Kansas  Pacific  R.  Co.  (1878), 

be  at  s«a  in  the  management  of  a  trans-  5  Dill.  476. 

continental  line,  of  whose  history  he  was  *  Wynne  v.  Lord  Newborough,  15  Ves. 

ignorant,  and  with  the  necessities  of  which  284. 

he  was  not  familiar."     The  circumstances  ^  As  to  the  removal  of  a  receiver  ap- 

niider  whicli  tlie  order  was  issued  are  not  pointed  ex  parte,  see  §  547,  posf. 

statcfl,  but,  if  the  case  is  intended  to  rest  "  Oravenstine's  Appeal  (1865),   49  Pa. 

on    any   a.ssumed    general    principle   that  St.  310. 


§  517.]         APPOINTMENT,  ETC.,  OF  RECEIVERS.  515 

Nor  will  a  receiver  be  appointed  to  oust  the  possession  of  the 
purchaser  at  a  previous  execution  sale  of  a  railroad,  where  such 
purchaser  has  not  been  made  a  party  to  the  proceedings.^ 

This  rule,  however,  is  subject  to  the  exception  that  a  receiver 
may  be  appointed  upon  an  ex  parte  application,  when  it  is  shown 
that  the  delay  which  would  result  from  giving  notice  would  cause 
irreparable  injury  to  the  adverse  party .^ 

Sufficient  urgency  to  justify  an  ex  parte  appointment  is  not 
shown  by  a  complaint  which  alleges  the  insolvency  of  the  com- 
pany and  its  predecessor,  and  levying  of  executions  on  the  rolling- 
stock,  the  result  being  the  stoppage  of  a  traffic  at  a  time  when  there 
are  immense  quantities  of  grain  awaiting  shipment.  Such  aver- 
ments do  not  show  that  any  great  loss  or  damage  is  likely  to  occur 
during  the  brief  period  required  for  giving  notice  to  a  resident 
corporation.^ 

Nor  ought  an  ex  parte  appointment  to  be  made  where  the  mal- 
administration alleged  as  a  ground  for  a  receivership  has  already 
extended  over  several  years,  and  it  is  evident  that  a  brief  delay 
will  cause  no  substantial  additional  injury .* 

The  particular  circumstances  which  constitute  the  necessity 
upon  which  the  ex  parte  application  is  based  must  be  set  forth  in 
the  petition.  A  mere  statement  of  the  petitioner's  opinion  will 
not  justify  an  appointment  without  notice.^ 

The  fact  that  the  defendant  is  out  of  the  jurisdiction  of  the 
court  is  a  sufficient  reason  for  failing  to  give  him  notice  of  a 
motion  for  a  receiver ;  ^  but  the  non-residence  of  the  officers  of  a 

^  Searles  v.  Jacksonville,  Pensacola,  &  pointed  at  the  instance  of  a  minority  of 

Mobile  R.  Co.  (1873),  2  Woods,  621.  the  directors  on  an  ex  parte  application, 

2  High  on  Rec,  §§  111,  113;  Railway  such  an   appointment  being   not   merely 

Co.  V.  Jewett  (1882),  37  Ohio  St.  649  ;  8  irregular,    but    absolutely   void,    and    an 

Am.  &  Eng.   R.    R.  Cas.    702  ;    State  of  abuse  of  the  power  of  the  court,   n-hich 

Florida  v.  Jacksonville,  Pensacola,  &  Mo-  might  be  corrected  by  mandamus.     This 

liile  R.  Co.   (187.5),   15   Fla.  201   (see  p.  ruling,  however,  is  possibly  not  to  be  re- 

286);  Piamsey  ■«.  Erie  Ry.  Co.  (1869),  38  garded  as  intended  to  deny  the  propriety  of 

How.  Pr.  193.     See  also  Cooke  v.  Detroit  an  ex  parte  appointment,  in  a  very  urgent 

&  Milwaukee  R.  Co.  (1881),  45  Mich.  453,  case,  at  the  instance  of  secured  creditors, 
and  tlie  note  in  the  report  of  this  case  in  ^  Chicago  &  S.   E.   Ry.    Co.   v.    Cason 

12  Am.  &  Eng.   R.   R.  Cas.  459.     There  (1892),  133  Ind.  49  ;  s.  c.  32  N.  E.  Rep. 

the  Michigan  court,  in  construing  the  stat-  827. 

ute  of  that  State  regarding  corporations  *  Wabash  Ry.  Co.  v.  Dykcman  (1892), 

concluded   that   the   management   ot    the  133  Ind.  56  ;  s.  c.  32  N.  E.  Rep.  823. 
corporate  business  could  be  taken  from  a  ^  Wabash  Ry.  Co.  v.  Dykeman  (1892), 

board  of  directors  only  in  proceedings  in-  133  Ind.  56  ;  s.  c.   32  N.  E.  Rep.   823  ; 

stituted   to  wind   up  the  corporation   in  High  on  Rec,  §  113. 

accordance   with   the   provisions   of    that  ^  Verplanck    v.    Mercantile    Ins.    Co. 

.statute.     For  tliis  reason  it  was  held   that  (1831),  2  Paige  Ch.  (N.  Y. )  438  (per  Wal- 

a  receiver   ought   not   to   have  been  ap-  worth,  Chancellor). 


516  RAILWAY    BONDS    AND    MORTGAGES.  [CHAP.  XXVI. 

lessor  company  is  no  excuse  for  the  omission  to  notify  its  lessee, 
which  is  in  possession,  and  which  is  alleged  by  its  maladministra- 
tion to  have  brought  about  the  condition  of  affairs  which  is  the 
gravamen  of  the  application.^ 

A  corporation  Avhich  is  defunct,  owing  to  the  transfer  of  its 
powers  and  property  to  a  new  corporation,  by  virtue  of  legislative 
enactment,  cannot,  of  course,  be  made  a  party  to  a  suit ;  but  this 
will  not  justify  the  court  in  appointing  a  receiver  of  its  assets  on 
an  ex  parte  application.  Such  a  receiver  can  be  appointed  only  in 
a  proceeding  to  which  the  successor  of  the  extinct  corporation  or 
a  substitute  is  a  party.^ 

§  518.  The  Court  will  not  go  into  the  Merits  of  the  Case  upon 
the  Hearing  of  an  Application  for  the  appointment  of  a  receiver.^ 

Hence  a  receiver  will  not  be  appointed  on  the  preliminary  hear- 
ing, where  the  propriety  of  the  appointment  is  a  principal  question 
in  the  case,  and  it  is  required,  if  at  all,  by  the  view  which  the 
court  shall  ultimately  take  of  the  case,  as  part  of  the  means  which 
should  be  used  to  afford  the  relief  contemplated  by  the  decree.* 

So  also,  upon  the  general  principle  that  one  who  is  lawfully  and 
by  the  contract  of  the  parties  in  possession  of  property  should 
not  be  disturbed  in  that  possession  except  in  a  clear  case,  a  receiver 
will  not  ordinarily  be  appointed  in  a  foreclosure  suit,  unless  the 
right  to  foreclose  is  clear  and  indisputable.  The  appointment 
will  be  refused  if  there  is  a  reasonable  doubt  as  to  whether  the 
conditions  of  the  mortgage  have  been  broken.^ 

So  also  tlie  court  should  hesitate  before  making  an  appoint- 
ment on  the  ground  of  a  possible  injury  to  one  holding  nothing 
more  than  a  disputed  equitable  claim  for  deferred  stock.^ 

But  the  applicant  need  not  show  conclusively  that  he  is  entitled 
to  recover  in  order  to  obtain  the  appointment  of  a  receiver.  He 
is  only  required  to  show  a  probable  right.' 

And  if  a  borulhulder  is  seeking  to  enforce  a  mortgage  which  on 
its  face  is  susceptible  of  enforcement,  the  probable  right  thus  in- 
dicated cannot  be  affected  by  an  allegation  on  the  part  of  the 
defendant  that  the  securities  are  fraudulent  and  void.     This  prob- 

1  Wa])a.sli  Ry,  Co.  v.  Dykcrnan  (1892),  C.  &  S.  R.  Co.  (ISSii),  29  Fed.  Rep.  416, 
133  Ind.  56  ;  s.  c.  32  N.  E.  Hep.  823.  420. 

2  Voiiii^r  V.  Rollins  (1881),  85  N.  C.  '  ^  Overton  y.  Memphis  &  Little  Rock  R. 
485  ;  s.  c.  12  Am.  &  Eng.  R.  R.  Cas.  4.55.    Co.  (1882),  10  Fed.  Rep.  866. 

8  Kerr  on  R(h;.,  p.  8.  ''  Des  Moines  Gas  Co.  v.  West  (1876), 

*  Union  Mat.  Life   Ins.  Co.    v.  Union  44  Iowa,  23,  wliere  tlie  court  said  that  the 

Mills    Plaster   Co.    (188:"),    37    I'Vil.    \\v\).  rule  was  not  ehani^ed  by  the  Code  of  Iowa, 

286.  which  rather  strengthened  than  impaired 

^  American  Loan  k  Trust  Co.  v.  Toledo,  the  rights. 


§§  519-521.]        APPOINTMENT,    ETC.,    OP    RECEIVERS.  517 

ability,  so  far  as  regards  the  appointment  of  the  receiver,  will 
continue  until  the  defence  is  made  good.  If  the  circumstances  of 
the  case  sliow  the  advisability  of  appointing  a  receiver  to  take 
charge  of  the  property  pending  the  litigation,  the  court  will  not 
be  prevented  by  such  an  allegation  from  making  the  appointment, 
and  the  determination  of  the  issue  of  fact  thus  raised  will  be 
reserved  for  the  final  hearing.^ 

The  court  will  sometimes  postpone  the  final  determination  of 
an  application  for  a  receiver,  so  that  the  defendant  may  have 
time  to  take  the  necessary  stei)s  to  make  his  defence  good. 
Under  such  circumstances,  he  must  act  with  reasonable  prompti- 
tude. Any  laches  in  this  respect  will  warrant  the  court  in  dealing 
with  the  case,  as  if  no  defence  had  been  put  forward.  Tims  where 
the  defence  made  to  a  petition  by  a  judgment  creditor  for  the  ap- 
pointment of  a  receiver  is  that  the  judgment  was  obtained  by  the 
collusion  and  fraud  of  the  ofiicers,  the  failure  of  the  defendant  to 
avail  himself  of  an  opportunity,  granted  him  by  a  susi)cnsion  of 
the  proceedings,  to  apply  to  the  court  in  which  the  judgment  was 
recovered,  and  have  it  set  aside,  authorizes  the  inference  that  the 
defence  is  without  merit,  and  justifies  the  court  in  proceeding 
with  the  case  and  ai)))ointing  the  receiver.^ 

§  519.  A  Full  and  Fair  Denial  by  the  Defendant  of  the  Allegations  in 
the  Bill  will  preclude  the  Petitioner  from  obtaining  a  Receiver.  — To 
a})point  one  in  the  face  of  such  denial  is  judicial  error  ;  ^  unless  there 
is  other  evidence  besides  the  sworn  pleadings  to  support  the 
application,  in  which  case  the  court  may  consider  whether  that 
evidence  does  not  overcome  the  denials  in  the  answer. 

§  520.  When  the  Mortgagor  Company  may  obtain  the  Appoint- 
ment of  a  Receiver.  —  Should  the  preponderance  of  evidence 
appear  to  be  in  favor  of  the  complainant,  a  receiver  may  be 
appointed,  notwithstanding  the  denials  in  the  answer.^ 

§  521.  At  whose  Instance  a  Receiver  may  be  appointed,  generally. 
—  In  the  great  majority  of  the  cases  of  the  class  with  which  the 
present  treatise  deals,  the  application  for  a  receiver  is  naturally 

1  K^pp  V.   Michigan  R.   Co.  (U.  S.  C.  the   circumstances  hy   which   a   court   is 

Ct.   187?.).   6  Chicago   Legal    News,   101,  guarded  in  dealing  with  applications   for 

followed  ill  Heinsheinier  v.  Dayton  R.  Co.  receivers. 

3  Rv.  &  Corp.  L.J.  268   (Ohio  Com.  PI.  2  Loder  t>.  New  York,  Utica,  &  Ogdens- 

1888)-  Farmers'  Loan  &  Trust  Co.  v.  Kan-  burgh  R.  Co.  (1875),  4  Hun,  22. 

sas  Cit-v,  W.  &  N.  W.  R.  Co.  (1892),   .^)3  »  High  on  Rec,  §  24. 

Fed.  Ren.  182.     In  Owen  v.  Roman,  4  H.  *  Allen    v.    Dallas   &  Wichita  R.    Co. 

L.  Rep.  997.  it  was  said  that  the  probahility  (1878),  3  Woods,  316,  332;  s.   c.  1  Fed. 

of  the  plaintiffs  being  ultimately  entitled  Cas.  465,  Case  No.  221. 
to  a  decree  is  one  of  the  most  material  of 


518 


RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  XXVI. 


made  by  the  secured  creditors,  and  in  one  case  it  was  even  con- 
tended that,  until  the  bondholders  or  their  trustees  are  made 
parties  to  such  an  application,  the  court  has  no  jurisdiction  to  ap- 
point a  receiver  at  the  instance  of  the  stockholders  and  general 
creditors  of  a  railroad  company  whose  property  is  under  mort- 
gage. This  theory  was,  however,  negatived,  the  question  whether 
the  protection  and  preservation  of  the  property  required  the 
appointment  being,  it  was  said,  necessarily  addressed  to  the  dis- 
cretion of  the  court.^ 

§  522.  When  the  Mortgagor  Company  may  obtain  the  Appointment 
of  a  Receiver. — The  general  rule  is  that  a  corporation  cannot 
apply,  in  its  corporate  name  and  capacity,  to  be  put  into  the  hands 
of  a  receiver.2 

But  a  railroad  company  itself  has  been  allowed  in  one  note- 
worthy suit  to  come  into  court,  shortly  before  default,  and  obtain 
the  appointment  of  a  receiver  over  its  property .^     The  appoint- 


^  Hervey  v.  Illinois  Midi.  Ry.  Co. 
(1884),  28  Fed.  Rep.  169,  176. 

2  Kimball  v.  Goodburn  (1875),  32  Mich. 
10. 

3  Wabash,  St.  Louis,  &  Pae.  Ry.  Co.  v. 
Central  Trust  Co.  (1884),  22  Fed.  Kep. 
272  ;  23  Fed.  Rep.  513.  On  this  proceed- 
ing and  the  criticisms  levelled  at  it  Judge 
Brewer  made  the  following  comiiients  : 
"  It  may  be  it  is  not  a  common  action,  and 
yet  I  believe  it  is  not  solitary,  nor  the  first. 
The  application  presented  this  state  of 
facts  to  the  court :  that  here  was  a  vast 
property  running  through  several  States, 
burdened  with  a  variety  of  local  incum- 
brant'es  and  obligations  whose  value  con- 
sisted largely  in  its  being  preserved  in  its 
entirety  and  with  all  its  connections. 
Split  up  into  a  hundred  fragments,  the 
aggregate  value  of  the  varied  fragments,  it 
was  contended,  would  be  as  nothing  com- 
pared with  the  value  of  the  single  intact 
property  ;  and  the  question  was  put  before 
the  court  whether,  two  days  before  the  de- 
fault, wlien  various  rights  of  attack  would 
arise  in  different  parts  of  this  territory,  the 
court  might  anticipate  and  take  possession 
of  tlie  pio]ierty  and  preserve  it  intact,  in 
order  to  permit  the  general  mortgagee, 
when  default  actually  occurred,  to  file  its 
bill  for  foreclosure,  and  have  the  property 
as  an  entirety  sold.  Wliile,  of  course, 
there  were  matters  in  respect  to  this,  of 
doubt,  tliat  rctiuirtMl  considei-ation,  yet  both 
of  us  then  thought,  and  both  agree  now. 


that  it  was  wise  that  it  was  so  done,  and 
that  the  court  properly  appointed  the  re- 
ceivers." 

The  mortgagee  in  this  case  filed  a 
cross-bill  in  the  suit  in  which  the  receiver 
was  appointed,  and  it  was  held  that  this 
gave  the  court  jurisdiction  to  proceed  to 
foreclose  the  mortgage.  A  second  suit, 
which  was  also  commenced  in  the  State 
court  by  the  same  mortgagee,  was  removed 
by  the  mortgagor  company  to  the  federal 
court,  and  on  its  motion  consolidated  with 
the  former  suit.  Judge  Brewer  considered 
that,  for  the  purpose  of  putting  the  ques- 
tion of  jurisdiction  beyond  all  doubt,  it 
was  not  unwise  to  institute  the  second  suit ; 
but  that,  after  the  removal  of  that  suit,  the 
identity  of  the  two  suits  in  all  respects  in- 
dicated the  propriety  of  consolidating  them 
and  proceeding  with  them  as  a  single  case. 

Judge  Brewer  did  not  cite  any  authori- 
ties for  the  "  unusual  "  course  he  took,  but 
the  princijile  of  the  case  is  countenanced  to 
some  extent  by  Macon  &  Western  R.  Co. 
V.  Parker  (1851),  9  Ga.  377,  where  it  was 
held  that  equity  would,  at  the  instance  of 
an  insolvent  company,  take  control  of  its 
road,  when  threatened  by  nnmerousyi. /a.?., 
and  in  danger  of  being  sold  in  sections, 
and  have  the  property  sold  for  the  benefit 
of  all  parties.  In  this  case  there  was 
ap])arently  no  formal  appointment  of  a 
receiver,  but  the  control  of  the  court  must 
have  been  exentiscd  through  what  was  vir- 
tually a  receivership. 


§  523.]  APPOINTMENT,    ETC.,   OF   RECEIVERS.  619 

ment  of  a  receiver  at  the  instance  of  the  corporation  in  this  case 
was  characterized  by  another  circuit  judge  as  "  unusual  and 
novel,  to  say  the  least,"  ^  and  the  Supreme  Court  of  the  United 
States  has  also  designated  the  bill  filed  by  the  company  as  "  one 
of  an  unusual  character."  ^  But  apparently  the  action  of  the 
court  has  not  been  Judicially  condemned  in  positive  terms,  except 
in  one  case.^ 

§  523.  Receiver  not  usually  appointed  on  Petition  of  General 
Creditors.  —  General  creditors  cannot  obtain  the  appointment  of 
a  receiver  of  a  corporation  except  upon  an  allegation  of  fraud  or 
breach  of  trust.  Such  relief  will  not  be  granted  to  them  upon  the 
ground  that  the  corporation  contemplates  entering  into  an  im- 
provident contract,  as  where  the  bill  states  that  it  is  insolvent ; 
that  all  its  property  is  mortgaged  to  trustees  for  the  benefit  of 
one  class  of  creditors ;  that  it  owes  large  amounts  to  other  cred- 
itors, one  of  whom  has  attached  all  its  property  ;  that  it  is  about 
to  execute  a  lease  to  the  attaching  creditor  for  a  long  term  of 
years,  at  a  rental  which  would  not  pay  its  indebtedness ;  and  that 
the  execution  of  the  lease  will  be  injurious  to  the  interest  of  its 
creditors  and  stockholders.* 

Nor  ought  a  receiver  to  be  appointed  at  the  instance  of  general 

1  Atkins  V.  Wabash,  St.  L.  &  Pac.  Ry.  poration  itself  and  its  directors  is  not  very 
Co.  (1886),  29  Fed.  Rep.  161,  per  Judge  intelligible,  as  the  action  of  the  corporation, 
Gresham.  The  question  actually  presented  under  such  circumstances,  must  necessarily 
in  this  case,  however,  was  merely  the  pro-  be  taken  through  the  directors  as  its  agents, 
priety  of  removing  the  receiver  for  malver-  and  the  directors  could  only  be  regarded  as 
sation  in  office  (see  below).  the  official  representatives  of  the  corpora- 

'^  United  States  Trust  Co.  v.  Wabash  tion  in  regard  to  any  action  they  might 

Western  Ry.   Co.   (1893),  150  U.  S.  287  ;  take  in  the  premises.      Whatever  reasons 

s.  c.  14  Sup.  Ct.  Rep.  86.  exist  against  allowing  the  corporation  itself 

2  In  Mcllhenny  v.  Binz  (1890),  80  Tex.  to  obtain  the  appointment  of  tlie  receiver, 
1  ;  s.  c.  13  S.  W.  Rep.  655,  a  receiver  was  must  be  equally  valid  against  granting  sucli 
appointed  in  a  suit  instituted  by  the  com-  relief  to  the  directors. 

pany  itself,  the  bill  alleging  its  insolvency,  *  Pond  v.  Franiingham  &  Lowell  R.  Co. 

and  praying  that  its  property  might   be  (1881),  130  Mass.  194;  s.  c.  9  Am,  &  Eng. 

sold,  and  its  proceeds  distributed.      The  R.  R.  Cas.  551.     In  Lehigh  Coal  &  Navi- 

court  referred  with  disapproval  to  the  ap-  gation   Co.    v.   Central    Railroad    of  New 

pointment  in  the  Wabash  case,  but,  as  a  Jersey    (1887),    43    Hun,    546,    a   similar 

mortgage  creditor  had   afterwards  filed   a  decision  was  made,  but  the  decision  was 

cross-bill  for  foreclosure,  and  the  question  based  upon  a  statute  by  which  the  power 

was  merely  as  to  the  validity  of  the  subse-  of  appointment  was  limited,  and  in  which 

quent  proceedings,  which  were  not  objected  creditors  at  large  were  not  mentioned.     In 

to  by  those  having  the  right  to  do  so,  there  both  these  cases  it  was  said  that  the])roper 

was  no  reversal  of  the  action  of  the  lower  wa}'  for  a  creditor  to  obtain  a  standing  in 

tribunal.      Yet  the  court  seems  to  be  of  court  to  ask  for  a  receiver  was  by  reducing 

opinion  that  the  directors  might  properly  his  claim  to  judgment  and  thus  becoming 

have  obtained  the  appointment  of  a   re-  a  lienholder. 
ceiver.     This  distinction  between  the  cor- 


520 


RAILWAY    BONDS    AND    MORTGAGES.  [CHAP.  XXVI. 


creditors  merely  in  order  to  prevent  a  public  sale  of  the  property 
of  the  corporation  to  satisfy  its  bonds,  where  the  petition  is  based 
upon  unsupported  allegations  of  a  fraudulent  design  on  the  part 
of  the  directors  to  transfer  the  property  to  the  bondholders  for  an 
inadequate  sura,  and  there  is  no  proof  that  the  directors  are  wast- 
ing or  destroying  the  property.^ 

§  524.  Successive  Applications  for  Receivers  in  the  same  Court,  how 
treated.  —  As  a  general  rule  of  convenience,  the  court  should  not, 
in  a  subsequent  suit,  displace  a  receiver  appointed  by  itself  in  a 
prior  suit,  aifecting  the  same  subject-matter.  The  proper  course 
is  to  extend  the  receivership  in  the  first  suit  over  the  second. 
Thus  where  a  road  has  been  placed  in  the  hands  of  a  receiver  on 
the  application  of  a  junior  mortgagee,  and  the  senior  mortgagee 
afterwards  aslcs  for  a  receiver,  the  original  appointment  may  be 
extended  to  cover  the  second  application.^  But  if  a  second  receiver 
is  appointed  in  the  subsequent  suit  by  an  order  purporting  to  dis- 
place the  first  receiver,  such  displacement  is  not  void,  for  the 
reason  that  the  order  was  not  made  in  the  suit  in  which  the  first 
receiver  was  appointed.^ 

A  receiver  appointed  at  the  instance  of  the  bondholders  secured 
by  a  mortgage  on  an  entire  system  is  regarded  as  the  custodian 


1  Fort  Payne  Furnace  Co.  v.  Fort  Payne 
Coal  &  Iron  Co.  (1892),  96  Ala.  472  ;  s.  c. 
11  So.  Rep.  439. 

2  Taylor  v.  Phil.  &  Reading  R.  Co. 
(1880),  7  Fed.  Rep.  377  ;  s.  c.  14  Phil.  451. 
An  official  li(pudator  appointed  under  the 
English  Companies  Act  is  practically  in  the 
position  of  a  receiver,  and,  according  to  the 
settled  practice  of  the  courts  of  etjuity, 
when  a  suit  is  brought  to  foreclose  a  lien 
on  the  property  in  liquidation,  and  the 
lienors  petition  for  a  receiver,  the  licpiidator 
is  appointed  receiver.  Li  re  Henry  Pound, 
etc.,  L.  R.  42  Ch.  Div.  402  ;  28  Am.  & 
Eng.  Corp.  Cas.  .500,  per  Kay,  J.,  citing 
Peri'y  v.  Oriental  Hotels  Co.,  L.  R.  5  Ch. 
420,  where  the  Court  of  Appeals  made  such 
an  appointment  on  the  apjilication  of  an 
efpiitiibh;  mortgagee.  But  if  debentures 
give  the  holders  the  right  to  apjtoint  a  re- 
ceiver, with  a  power  of  sale,  upon  the  cnn- 
tinuanee  of  a  default  f.ir  a  speciricd  time, 
the  court  will  order  tin;  dlliiial  li(|ui<lator 
to  surrentier  iio.ssession  of  the  pro|)erty  to 
the  receiver  so  appointed,  such  order  to  be 
without  picjudice  as  to  any  (pu^stion  vvliicli 
may  alterwards  be  raised  as  to  the  powers 


of  the  receiver  other  than  the  power  to  take 
possession  and  to  sell  it.  The  Court  of 
Appeals  distinguished  such  a  case  from  the 
more  ordinary  one  in  which  a  receiver  is 
asked  for  in  a  suit  to  foreclose  debentures 
not  empowering  the  holders  to  appoint  one 
for  themselves,  and  in  which  the  court  ex- 
ercises its  discretion  as  to  whom  it  shall 
appoint.  The  only  reason  why  an  applica- 
tion is  necessarily  made  to  the  court,  where 
the  lienors  thus  reserve  the  right  to  appoint 
their  receiver,  is  that  the  liquidator  cannot 
otherwise  be  dispossessed.  I)i  re  Henry 
Pound,  etc.,  L  R.  42  Ch.  Div.  402;  28 
Am.  &  Eng.  Corp.  Cas.  500  (1890). 

Debenture-holders  have  rights  with 
which  a  winding-up  ought  not  to  be  al- 
lowed to  interfere,  and  when  they  have 
properly  obtained  the  ap])ointment  of  a 
receiver,  the  court  will  not  allow  him  to  be 
removed  and  the  official  licpiidator  put  in 
his  place.  Strong  v.  Carlyle  Press  (1893), 
1  Ch.  268;  Lire  Joshua  Stubbs  (1891), 
L.  R.  1  Ch.  475. 

8  State  of  Florida  v.  Jacksonville,  P.  & 
M.  R.  Co.  (1875),  15  Fla.  201,  276. 


§  52-1.]         APPOINTMENT,  ETC.,  OF  RECEIVERS.  521 

of  the  interests  of  the  divisional  mortgagees  also,  and  the  latter 
cannot,  as  a  rule,  obtain  the  appointment  of  separate  receivers. 
Such  an  appointment  would  have  the  elT'ect  of  disintegrating  the 
system  and  do  much  harm  to  all  parties.^ 

For  similar  reasons  the  appointment  of  a  separate  receiver 
for  a  distinct  part  of  a  street-railway  system  will  not  be  granted, 
unless  some  special  reason  is  shown  to  exist  for  thus  divid- 
ing the  administration  of  the  property.  The  court  pointed  out 
that  the  property  was  not  large,  that  the  services  of  another 
receiver  were  not  necessary,  and  that  the  appointment  would 
increase  expenses,  and  complicate  the  situation  by  creating  two 
administrations,  which  might  eventually  become  hostile.  It  was, 
however,  intimated  that  if  the  branch  road  were  running,  which 
was  not  the  case,  the  receiver  might  perhaps  have  been  directed 
to  keep  a  separate  account  of  its  receipts  and  disbursements.^ 

On  the  other  hand  it  has  been  laid  down  that,  on  the  application 
of  divisional  mortgagees,  a  receivei'  appointed  in  a  suit  to  foreclose 
a  general  mortgage  junior  to  their  own  will  at  any  time  be  divested 
of  his  control  of  the  division,  provided  they  will  pay  their  propor- 
tion of  the  charges  of  administration  which  have  been  made  alien 
upon  the  property  prior  to  all  the  mortgages.^ 

A  stockholder  who  has  brought  suit  against  the  corporation, 
asking  to  have  a  receiver  appointed,  cannot  by  intervening  in  a 
subsequent  suit  brought  by  the  bondholders,  asking  a  foreclosure 
and  the  appointment  of  a  receiver,  have  the  latter  suit  stayed  until 
his  own  is  determined,  unless  the  case  is  an  extraordinary  one. 
Whether  the  stay  shall  be  granted  rests  in  a  sound  judicial  dis- 
cretion.* 

The  Minnesota  statutes  provide  for  the  appointment  of  a 
receiver  under  certain  circumstances  to  sequestrate  all  the  cor- 
porate property  for  the  benefit  of  the  creditors,  and  it  has  been 
held  that,  as  the  powers  of  such  a  receiver  are  entirely  different 
from  those  of  a  receiver  ajipointed  in  a  foreclosure  suit,  the  fact 
tliat  a  receiver  of  the  latter  sort  has  been  appointed  is  not  a  reason 
why  a  statutory  receiver  should  not  also  be  appointed.^ 

1  Wahash,  St.  Louis,  k  Pac.  Ry.  Co.  v.  Louis,  &  Pac.  Ry.  Co.  (1886),  29  Fed.  Rep. 
Central  Trust  Co.    (1884),   22  Fed.    Rep.     616. 

272  ;   Central  Trust   Co.  v.   Wabash.    St.  ^  Pennsylvania  Co.    for  Ins.   on  Lives 

Louis,  &  Pac.  Ry.  Co.  (1885),  23  Fed.  Kep.  and  forOranting  Annuities  w.  Jacksonville, 

863,  868;   Central  Trust  Co.  v.  Wabash,  T.  &  K.  W.  Ry.  Co.  (1893),  55  Fed.  Rep. 

St.  Louis,  &  Pac.  Ry.  Co.  (1885),  25  Fed.  131. 
Rep.  693.  ^  St.  Louis  Car  Co.  v.  Stillwater  Street 

2  Clap  V.  Interstate  Street  Ry.  Co.  Ry.  Co.  (1893),  53  Minn.  129;  s.  c.  54 
(1894),  61  Fed.  Rep.  537.  N.  W.  Rep.  1064. 

*  Ceutral    Trust   Co.    v.   Wabash,    St. 


522  RAILWAY   BONDS   AND    MORTGAGES.  [CHAP.  XXVI. 

S  525.  Appointment  of  Additional  Receivers  in  other  States  or 
Districts. — Receivers  have  frequently  been  appointed  in  English 
cases  to  take  control  of  property  or  assets  in  other  jurisdictions  ; 
but  this  can  be  done  only  when  the  parties  interested  in  the  prop- 
erty are  personally  before  the  court,  and  subject  to  its  orders.^ 
Receivers  appointed  in  one  jurisdiction  are  not  entitled,  as  of 
right,  to  recognition  in  other  jurisdictions  ;  the  rule  being  the 
same  whether  they  are  appointed  under  the  ordinary  practice  of 
a  court  of  chancery,  or  under  a  statute,  like  that  of  New  York, 
which  defines  their  authority.  They  have  no  extra-territorial 
})ower  of  official  action ;  none  which  the  court  appointing  them 
can  confer,  with  authority  to  enable  them  to  go  into  a  foreign 
jurisdiction  to  take  possession  of  the  debtor's  property ;  none 
which  can  give  them,  upon  the  principle  of  comity,  a  privilege 
to  sue  in  a  foreign  court  or  another  jurisdiction.^ 

Usually,  however,  the  appointment  of  a  receiver  to  take  charge 
of  a  railroad  running  into  other  States  of  federal  districts  will  be 
recognized,  as  a  matter  of  comity,  to  the  extent  that  he  will  be 
reappointed  in  the  other  jurisdictions.^ 

The  reasons  for  refusing  to  embarrass  the  management  of  the 
system  by  appointing  a  separate  receiver  are  of  course  stronger, 
where  by  far  the  largest  and  most  important  portion  of  the  prop- 
erty is  situated  in  the  State  or  district  where  the  first  appointment 
was  made.'* 

It  has  been  held  that  an  ancillary  receiver  will  not  be  appointed 
upon  a  bill  not  filed  for  a  final  decree  of  foreclosure  in  the  cir- 
cuit in  which  it  is  filed,  but  simply  for  the  purpose  of  having  the 
court  approve  or  confirm  the  appointment  of  a  receiver  already 
appointed  in  another  circuit,  and  for  the  purpose  of  such  other 
orders  as  might  be  necessary  to  vest  in  him  the  possession  and 
control  of  any  of  the  mortgaged  property  which  might  be  in  the 
circuit  in  which  it  was  sought  to  have  him  appointed  as  receiver.^ 
But  in  other  districts  than  the  one  where  this  ruling  was  made, 
such  bills  have  bfu-n  frequently  entertained,  and  the  appointment 
generally,  if  not  always,  made  in  ex  parte  proceedings.^ 

1  lli;,'h  on  Rec,  §  44.  &   Ohio    Ry.    Co.    (1S80),    39    Fed.   Rep. 

2  Booth  V.  Chirk  (1854),  17  How.  322.     337. 

8  St^e,  for  examphi,  Atkins  v.   Wabash,  ^  Sue  the  remarks  of  the  court  in  Piatt 

St.  L.  &  I'ac.  Ry.  Co.  (1886),  29  Fed.  Rep.  v.  Fliihidelpliia  &  Reading  R.   Co.  (1893), 

101.  54  Fed.   Rep.  509,  where  an  ancillary  re- 

*  Port  Royal  &  Auf^usta  Ry.  Co.  v.  ceiver  was  appointed,  hut  withont  ]irejiidice 
Kin;,'  (1893),  93  Ga.  63  ;  s.  c.  19  S.  E.  to  a  full  consideration  of  the  le<rality  of  the 
Rep.  809.  ])raetice,    in    case  a  motion  should  sub.se- 

*  Mercantile    Trust    Co.    v.    Kanawha  ([uently  be  ni.ade  to  annul  the  order. 


§  526.]  appointment,  etc.,  of  receivers.  523 

Article  II.  —  Circumstances  under  which  a  Receiver  will  or 
will  not  be  appointed. 

§  526.  General  Principles  upon  -wrhich  Receivers  are  appointed.^ 
—  Whether  a  receiver  shall  or  shall  nut  be  appointed  in  a  given 
case  is  always  said  to  be  a  matter  resting  in  the  discretion  of  the 
court.2  f^jjig  principle  was  held  to  warrant  a  court  in  ruling  that, 
even  if  the  inadequacy  of  the  legal  remedy  is  demonstrated,  and 
the  case  is  such  as  would  ordinarily  lead  as  a  matter  of  course  to 
the  appointment  of  a  receiver,  no  receiver  will  be  appointed  M'here, 
upon  a  survey  of  all  the  circumstances,  it  is  apparent  that  there 
are  special  considerations  of  propriety  or  convenience  which  ren- 
der the  appointment,  on  the  whole,  an  inexpedient  remedy.  By 
the  "  Florida  Improvement  Act "  certain  public  lands  were  vested 
in  the  Governor  and  other  State  officials,  as  trustees,  to  constitute 
an  "  Internal  Improvement  Fund,"  and  to  serve,  among  other 
things,  as  a  guaranty  of  bonds  to  be  issued  by  certain  designated 
railroad  companies.  The  interest  on  the  bonds  of  one  of  those 
companies  being  in  default,  the  trustees  seized  and  sold  the  road, 
and  with  the  proceeds  of  the  sale  purchased  and  cancelled  a  large 
part  of  the  outstanding  guarantied  bonds.  A  holder  of  some  of 
the  bonds  not  thus  purchased  filed  a  bill  for  relief  against  the 
trustees,  whom  he  charged  with  mismanaging  the  funds,  and 
asked  for  the  appointment  of  a  receiver.  This  petition  was 
denied  by  Mr.  Justice  Bradley,  who  explained  his  reasons  as 
follows :  "  In  this  case  the  trustees  having  possession  of  the  trust 
fund  and  property  are  public  officers  and  trustees  ex  officio.  .  .  . 
Tiie  State  has  a  great  interest  in  the  trust.  It  is  not  merely  to 
preserve  the  fund  as  a  security  for  the  payment  of  the  railroad 
bonds  that  the  trust  is  created,  but  to  provide  for  the  drainage 
and  reclamation  of  the  lands,  and  their  settlement  and  cultiva- 
tion. These  are  political  objects  of  the  most  important  character. 
.  .  .  These  public  and  political  objects  of  the  trust  make  it 
extremely  fitting  that  the  chief  executive  officers  of  the  Srate 
should  administer  the  fund.     And  it  must  be  a  very  strong  case 

1  For  a  collection  of  authorities  and  a  Loan  &  Trust  Co.  v.  Kansas,  W.  &  N.  W. 
discussion  of  the  suhject  of  the  appoint-  R.  Co.  (1892),  53  Fed.  Rep.  182  ;  Vose  v. 
inent  of  receivers,  see  Woods  Ey.  Law,  Reed  (1871),  1  Woods,  647,  650  ;  William- 
1648-1652  ;  Roreron  Railroads,  S89,  994  ;  son  v.  New  Albany,  etc.  K.  Co.  (18.'.7),  1 
and  the  notes  in  12  Am.  &  Eng.  R.R.  Cas.  Biss.  198,  205  ;  Hervey  v.  Illinois  Midland 
461,  and  30  Am.  &  Eiig.  R.  R.  Cas.  158.  R.  Co.  (1884),  28  Fed."  Rep.  169  ;  Douglafss 

2  Sage  r.  Memphis  &  Little  Rock  R.  Co.  v.  Cline  (1877).  12  Bush  (Ky.),  608  ;  s.  c. 
(1888).  125  [T.  S.  361  ;  Tysen  v.  Wabash  18  Am.  Ry.  Rep.  273  ;  High  on  Rec,  §  7  ; 
Ey.  Co.    (1878),    8  Biss.   247  ;    Farmers'  Kerr  on  Rec,  p.  3  ;  Beach  on  Rec,  §  5. 


524  RAILWAY   BONDS   AND    MORTGAGES.  [CHAP.  XXVI. 

indeed  which  will  induce  the  court  to  take  the  property  out  of  their 
hands  and  put  it  into  the  hands  of  its  own  officers.  The  legis- 
lature has  seen  fit  to  intrust  the  chief  officers  of  the  State  with 
these  important  duties,  and  it  would  show  a  great  disrespect  to 
this  co-ordinate  branch  of  the  government  for  the  judiciary,  on 
light  grounds,  to  displace  these  officers  from  the  trust,  and  to  put 
appointees  of  its  own  in  their  stead."  It  was  then  pointed  out 
that,  if  the  trustees  should  be  guilty  of  a  breach  of  duty,  tliey 
could  be  enjoined ;  that  they  were  personally  responsible ;  and 
that  the  fund  could  be  followed  into  the  hands  of  persons  getting 
hold  of  it  in  a  fraudulent  manner.  The  inconvenience  of  with- 
holding the  property  from  each  new  set  of  officers,  as  they  might 
be  elected  from  time  to  time,  was  also  dwelt  upon,  as  well  as  the 
peculiar  and  important  duties  attaching  to  the  trust,  which,  if 
undertaken  by  the  court  through  a  receiver,  would  necessitate 
taking  cognizance  of  the  requirements  of  a  vast  political  territory 
in  reference  to  drainage,  development,  pre-empticn,  and  popula- 
tion. On  the  whole,  therefore,  the  learned  justice  considered  it 
to  be  a  case  in  which,  if  a  receiver  could  be  appointed  at  all,  the 
appointment  ought  not  to  be  made  until  every  other  remedy  had 
been  tried  in  vain.^ 

The  court  will  also  exercise  its  discretion  to  refuse  a  petition 
for  a  receiver  where  there  is  good  ground  for  the  conclusion  that 
the  business  in  and  of  which  the  complainant  asks  this  relief  is 
not  legitimate.  Thus  it  has  been  held  in  a  recent  case  that, 
whether  the  question  arises  or  not  in  a  jurisdiction  where  a 
statute  has  been  enacted  for  the  suppression  of  monopolies,  a 
contract  for  the  prevention  of  a  healthy  competition  in  some  par- 
ticular trade  is  one  which  should  not  be  favored  by  a  court  of 
equity,  and  that  its  enforcement  will  not  be  aided  by  the  appoint- 
ment of  a  receiver.^ 

§  527.  Limits  to  the  Discretionary  Powers  of  Courts  in  appoint- 
ing Receivers.  —  Except  in  cases  like  those  referred  to  in  tlie 
jtreceding  section,  the  freedom  of  judicial  action  is  practically 
circumscribed  by  well-recognized  subsidiary  principles  which  hnve 
imparted  a  considerable  degree  of  precision  to  an  extremely 
vague  and  shadowy  rule,  and  liave  in  practice  left  the  liypotheti- 
cal  discretion  of  the  court  little  more  than  a  name.  These  prin- 
ciplf'S  we  shall  now  proceed  to  examine  by  the  light  of  the 
authorities  in  the  following  sections  of  the  present  subdivision. 

1  Vose  V.  Kced  ct  al.,  Trusti-cs  (1871),  (1801),  44  Fed.  Kep.  721  ;  9  Ry.  &  Corp. 
I  WfKids,  Ml.  L.  .1.  316. 

*  American  Biscuit  MTl'.  Co.  v.  Klotz 


§§  528,  529.]         APPOINTMENT,    ETC.,    OF   RECEIVERS. 


525 


§  528.  The  Appointment  of  a  Receiver  is  not  justifiable  merely 
because  it  will  furnish  a  more  agreeable  and  convenient  way  of 
protecting  the  rights  of  the  suitor ;  ^  or  on  the  abstract  ground 
that  the  appointment  will  do  good ;  ^  or  will  do  harm.^ 

A  fortiori  is  it  contrary  to  equitable  principles  to  appoint  a 
receiver,  if  some  of  the  other  parties  in  interest  would  thereby 
suffer  injustice;*  or  if,  upon  a  review  of  all  the  circumstances, 
gi-eater  injury  than  good  will  result  from  the  appointment.^ 

§  529.  No  Receiver  appointed  unless  Appointment  will  give 
Effectual  Relief.  —  As  equity  does  nothing  in  vain,  the  appointment 
of  a  receiver  will  be  refused,  unless  it  will  probably  result  in 
effectual  relief.  Thus  a  receiver  will  not  be  appointed  at  the 
instance  of  a  judgment  creditor  to  enable  him  to  obtain  his  share 
of  the  earnings  of  a  canal,  where  those  earnings  have  by  statute 
been  made  applicable,  and  are  being  applied  by  the  lessee  of  the 
canal  towards  the  reduction  of  the  incumbrances,  and  are  suffi- 
cient to  pay  the  interest  thereon .^  Nor  will  a  court  appoint  a 
receiver  of  rents  and  profits  where  there  is  no  property  coming 
under  that  description  which  he  can  administer  upon.'^ 


^  Overton  v.  Memphis  &  Little  Rock  R. 
Co.  (1882),  10  Fed.  Rep.  8ti6. 

2  Vermont  &  Canada  R.  Co.  v.  Vermont 
Central  R.  Co.  (1877),  50  Vt.  500  ;  s.  c. 
14  Am.  Ry.  Rep.  497. 

^  Orphan  Asylum  Soc.  v.  McCartee  e< «?. 
(1825).  1  Hopk.  Ch.  (N.  Y.)  500  ;  Blond- 
heim  v.  Moore  (1857),  11  Md.  365  ;  Smith 
V.  Port  Dover  R.  Co.  (1885),  12  Out.  App. 
288  ;  s.  c.  25  Am.  &  Eng.  R.  R.  Cas.  639, 
citing  the  two  first-mentioned  cases.  Ver- 
mont &  Canada  R.  Co.  v.  Vermo7it  Central 
R.  Co.  (1877),  50  Vt.  500;  s.  c.  14  Am. 
Ry.  Rep.  497. 

"  *  Fo.sdick  V.  Schall  (1878),  99  U.  S.  235, 
253. 

5  Vose  V.  Reed  (1871),  1  Woods,  647, 
650,  followed  in  Tysen  v.  Wahash  Ry.  Co. 
(1878),  8  Bis.s.  247,  256.  In  the  latter  case 
the  court  declined  to  appoint  a  receiver,  at 
the  instance  of  a  small  minority  of  the 
bondholders,  where  a  funding  scheme  had 
been  agreed  upon  by  an  overwhelming 
majority  of  such  bondholders,  and  the 
arrangement  for  the  operation  of  the  road 
adopted  as  a  part  of  the  scheme  was  on  the 
whole  successful.  The  appointment,  it  was 
pointed  out,  would  not  only  break  up  the 
system  into  its  original  fragments,  but  also 


overturn  the  funding  scheme,  thus  destroy- 
ing a  large  present  income  for  a  great 
majority  of  the  bondholders.  Besides  this, 
there  was  the  objection  that  it  would  woik 
the  financial  ruin  of  all  the  interests  sub- 
ordinate to  the  first  mortgage.  "  If,"  said 
Mr.  Justice  Harlan,  "  the  present  manage- 
ment of  the  road  were  guilty  of  any  fraud 
or  di.'^honest  practices  in  their  control  of 
this  property,  I  should  feel  diff"erently. 
While  there  are  differences  between  them 
and  some  of  the  bondholders  as  to  certain 
matters  connected  with  the  discharge  of 
the  company's  obligations,  those  ditfei'ences 
do  not  involve  the  integrity  of  those  operat- 
ing the  railroad.  The  court  is  disposed  to 
recognize  the  absolute  necessity  of  large 
discretion  in  the  management  of  such  vast 
propert)',  and  in  the  distribution  of  the  net 
income  arising  therefrom,  and  it  is  unwill- 
insr,  for  the  present  at  least,  to  make  honest 
differences  as  to  such  matters  the  basis  for 
its  interference  by  the  appointment  of  a 
receiver." 

s  Stewart  v.  Chesapeake  &  Ohio  Canal 
Co.  (1881),  5  Fed.  Rep.  149. 

"  Mercantile,  etc.  T.  Co.  v.  River  Place, 
etc.  Co.  (1892),  L.  R.  2  Ch.  303. 


526  RAILWAY   BONDS    AND    MORTGAGES.  [CHAP.  XXVI. 

§  530.  The  Existence  or  Non-existence  of  Danger  to  the  Fund  or 
property  on  which  the  petitioner  relies  for  payment  has  been  said 
to  supply  the  proper  test  for  determining  whether  a  receiver 
should  be  appointed  or  not.^ 

§  531.  Adequacy  of  Legal  Remedy  a  Reason  for  refusing  to  appoint 
Receiver.  —  The  rule  mentioned  in  the  preceding  section  must,  it  is 
scarcely  necessary  to  point  out,  be  applied  with  due  reference  to 
the  universal  principle  underlying  all  equitable  relief,  viz.,  that 
the  legal  remedy  is  inadequate.  The  court  will  not  exercise  this 
extraordinary  power  of  appointing  a  receiver  where  the  loss  or 
danger,  such  as  it  is,  may  be  averted  by  legal  proceedings.^ 

Thus  the  application  of  a  bondholder  for  a  receiver,  in  a  suit  in 
which  he  seeks  to  set  aside  a  reorganization  agreement,  will  be 
denied,  where  no  irreparable  injury  is  threatened,  and  the  defend- 
ant is  solvent  and  capable  of  responding  in  damages.^ 

Nor  will  a  receiver  be  appointed  to  take  possession  of  a  railroad 
during  litigation  because  of  alleged  failure  of  the  operators  to 
keep  it  in  suitable  repair,  where  the  operating  company  is  finan- 
cially responsible,  and  acknowledges  its  duty  and  is  compellable 
by  law  to  keep  the  road  in  repair.^ 

§  532.  Default  of  Mortgagor  alone  not  sufficient  to  justify  Appoint- 
ment.—  Frequent  illustrations  of  the  principle  stated  in  the  last 
section  but  one  are  furnished  by  the  cases  in  which  the  courts 
have  acted  upon  the  rule  that  tliis  extraordinary  relief  will  not 
be  granted  merely  on  the  ground  that  the  defendant  is  in  default. 
Such  default  may  or  may  not  be  an  occasion  for  appointing  a 
receiver.^ 

1  State  V.  Northern  Central  R.  Co.  v.  Boston  &  Lowell  Railroad  (1891),  65 
(1861),  18  Md.   193.      This  principle  has     N.  H.  393;  s.  c.  23  Atl.  Rep.  529. 

been  embodied  in  the  statutes  of  several  ^  Williamson  v.   New  Albany,  etc.  R. 

States  which  provide  for  the  appointment  Co.    (1857),   1  Biss.   198  :  Farmers'  Loan 

of  a  receiver  whenever  tlie  property  is  "  in  &  Trust  Co.  v.  Chicago  &  A.  Ry.  Co.  (1886), 

danc^er  of  being  lost,  removed,  or  materially  27  Fed.  Rep.  146  ;  American  Loan  &  Trust 

injured."     Civil  Code  of  Kentucky,  §  329  Co.  v.  Toledo,  C.  &  G.  R.  Co.  (1886).  29 

(see  Newport  &  Cincinnati  Bridge  Co.  v.  Fed.  Rep.  416,  420.     In  Mercnntile  Trust 

Douglass   (1877),    12    Bush    (Ky.),    673)  ;  Co.  v.   Missouri,  K.  &  T.  Ry.  Co.  (18«8), 

Ohio  Rev.  Stat.,  §5587  (see  Hensheimery.  36  Fed.  Rep.   221  ;  s.  c.  4  Ry.   &  Corp. 

Dayton  H.  Co.,  3  Ry.  &  Corp.  L.  J.  268);  L.  .1.  362,  Judge  Brewer  thus  stated  the 

Ohio  Code,  §  254.  (See  State  Journal  Com-  general  principle  in  regard  to  the  effect  of 

pany  v.  Commonwealth  Company  (1890),  a  default,  quoting  from  the  report  as  it 

43  kans.  93  ;  s.  c.  22  Pac.   Rep.   982  ;  28  appears    in   4   Ry.    &    Corp.    L.  J.    363, 

Am.  &  Eng.  Corp.  Cas.  443.)  364  :   "  The   mere   fact   of   a   default    in 

2  Overton  V.  Memidiis  &  Little  Eock  R.  payment  of  interest  does  not  give  the 
Co.  (1882),  10  Fed.  Rep.  866.  jmrty  the  right  to  come  into  a  court  of 

8  Matthews   v.    Murchison    (1883),   15     efpiity  aud  have  a  receiver.     Something 

Fed.  Rep.  601.  beyond  that  must  exist.     It  is  difficult  to 

*  Boston,  Concord,  &  Montreal  Railroad     formulate  any  law  which,  briefly  stated, 


§  532.] 


APPOINTMENT,  ETC.,  OF  RECEIVERS. 


627 


In  the  absence  of  circumstances  which  imperil  the  security, 
corporate  officers  to  whom  no  fraud  or  incomi)etcncy  is  imputed 
are  obviously,  by  reason  of  their  familiarity  with  the  details  of 
the  business,  more  likely  than  a  stranger  to  manage  the  property 
to  the  best  advantage,  and  should  not  be  displaced  merely  because 
a  foreclosure  suit  has  been  instituted.^ 

In  no  case,  therefore,  ought  a  receiver  to  be  appointed  if  it  is 
apparent  that  the  property  is  sufficiently  valuable  to  be  an  ade- 
quate security  for  the  payment  of  the  petitioners'  claim.^ 

Still  less,  of  course,  will  a  receiver  be  appointed  on  the  mere 
ground  of  a  default,  if  it  appear  that  the  company  may  excuse 
such  default,  or  that  the  plaintiff  may  be  estopped  from  relying 
on  it.^ 

But  the  continuance  of  a  default  for  ten  years  is  not  excused 
by  the  plea  that  several  millions  of  dollars  have  been  spent  by 
the  company  in  perfecting  its  connections  with  a  view  to  obtain 
a  line  to  a  commercial  centre.  Whatever  is  done  for  such  a 
purpose  is  done  at  the  company's  own  risk ;  and  if,  by  assuming 


will  control  in  all  eases.  But  if  it  appear 
that  there  is  some  danger  to  the  property, 
that  its  protection,  its  preservation,  or  the 
interests  of  the  various  owners  require  pos- 
session by  the  court,  then  a  receiver  should 
be  appointed.  It  does  not  go  as  a  matter 
of  course,  and  yet  it  is  a  matter  that  a 
court  cannot  refuse  simply  because  it  is  an 
annoyance."  For  very  similar  language 
see  Union  Trust  Co.  v.  St.  Louis,  Iron 
Mountain,  &  Southern  R.  Co.  (1877),  4 
Dill.  114,  where  it  was  said  that,  in  addi- 
tion to  a  default,  the  petitioner  must  also 
show  that  the  beneficiaries  under  the  mort- 
gage will  also  suffer  loss,  if  the  projierty 
is  allowed  to  remain  in  the  hands  of  the 
company  until  the  final  decree.  As  to  the 
more  special  question  involved  in  this  case, 
see  below,  in  this  chapter. 

1  Mever  v.  Johnston  (1875),  3.3  Ala. 
237  ;  .s.  c.  1.5  Am.  Ry.  Rep.  467  ;  Blair  v. 
St.  Louis.  H.  &  K.  R.  Co.  (1884),  20  Fed. 
Rep.  348. 

2  Pnllnn  V.  Cincinnati  &  Chicago  Air 
Line  R.  Co.  (1865),  4  Biss.  3.5,  49  (in  this 
case  a  receiver  was  appointed,  default  hav- 
ing continued,  without  a  valid  excuse,  for 
ten  years,  while  the  probable  proceeds  of 
a  foreclosure  sale  were  not  sufficient  to 
satisfv  the  debt)  ;  ^lilwaukee  v.  Soutter, 
]i.  Wall.  510,  523  (in  this  case  a  receiver 


was  refused,  the  amount  in  suit  being 
small  compared  with  the  value  of  the 
property).  The  inadequacy  of  the  se- 
curity is  usually  recognized  as  a  statutory 
ground  for  the  appointment  of  a  receiver 
wherever  the  subject  has  been  regulateil 
by  the  legislature.  See,  for  example,  the 
enactments  in  Kentucky  and  Ohio,  con- 
strued in  the  cases  cited  in  the  note  above. 
But  in  New  Jersey  the  general  rule  has  been 
modified  for  special  reasons  of  public  policy 
in  the  direction  of  greater  severity.  A  com- 
pany is  there  insolvent  "within  the  mean- 
ing of  a  statute  which  jn-ovides  that  a 
receiver  may  be  appointed  in  case  of  insol- 
vency or  suspension  of  its  business,  when 
its  entire  capital  stock  and  an  additional 
sum  besides  has  been  expended  in  building 
and  equipping  the  road,  and  an  indebted- 
ness for  current  expenses  incurred  and  still 
unpaid,  even  though  that  indebtedness  be 
comparatively  small,  and  the  value  of  the 
whole  ]iroperty  is  sufficient  to  leave  a  sur- 
plus, if  it  was  sold  and  the  affairs  of  the 
companv  wound  up.  Sewell  v.  Cape  May 
R.  Co.  (N.  J.  Eq.,  1887),  30  Am.  &  Eng. 
R.  R.  Cas.  15.5. 

8  American  Loan  &  Trust  Co.  v.  Toledo 
C.  &  S.  Ry.  Co.  (1886),  29  Fed.  Rep.  416, 
420. 


528  RAILWAY   BONDS    AND    MORTGAGES.  [CHAP.  XXVI. 

Imrdens  of  this  description,  it  becomes  the  less  able  to  pay  the 
interest  on  its  bonds,  this  fact  furnishes  a  reason  for  the  appoint- 
ment of  a  receiver. 1 

§  533.  Receivership  usually  denied  if  Default  not  complete.  — 
Since  the  right  to  obtain  the  appointment  of  a  receiver  in  a  fore- 
closure suit  will  usually  depend  on  whether  the  right  to  foreclose 
is  complete  at  the  time  the  application  is  made,  evidence  that 
there  is  an  agreement  between  the  parties  interested  that  money 
will  be  furnished  for  the  payment  of  interest  after  default  will,  in 
the  absence  of  some  specific  danger  to  the  fund,  justify  the  court 
in  denying  a  receivership,  inasmuch  as  a  reasonable  controversy 
is  thereby  raised  as  to  whether  there  has  been  an  extension  of 
the  time  of  payment.^ 

§  534.  Prevention  of  Fraud.  —  A  receiver  will  be  appointed  for 
the  purpose  of  preventing  fraud  and  preserving  the  subject  of 
litigation,  where  a  company  issues  bonds  redeemable  according  to 
their  numbers,  under  a  scheme  which  will  result  in  great  gains 
by  forfeitures  of  other  numbers.^ 

§  535.  Prevention  of  Waste.  —  It  is  well  Settled  that  a  proper 
case  for  the  appointment  of  a  receivership  is  presented,  when  the 
mortgaged  property  is  an  insufficient  security,  and  there  is  good 
ground  to  believe  that  it  will  be  wasted  or  deteriorate  in  the 
hands  of  the  mortgagor.* 

But  the  mere  disuse  of  a  manufacturing  plant,  under  an  agree- 
ment with  other  manufacturers  to  restrict  production,  though 
attended  with  the  decay  and  dilapidation  inseparable  from  disuse, 
is  not  such  destruction  or  waste  as  to  entitle  a  mortgagee  of  the 
property  to  ask  for  a  receiver.^ 

A  fortiori  will  this  relief  be  granted  when  the  mortgagor  is 
insolvent  and  without  credit,  and  the  property  is  already  going 


1  Pullan  V.  Cincinnati  &  Chicago  Air  ceiver  had  been  apjiointed  in  ancorrlmine 
Line  R.  Co.  (1865),  4  Biss.  35,  49.  with  the  agreement  of  the   parties,   and 

2  American  Loan  &  Trust  Co.  i'.  Toledo  upon  allegations  that  the  property  was 
C.  &  S.  R.  Co.  (ISSG),  29  Fed.  Rep.  416,  deteriorating  in  value,  and  heing  wasted, 
419-  scattered,  and  destroyed,  whereW  the  se- 

8  McLoiiglilin  V.  National  Mut.  Bond  rnnty  of   the  first-mort.£;a£re  bondholders 

&  Investment  Co.  (1894),   64   Fed.  Rep.  and  the  interest  of  all  othpr  persons  then 

90S-  concerned  in  that  property  were  subjected 

*  Omaha  Hotel  Co.  r.  Kountze  (1882),  to  danger,   and  npon   a  showing  that   it 

107  U.  S.    378;  Vose  v.   Roed   (1871),   1  was   impossible   to   dispose   of   the  prop- 

Woo.ls,  647,    6.50  ;    White  Water  Valley  erty  in  its  then  condition   without  great 

Canal   Co.    ,..   Valh-tte   (1858),    21    How.  sacrifice. 
414;  High  on  Rec.  §  4.  «  Union  Mnt.  Life  Ins.  Co.   7-.   Fnion 

By  the  dfcrpe  di'icussed  in  Davenport  Mills    Plaster  Co.   (1889),    37  Fed.    Rep. 

V.  Receivers  (1875),  2  Woods,  519,  a  re-  286. 


§  536.]  APPOINTMENT,   ETC.,   OF   RECEIVERS.  529 

to  utter  waste,  and  the  mortgagor  unable  to  repair  or  use  it  so  as 
to  earn  a  revenue.^ 

An  appointment  on  the  ground  of  threatened  waste  may  be 
made  even  before  the  maturity  of  the  debt.^ 

§  536.  A  Long-continued  and  Hopeless  Condition  of  Insolvency. — 
This  may  sometimes  operate  as  a  sufhcient  reason  for  appointing 
a  receiver,  as  where  the  company  is  in  default  for  a  large  amount 
of  interest,  its  income  diminishing,  its  business  threatened  with  a 
dangerous  competition  from  the  building  of  rival  lines,  and  there 
is  an  apparent  lack  of  harmony  among  the  bondholders,  who  are 
virtually  the  owners  of  the  road.  An  additional  special  feature 
was  that  by  the  law  of  the  State  in  which  the  corporation  was 
organized,  the  only  way  in  which  the  mortgagee  could  get  pos- 
session of  the  rents  and  profits  was  by  the  institution  of  a  fore- 
closure suit  and  the  appointment  of  a  receiver.  So  where  the 
finances  of  the  company  are  at  such  a  low  ebb  that  it  is  incapable 
of  even  constructing  a  few  miles  of  road,  and  the  consequences  of 
completion  within  a  given  time  will  be  the  loss  of  a  valuable  land- 
grant  which  forms  a  part  of  the  security  on  which  the  bond- 
holders rely,  the  court  will  appoint  a  receiver  to  take  charge  of 
the  property  and  finish  the  work.^ 

To  establish  such  a  hopeless  state  of  insolvency  as  will  induce 
a  court  to  grant  a  receiver,  it  has  been  held  sufficient  to  show 
that  the  company  has  allowed  the  taxes  on  some  of  its  property 
to  go  to  default,  and  thus  incurred  the  severe  penalties  attach- 
ing to  such  delinquency,  and  that  it  was  largely  in  debt  for  wages 
and  supplies,  which,  under  the  so-called  "  six-months  rule,"  were 
entitled  to  preference  over  the  mortgage  lien,  if  they  were  not 
otherwise  provided  for,  such  an  accumulation  of  preferential 
debts  being  a  direct  source  of  peril  to  the  rights  of  bondholders.* 

So  also  a  receiver  will  be  appointed  at  the  instance  of  a  mort- 
gagee who  has  only  a  second  lien  on  a  part  of  the  railroad,  and  a 
third  and  fourth  on  other  parts  which  lie  beyond  the  limits  of  the 
jurisdiction  of  the  court,  when  the  company's  condition  is  such 
that,  in  order  to  prevent  the  ruin  of  its  creditor,  and  the  practical 
cessation  of  its  business,  it  is  forced  to  misapply  its  revenues.^ 

J  Brown  v.  Chesapeake  &  Ohio  Canal  (1873),    2  Dill.   448,    453;   s.  c.  14  Fed. 

Co.  (1891),  73  Md.  567.  Cas.  321,  Case  No.  7706;  Allen  w.  Dallas 

2  Long  Dock  Co.  v.  Mallery  (1858),  12  &  Wichita  R.  Co.  (1878),  3  Woods,  316  ; 
N.  J.   Eq.  431  ;  Brassey  v.   New  York  &  s.  c.  1  Fed.  Cas.  465,  Case  No.  221. 

N.    E.   R.    Co.,    22   Blatch.   72;  s.  C.    19  *  Putnam  v.  Jacksonville  L.   &  St.  L. 

Fed.  Rep.  663  ;  Union  Trust  Co.  v.  Illinois  Ry.  To.  (1893),  61  Fed.  Rep.  440. 

Midland  Ry.  Co.  (1885),  117  U.  S.  434.  "  ^  State    v.    Northern    Central    E.    Co. 

3  Kennedy  v^  St.  Paul  &  Pacific  R.  Co.  (1861),  18  Md.  193. 

34 


530  RAILWAY    BONDS    AND    MORTGAGES.  [CHAP.  XXVI. 

There  can  be  no  question  but  that  a  company  is  insolvent 
when  it  has  mortgaged  all  its  property  twice,  and  finally  made  an 
assignment  of  all  its  bills  receivable  and  available  assets  to  a 
syndicate  of  the  directors  to  secure  the  payment  of  a  loan  to 
defray  operating  expenses.^ 

So  also  the  appointment  of  a  receiver  is  justified,  when  the 
company  is  practically  insolvent,  its  affairs  are  in  a  chaotic  con- 
dition, it  has  no  president,  vice-president,  or  treasurer,  its  trustees 
are  about  to  resign,  and  there  are  no  means  of  satisfying  its  out- 
standing obligations,  which  are  about  to  be  enforced  against  its 
plant  and  property .^ 

So  a  proper  case  for  a  receivership  is  presented  when  the  cur- 
rent expenses  have  equalled  the  earnings  ever  since  the  road  went 
into  operation,  and  no  interest  has  ever  been  paid.'^ 

There  are,  of  course,  especially  strong  reasons  for  appointing  a 
receiver  as  a  relief  when  the  impecuniosity  of  the  company  is  so 
extreme  as  to  affect  the  interests  of  the  public  by  impairing  its 
capacity  to  perform  the  duties  of  a  carrier  of  freight  and  pas- 
sengers. Thus  a  receiver  has  been  appointed  where  the  affairs 
of  a  company  were  in  a  state  of  hopeless  embarrassment ;  the 
physical  condition  of  the  road  such  that  it  could  not  be  operated 
with  profit,  nor  without  great  danger  to  life  and  property  ;  the 
rolling-stock  insufficient  for  the  business  to  be  carried  on  ;  and 
the  income  not  large  enough  to  meet  current  expenses ;  the  result 
being  that  the  manager,  in  order  to  keep  control  of  the  em- 
ployees, was  forced  periodically  to  borrow  money  on  the  pledge 
of  his  own  personal  credit  and  that  of  his  friends.* 

§  537.  Dissensions  among  the  Corporate  Officers.  —  A  receiver 
may  be  appointed  in  a  suit  to  foreclose  a  chattel  mortgage  where 
a  corporation  is  greatly  embarrassed  by  its  debts,  and  there  are 
dissensions  among  its  officers  likely  to  injure  materially  the  value 
of  its  property.^ 

§  538.  The  Demonstrated  Indisposition  of  an  Insolvent  Company 
to  pay  its  Debts,  even  to  the  Extent  of  its  Ability  to  do  so.  —  This 
w^ill,  of  course,  weigh  strongly  with  the  court  in  a  case  where 
there  might  otherwise  be  some  doubt  as  to  the  advisability  of  an 
immediate  appointment.^ 

1  III  the  Matter  of  the  South  Carolina  (Oliio  Tom.  PL,  1888),  3  Ry.  &  Corp. 
R.  Co.,  11  Chic.  Leg.  News,  8.  L.  J.  208. 

2  Ralph  V.  Shiawassee  Circuit  Judge  ^  State  Journal  Company  v.  Coramon- 
(1894),  100  Mich.  164;  s.  c.  58  N.  W.  wealth  Company  (1890),  43  Kan.  93  ;  s.  c. 
Rep.  837.  22  Pac.  Rep.  982  ;  28  Am.  &  Eng.  Corp. 

'  Hcnedict  v.  St.  Joseph  &  W.   R.  Co.     Cas.  443. 
(1883),  19  Fe.l.  Rep.  174.  e  Dow  v.   Memphis  &  Little  Rock  R. 

*  Hciiisheimer  v.  Dayton,  etc.   R.  Co.     Co.  (1884),  20  Fed.  Rep.  260,  263. 


§§  539,  540.]        APPOINTMENT,    ETC.,   OF   RECEIVERS.  531 

§  539.  The  Wrongful  Failure  of  the  Company  to  apply  its  Revenues 
to  the  Bonded  Debt. — This  presents  an  appropriate  case  for  the 
appointment  of  a  receiver  when  its  insolvency  and  the  inadequacy 
of  the  security  are  also  established.^ 

But  no  misapplication  is  shown  where  tlie  revenues  have  been 
applied  to  the  reduction  of  a  floating  debt  incurred  for  the  com- 
pletion and  equipment  of  the  road,  whereby  the  security  of  the 
bondholders  has  been  improved  and  enlarged,  especially  if  this  has 
been  done  with  the  approval  of  the  trustees  and  a  large  majority 
of  the  bondholders.^ 

A  similar  rule  is  applicable  where  the  improper  use  of  the  rev- 
enues is  being  made  by  persons  who  have  superseded  the  company 
in  the  control  of  the  property  by  virtue  of  legal  proceedings  in 
which  the  bondholders  have  taken  no  part.  Thus  a  receiver  will 
be  appointed  where  the  company  has  been  declared  bankrupt  and 
practically  dissolved,  the  amount  of  its  outstanding  bonds,  with 
the  accumulations  of  interest  thereon,  exceeds  the  value  of  the 
property  mortgaged  to  secure  them,  and  the  purchasers  of  the 
company's  equity  of  redemption  at  the  assignee's  sale  are  in  pos- 
session of  the  road,  receiving  the  income  to  which  the  mortgagee 
is  entitled,  and  using  the  road  for  their  own  exclusive  use  and 
benefit.  2 

§  540.  The  Danger  to  the  Fund  arising  from  Mismanagement  of 
the  Corporate  Property  is  a  ground  for  appointing  a  receiver  when 
a  priyna  facie  case  of  such  mismanagement  is  made  out.* 

Such  mismanagement  may  consist  in  an  abuse  of  the  corporate 
franchises,^  or  may  arise  from  the  business  incapacity  of  the  man- 
agers of  the  road,  the  result  being  that  the  property  has  changed 
hands  several  times.^ 

But  the  fact  that  the  property  of  a  company  in  which  the  State 
owns  a  large  amount  of  stock  has  been  used  by  the  directors  to 
further  political  schemes,  and  that  they  have  made  an  extravagant 

1  Keep  V.  Michigan  R.  Co.,  6  Chic.  Leg.  ^  Kelly  v.  Trustees  (1877),  58  Ala. 
News,   101  ;    Dow  v.    Memphis  &   Little     489  ;  s.  c.  31  Am.  Ry.  Rep.  138. 

Rock  R.  Co.  (1884),  20  Fed.  Rep.  260.  ^  Stewart  v.  Chesapeake  &  Ohio  Canal 

2  Williamson  v.  New  Albany,  etc.  R.  Co.  (1881),  5  Fed.  Rep.  149  ;  Pullan  v. 
Co.  (1857),  1  Bi.ss.  198.  Under  the  cir-  Cincinnati  &  Chicago  Air  Line  R.  Co. 
cumstances  of  this  case  it  was  ordered  that  (ISe.'j),  4  Riss.  3.5,  47  ;  s.  c.  20  Fed.  Cas. 
the  officers  of  the  company  set  aside  one-  32,  Case  No.  11,461. 

half  of  the  net  earnings  of  the  road  for  ^  City  of  Rochester  v.   Bronson  (1871), 

the  payment  of  the  interest  on  the  float-  41  How.  Pr.  78. 

ing  debt,  and  a  full  monthly  report  be  ^  Pullan  v.   Cincinnati  &  Chicago  Air 

made  to  the  court,  the  complainant  liav-  Line  R.  Co.  (186.5),  4  Riss.   35,  47  ;  s.  C. 

ing  the  right  to  renew  his  application  for  20  Fed.  Cas.  32,  Case  No.  11.461. 

a  receiver  upon  a  new  statement  of  facts. 


532  RAILWAY    BONDS    AND    MORTGAGES.  [CHAP.  XXVI. 

outlay  for  entertainments  and  personal  expenses,  does  not  justify 
the  employment  of  the  costly  machinery  of  a  receivership.^ 

An  additional  reason  for  the  interference  of  a  court  of  equity 
is  presented  when  the  mismanagement  involves  the  element  of 
fraud,  as  where  the  directors  have  executed  a  mortgage  of  the 
corporate  property  to  themselves  to  secure  their  own  claim. 
Under  such  circumstances  the  other  creditors,  in  a  suit  brought 
to  set  aside  the  mortgage,  may  have  a  receiver  appointed.^ 

So  also  a  receiver  is  properly  appointed  where  a  stockholder,  a 
bondholder,  and  the  trustees  bring  suit  in  a  representative  capa- 
city against  the  directors,  charging  them  with  squandering  and 
embezzling  the  corporate  property.^ 

Facts  which  create  a  reasonable  certainty  that  the  directors 
will  abuse  their  fiduciary  position  to  the  detriment  of  the  com- 
pany will  also  justify  a  receivership,  as  where  the  majority  of  the 
railroad  company's  stock  is  owned  by  an  improvement  company, 
and  the  officers  of  the  two  corporations  are  substantially  the  same 
persons,  the  result  being  that  the  interests  of  the  bondholders  are 
placed  at  the  mercy  of  persons  whose  interests  may  be  quite  an- 
tagonistic to  their  own.^ 

The  fact  that  the  mortgagee  in  possession  is  mismanaging  the 
property  is  the  only  recognized  ground  on  which  a  receiver  will 
be  appointed  in  a  suit  to  redeem.^ 

§  541.  Numerous  Executions  threatening  Integrity  of  Property. — 
It  is  well  settled  that  equity  will  interfere  to  prevent  a  railroad 
from  being  sold  piecemeal  by  execution  creditors  to  the  detriment 
of  lienors,  and  will,  at  the  instance  of  the  latter,  appoint  a  re- 
ceiver, with  a  view  of  having  the  property  sold  as  an  entirety  for 
the  benefit  of  all  parties  in  interest.^ 

So  also  upon  a  bill  for  an  injunction  against  attacks  on  the  mort^ 
gaged  property  by  numerous  attachments,  where  it  is  shown  that 
the  corporation  is  entirely  insolvent ;  that  it  is  unable  to  pay  its 
secured  debts,  its  floating  debt,  or  the  sums  due  to  connecting 
lines,  and  unable  to  borrow  money  for  that  purpose  ;  that  it  is  in 
peril  of  the  breaking  up  and  destruction  of  its  business ;  and  that 

1  Stewart  v.  Chesapeake  &  Ohio  Canal  ^  Boston  &  Providence  R.  Corp.  v.  New 
Co.  (1831),  5  Fed.  Rep.  149,  156.                    York  &  New  England  R.  Corp.  (1878),  12 

2  Haywood  y.  Lincoln  Lumber  Company     R.  L  220. 

(1885),  64  Wi.s.  639  ;  s.  c.  26  N.  W.  Rep.  «  Sage  ?;.  Memphis  &  Little  Rock  R.  Co. 

184.  (1888),  125  U.  S.  361  ;  In  re  South  Car. 

8  Forbes  v.   Memphis,  El  Paso,  &  Pac.  R.  Co.,  11   Chicago  Leg.   News,   8  (U.  S. 

R.  Co.  (1872),  2  Woods,  323.  Cir.    Ct.,    1878);    Edwards    v.     Standard 

*  Farmers'Loan&TrnstCo.r.  Winona,  Rolling-Stock  Syndicate  (1893),    L.  R.  1 

W.  &  S.  W.  Ry.  Co.  (1893),  59  Fed.  Rep.  Ch.  574. 
957. 


§§  542,  543.]        APPOINTMENT,   ETC.,   OP   RECEIVEBS.  533 

a  default  on  its  securities  is  imminent  and  manifest,  —  a  tempo- 
rary receiver  may  properly  and  wisely  be  appointed  to  protect  the 
property.^ 

The  appointment  of  a  receiver  will  be  granted  upon  a  bill  filed 
by  a  stockholder  of  a  consolidated  corporation  and  judgment  cred- 
itors, alleging  that  executions  are  being  levied  on  the  property ; 
that  it  is  being  sold  at  a  sacrifice ;  and  that  there  is  great  diffi- 
culty in  determining  upon  what  property  the  different  executions 
should  be  levied.  Under  such  circumstances  the  court  will  take 
possession  by  a  receiver,  without  regard  to  the  question  liow  far 
its  action  will  affect  the  rights  of  parties  not  before  it.^ 

§  542.  Circumstauces  under  vrhich  a  Judgment  Creditor  will  be 
granted  a  Receivership  of  Mortgaged  Property.  —  A  bill  filed  by 
a  judgment  creditor  of  a  railroad  company  which  alleges  in  sub- 
stance that  the  corporate  property  is  so  heavily  mortgaged  that 
if  the  plaintiff  should  attempt  to  enforce  payment  of  his  debt,  by 
seizure  and  sale  on  execution,  there  would  be  no  bidders  except 
at  a  nominal  amount,  while  if  the  property  were  placed  in  the 
hands  of  a  receiver,  and  held  together  and  carefully  operated, 
there  would  be  a  large  surplus  each  year  for  the  payment  of  the 
plaintiffs,  has  been  held  to  contain  averments  amply  sufficient  to 
give  a  court  jurisdiction  to  appoint  a  receiver. ^ 

§  543.  Right  to  Receiver,  when  lost  by  Laches.  —  The  maxim, 
vigilantihus  non  dormientibus  equitas  subvenit,  is  as  applicable  to 
appointments  of  receivers  as  to  other  forms  of  equitable  relief.* 

Thus  the  failure  to  follow  up  a  petition  for  the  appointment  of 
a  receiver  for  six  years  will  deprive  the  petitioner  of  his  right  to 
have  such  appointment  made.^ 

So  also,  where  the  suit  is  one  to  set  aside  the  reorganization  of 
a  new  company  by  the  bondholders  who  have  purchased  through 
a  committee  at  the  foreclosure  sale,  the  petitioner  cannot  procure 
the  appointment  of  a  receiver  over  the  property  of  that  company 
if  his  acts  during  the  progress  of  the  negotiations  which  resulted 
in  the  purchase  and  reorganization  were  such  as  to  lead  the  public 
and  the  committee  to  suppose  that  he  acquiesced  in  what  was 
done.^ 

1  Brassey  v.  Kew  York  &  Kew  England  paid,  he  may,  as  a  matter  of  right,  obtain 
R.  Co.  (1884),  19  Fed.  Rep.  663,  citing  the  appointment  of  a  receiver.  /«  ?-c  Man- 
Long  Dock  Co.  w.  Mallery,  12  N.  J.  Eq.  431.  Chester,  etc.  Ry.  Co.,   L.  R.  14   Ch.   Div. 

2  Hervey  v.  111.  Midland  Ry.  Co.  (1884),  645  (1879). 

28  Fed.  Rep.  169.  *  High  on  Receivers,  §  14. 

3  Sage  V.  Memphis  &  Little  Rock  R.  Co.  ^  Hood  v.  First  National  Bank  of  Tre- 
(1888),  125  U.  S.  361.                                       niont  (1886),  29  Fed.  Rep.  55. 

Under   the  English  Companies  Act  of  ^  Matthews   v,   Murchison    (1883),    15 

1867,  whenever  a  judgment  creditor  is  un-     Fed.  Rep.  691. 


534  RAILWAY   BONDS   AND    MORTGAGES.  [CHAP.  XXVI. 

§  544.  Effect  of  a  Provision  in  Mortgage  authorizing  the  Trustee  to 
take  Possession  on  Default.  —  The  right  of  the  trustee  to  take  jjos- 
session  after  default  has  been  viewed  as  furnishing  a  conckisive 
reason  for  denying  an  application  for  a  receiver,  on  the  ground 
that  the  legal  remedy  afforded  by  a  stipulation  conferring  such  a 
right  is  fully  adequate  to  enable  the  trustee  to  protect  the  in- 
terests of  his  beneficiaries.^ 

The  rule  here  laid  down  is  very  much  the  same  as  that  of  the 
English  Court  of  Chancery,  until  it  was  altered  by  statute ;  viz., 
that  a  receiver  ought  not  to  be  appointed  in  behalf  of  a  mort- 
gagee who  had  the  legal  estate,  because  he  had  nothing  to  do  but 
to  take  possession.^ 

On  the  other  hand  it  has  been  held  that,  where  the  trustees 
under  a  mortgage  by  which  the  income  is  pledged  to  the  payment 
of  the  principal  and  interest  of  the  bonds  are  empowered  to  take 
possession  after  the  continuance  of  a  default  for  a  specified  period, 
it  is  the  clear  duty  of  the  court  to  appoint  a  receiver,  irrespective 
of  any  showing  that  the  property  is  insufficient  to  pay  the  mort- 
gage debt,  that  the  mortgagor  is  insolvent,  that  the  trust  property 
is  in  jeopardy,  or  the  like."^ 

So  also  it  has  been  held  that  where  the  trustees  have  neglected 
to  take  possession,  a  bondholder  may,  in  a  suit  brought  to  compel 
them  to  perform  their  duty,  obtain  the  appointment  of  a  receiver, 

1  Rice  V.  St.  Paul  E.  Co.  (1878),  24  of  an  estate  where  the  creditor  is  entitled 
Minn.  464.  to  it,  and  has  no  way  of  enforcing  his  riglits 

2  Daniell's  Ch.  Pr.  1724,  1725.  except  by  a  creditor's  bill.     They  are  not 

3  Allen  V.  Dallas  &  AVichita  R.  Co.  an  authority  for  the  position  that  a  court 
(1878),  3  Woods,  316,  per  Woods,  J.  This  of  equity  will  aid  a  mortgagee  in  this  way, 
case  seems  scarcely  reconcilable  with  the  where  he  lias,  by  an  express  stipulation  in 
principles  upon  which  receivers  are  ordi-  the  mortgage,  reserved  a  legal  remedy  such 
iiarily  appointed.  Much  stress  was  laid  by  as  the  right  of  entry  upon  the  default  of 
the  learned  judge  upon  the  supposed  prin-  the  mortgagor. 

ciple  that  the  rights  of  railroad  bondholders  There  is  doubtless  a  clear  and  well-de- 
were  not  to  be  measured  by  the  same  rules  fined  distinction  as  to  the  right  to  have  a 
as  those  which  apply  to  a  mortgage  of  a  receiver  of  the  income  appointed  where  the 
liouse  or  lot  to  secure  one  or  two  promis-  income  is  expressly  pledged  and  where  it  is 
scry  notes.  The  correctness  of  the  doctrine,  not :  see  Des  Moines  Gas  Co.  v.  West  (1876), 
that  a  mere  default  in  the  payment  of  in-  44  Iowa,  23  ;  Jones  on  Mortgages,  §  1516  ; 
terest  was  not  a  ground  for  the  appoint-  but  the  real  question  in  the  caseof  amort- 
ment  of  areceiver,  was  admitted,  but  it  was  gage  which  gives  the  right  of  entry  as 
declared  not  to  be  applical)le  where  there  regai'ds  the  entire  property  is  whether  such 
is  a  stipulation  that  the  mortgagee  shall  a  stipulation  does  not  supply  an  adequate 
have  the  rents  ;  tlie  authorities  cited  being  legal  remedy,  and  thus  do  away  with  the 
Whitehead  v.  Wooten  (1870),  43  Miss,  necessity  of  e(]uitable  interference,  except 
523  ;  Morrison  v.  Buckner  (1843),  1  Hemp-  in  so  far  as  it  may  be  required  for  the  pur- 
stead,  442.  But  those  cases  merely  refer  pose  of  compelling  the  trustees  to  do  their 
to  tlie  general  rule  as  to  the  action  of  a  duty. 
court  of  ecjuity  in  sequestrating  the  income 


§  545.]         APPOINTMENT,  ETC.,  OP  RECEIVERS.  535 

and  that  such  appointment  was  not  necessarily  predicated  on  the 
apprehension  that  the  debt  would  be  lost.^ 

§  .545.  Last  Subject  continued.  —  A  like  ruling  has  been  made 
where  the  suit  in  which  the  appointment  was  made  was  one 
brought  to  obtain  possession,  the  court  expressly  distinguishing 
between  such  a  suit  for  specific  performance  and  one  for  fore- 
closure, in  which  the  power  of  appointment  was  limited  by  statute 
to  certain  specified  cases.^ 

A  doctrine  intermediate  between  these  two  is,  that  the  fact  of 
the  trustees  having  the  power  to  take  possession  of  the  property 
in  the  event  of  a  default  dues  not  constitute  a  sufficient  reason  for 
refusing  to  appoint  a  receiver.  Such  a  power  may  be  waived,  if 
the  mortgagees  prefer  to  invoke  the  interposition  of  a  court  of 
chancery.^ 

The  more  reasonable  view  would  certainly  seem  to  be  that 
the  fact  of  the  income's  being  subject  to  the  mortgage  cannot 
affect  the  general  principle  that  a  mere  default  is  not  sufficient  to 
warrant  the  appointment  of  a  receiver,  even  though  such  default 
may  entitle  the  mortgagee  to  enter,  and  that  the  court  is  still  at 
liberty  to  exercise  its  discretion  in  determining  whether  the  case 
is  one  which  calls  for  the  appointment  of  a  receiver,  or  merely  for 
an  order  requiring  the  defendant  to  account  for  the  income,  and 
pay  the  surplus  left  after  defraying  the  necessary  expenses  to  the 
mortgagee,  or  whether  the  plaintiff  shall  be  left  to  the  usual  legal 
remedies  for  obtaining  possession,  or  to  his  action  for  damages  for 
refusing  to  deliver.  Even  if  these  remedies  are  inadequate,  that 
does  not  constitute  an  imperative  reason  for  which  a  court  of 
equity  should  become  active  in  enforcing  specifically  a  contract 
which  is  in  its  nature  a  forfeiture  of  the  most  stringent  character.* 

1  Warner  v.  Rising  Fawn  Iron  Co.  ■*  Union  Trust  Co.  v.  St.  Louis,  Iron 
(1878),  3  Woods,  514,  also  a  ruling  of  Mountain,  &  Southern  R.  Co.  (1877),  4 
Woods,  J.  Dill.  114,   per  Miller,  J.,  explaining   the 

2  McLane  v.  Placerville  &  Sacramento  proper  meaning  of  American  Bridge  Co.  v. 
Valley  R.  Co.  (1888),  66  Cal.  606  ;  s.  c.  Heidelbach  (1876),  94  U.  S.  798,  to  be  that 
26  Am.  &  Eng.  R.  R.  Cas.  404.  the  appointment  of  a  receiver  was  one  of 

3  Williamson  v.  New  Albany,  etc.  R.  the  ways  by  which,  in  a  proper  case,  the 
Co.  (18.57),  1  Biss.  198,  per  McLean,  J.  attachment  of  the  income  by  the  creditors 

In  Tome  v.  King  (1891),  64  Md.  166  ;  before  possession  was  taken  by  the  mort- 

s.  c.  21  Atl.  Rep.    279,   the  trustees  who  gagee  might   be   prevented,    and   not    as 

were  entitled  to  possession  on  default  asked  contended  by   the  plaintiff,  that  such  an 

for  a  receiver  on  the  ground  that  some  appointment  was  the  only  mode  of  effecting 

delay  would  occur  in  preparing  the  case  for  this,  or  that  an  appointment  was  to  follow 

a  decree,  and  that  the  property  would  in  the  in  every  case  of  foreclosure  where  the  m- 

meantime  suffer.    The  petition  was  granted  come  was  mortgaged.      In  line  with  this 

without  any  questions  being  made  as  to  the  decision  is  Cheever  v.  Rutland  &  Burling- 

propriety  of  the  appointment.  ton  R.  Co.  (1863),  39  Vt.  653,  a  decision 


536  RAILWAY   BONDS   AND    MORTGAGES.  [CHAP.  XXVI. 

§  546.  Appointment  of  Receivers  after  Rendition  of  Foreclosure 
Decree,  when  proper.  —  After  the  foreclosure  decree  is  rendered, 
the  bondholders  have  a  right  to  demand  that  the  earnings  of  the 
road  shall  be  received  by  a  disinterested  trustee,  and  the  fact  that 
a  part  of  the  bondholders  are  in  possession,  to  the  exclusion  of 
others  to  whom  their  interests  are  hostile,  is  a  sufficient  reason 
for  appointing  a  receiver  of  those  earnings  at  the  instance  of  the 
latter,  unless  the  interval  between  the  decree  and  the  foreclosure 
is  very  short.^ 

Article  III.  —  Removal,  Substitution,  and  Final  Discharge 

OF  Receivers. 

§  547.  Generally.  —  The  cases  in  which  the  removal  of  a  re- 
ceiver is  asked  for  may  be  divided  into  two  classes :  (1)  Those 
in  which  it  is  alleged  that,  owing  to  circumstances  existing  at 
the  time  the  appointment  was  made,  the  court  ought  either  to 
have  disallowed  the  application  altogether,  or  to  have  appointed 
some  other  person  than  the  one  actually  selected  ;  and  (2)  those 
in  which  the  circumstances  relied  upon  to  establish  the  impro- 
priety of  permitting  the  receiver  to  retain  the  office  have  arisen 
subsequently  to  the  appointment.  The  second  of  these  classes 
comprehends  both  the  cases  in  which  the  removal  of  a  receiver 
is  asked  for  merely  for  the  purpose  of  substituting  another  in 
his  place,  and  those  in  which  there  is  asserted  to  be  no  longer 
any  reason  why  the  receivership  should  be  continued. 

§  548.  Power  of  Removal.  —  A  court  which  is  invested  by 
statute  with  the  power  of  appointing  a  receiver  possesses  by  im- 
plication the  power  of  discharging  him  also.^ 

Ordinarily  the  question  of  the  removal  of  a  receiver,  like  the 
question  of  his  appointment,  is  a  matter  resting  in  the  discretion 
of  the  court,^  and  the  appellate  court  will  not  review  the  pro- 
priety of  the  appointment.* 

But  to  this  rule  there   are  several  exceptions,  the  reasons  for 

rendered  by  Justice  Barrett  of  tlie  Supreme  cumstances  were  not  such  as  to  call  for  the 

Court  of  Verniiint,  while  sitting  as  Clian-  preservative  nianafjjement  of  a  receiver,  the 

cellor.      The  bill  in  that  case  was  for  fore-  application  would  be  denied. 

closure,  and  asked  for  a  receiver.    So  far  as  *  Benedict  v.  St.  Joseph  &  W.  R.  Co. 

the  preliminary  interposition  of  the  court  (1883),  19  Fed.  Rep.  173. 

was  to  be  invoked,  the  bill  was  drawn  with  2  Cincinnati,    Sandusky,    &   Cleveland 

tlie  controlling  idea  that  this  interposition  R.  Co.  v.  Sloan  (1876),  31  Ohio  St.  1. 

was  to  be  predicated  upon  the  orator's  right  ^  Tiicrh  on  Rec.  §  821. 

to  possess    as   mortgagees  with   condition  *  Milwaukee   &    Minnesota  R.   Co.  v, 

broken.      The    learned  judge  declined    to  Soutter  (1864),  2  Walk  510. 

adopt  this  view,  and  said  that,  as  the  cir- 


§  548.]         APPOINTMENT,  ETC.,  OP  RECEIVERS.  537 

which  are  sufficiently  obvious,  from  a  statement  of  the  rulings 
which  illustrate  them. 

Thus  it  is  held  that  when  all  the  questions  in  dispute  have  been 
passed  upon  both  in  the  lower  and  the  appellate  courts,  with  the 
result  that  the  right  of  the  defendants  to  have  the  propci-ty  re- 
stored to  them,  on  payment  of  the  amount  found  to  be  due,  is 
clearly  established,  a  refusal  on  the  part  of  the  lower  court  to 
discharge  the  receiver  is  judicial  error,  which  may  be  examined 
into  on  appeal,  and  the  ruling  of  the  lower  court  will  be  re- 
versed, if  there  are  no  special  facts  presented  to  justify  the 
continuation  of  the  receivership. ^ 

So,  also,  as  the  appointment  of  a  receiver  without  notice  to  the  de- 
fendant is  deemed  to  be  a  very  dangerous  exercise  of  the  judicial 
power,  tlie  circumstances  of  such  an  appointment  will  be  jealously 
scrutinized  by  an  appellate  tribunal,  and  if  the  necessary  degree 
of  urgency  is  not  shown  to  have  existed,  the  receiver  will  be 
removed. 2 

So  also,  if  the  motion  to  terminate  the  receivership  is  made  with 
the  concurrence  of  all  the  parties  in  interest,  the  entire  control  of 
the  property  should  be  restored  to  the  owners ;  and  it  is  an  abuse 
of  the  court's  power  to  refuse  the  motion  so  far  as  to  require  the 
receiver  still  to  receive  and  disburse  tlie  earnings.^ 

The  rule  is  also  to  some  extent  modified  by  statute.  Under  the 
Ohio  Code,  which  allows  an  appeal  from  "  an  order  affecting  a  sub- 
stantial right  made  in  a  special  proceeding,"  it  has  been  held  that 
an  order  discharging  a  provisional  receiver  was  subject  to  review.* 

It  is  not  denied  that  a  court  which  appoints  as  ancillary  receiver 
a  person  who  is  already  acting  as  receiver  under  a  prior  appoint- 
ment in  the  court  where  the  proceedings  were  originally  instituted, 
has  an  abstract,  technical  right  to  remove  that  receiver  if  it  thinks 
proper,  and  put  another  in  his  place. ^ 

1  Milwaukee  &  Minnesota  R.  Co.  v.  vacate  an  order  appointing  a  receiver. 
Soutter  (1864),  2  Wall.  510.  The  facts  But  if  an  appointment  ex  parte  without 
of  this  case  are  referred  to  above.  sufRcient  cause  may  be  treated  as  judicial 

2  Wabash  Ry.  Co.  v.  Dykeman  (1892),  error,  which  is  the  conclusion  arrived  at, 
133  Ind.  56 ;  s.  c.  32  N.  E.  Rep.  823  ;  it  was  apparently  not  necessary  for  the 
Chicago  &  S.  E.  Ry.  Co.  v.  Cason  (1892),  appellate  court  to  fortify  its  position  by 
133  Ind.  49  ;  s.  c.  32  N.  E.  Rep.  827.  this  technical  consideration.  See  note  on 
In  the  first  of  these  cases  it  was  held  that  these  cases,  27  Am.  L.  Rev.  470. 

the  question   as  to  propriety  of  the   ap-  ^  L'Engle   v.    Florida   Central   R.  Co. 

pointnient  could  be   brought  directly  to  (1873),  14  Fla.  266. 

the    appellate    court   without  moving  in  *  Cincinnati,   Sandusky,    &   Cleveland 

the  lower  court  to  have  the  appointment  R.   Co.    v.   Sloan  (1876),    31    Ohio  St.  1 ; 

vacated.     Stress  was  laid  on  the  fact  that  s.  c.  15  Am.  Ry.  Rep.  376. 

there  was   no  express  statutory  right   of  °  Chattanooga  Terminal  Ry.  Co.  v.  Fel- 

appeal  from  a  ruling  denying  a  motion  to  ton  (1895),  69  Fed.  Rep.  273. 


538  RAILWAY  BONDS  AND  MORTGAGES.     [CHAP.  XXVI. 

This  course  was  taken  by  Judge  Gresham  in  the  Wabash  case. 
The  rule  was  strongly  insisted  upon  that  a  federal  court,  by  ap- 
pointing a  receiver  over  a  railroad  system  extending  through 
several  States,  does  not  acquire  such  a  primary  and  paramount 
jurisdiction  over  the  entire  property  that  the  court  of  another 
district  which  has  appointed  the  same  person  as  receiver  in  ancil- 
lary proceedings  is  precluded  from  entertaining  an  application  for 
his  removal  made  by  holders  of  bonds  secured  by  sectional  mort- 
gages on  portions  of  the  property  within  the  latter  district.^ 

§  549.  Jurisdiction  to  remove  Ancillary  Receiver.  — An  ancillary 
receiver  was  also  removed  by  Judge  Simonton  of  the  District  of 
South  Carolina,  but  it  was  on  the  ground  that  the  receiver  had 
been  appointed  in  the  sister  court  at  the  instance  of  another  com- 
pany which  controlled  the  stock  of  the  defendant,  to  further  the 
interests  of  the  dominant  company's  system,  and  not  in  the  in- 
terest of  the  creditors,  and  also  on  the  ground  that  the  appointing 
court  had  in  substance  afterwards  held  that  its  action  in  the  prem- 
ises was  unauthorized,  while  the  proceedings  in  which  the  appoint- 
ment of  another  receiver  was  asked  for  were  instituted  by  creditors 
seeking  to  enforce  liens  and  equities  paramount  to  those  of  any 
stockholders.^ 

But  it  is  unquestionably  more  agreeable  to  those  principles  of 
comity  which  regulate  the  attitude  of  the  federal  courts  of  the 
different  districts  towards  one  another  to  decline  to  consider  any 
application  for  the  removal  of  a  receiver  appointed  in  ancillary 
proceedings.*^ 

In  any  event,  something  more  than  mere  unsupported  allega- 
tions that  the  original  receivership  was  procured  by  fraud  are 
necessary  to  induce  a  court  to  remove  an  ancillary  receiver.* 

§  550.  Questions  ■which  will  not  be  decided  upon  an  Application 
for  Removal.  ^ — Whether  a  receiver  appointed  in  an  action  to  fore- 
close a  first  mortgage,  given  to  secure  the  payment  of  bonds,  is 
entitled  to  receive  the  income  and  money  previously  collected  by 
a  receiver  appointed  in  an  action  to  foreclose  the  second  mortgage, 

1  Atkins  V.   Wahash,   St.    L.    &    Tao.  2  phinizy  i..  Augusta  &  K.R.  Co.  (1893), 

Ry.  Co.  (1886),  29  Fed.  Ri-p.  161,  Judge  56  Fed.  Hep.  273. 

Gresliam  said :  "  If  by  the  inei-e  force  of  its  ^  Chattauooga  Teiminal  Ry.  Co.  v.  Fel- 

orders  the  other  court  acquired  the  legal  ton  (189.'')),  69  Fed.  Rep.   273  ;  Dillon  v. 

custody  of  the  res,  tlie  entire  Wabash  ]»ro])-  Oregon,  etc.  Ry.  Co.  (1895),  66  Fed.  Rep. 

erty,  ...  it  would  be  alike  the  duty  and  the  622. 

pleasure  of  this  court  to  aid  that  court  in  ^  New  York,  P.   &  0.  R.  Co.  v.  New 

the  e.xercise   of  its  primary  jurisdiction.  York,  I..  E.  &  W.  R.  Co.  (1893),  58  Fed. 

But  taking  a  different  view,  it  allowed  this  Rep.  2G8. 
bill  to   ]iroceed   here  for  a  foreclosure  of 
the  sectional  mortgages." 


§  551.]  APPOINTMENT,   ETC.,   OF   RECEIVERS.  639 

will  not  be  adjudicated  on  an  application  for  a  removal  of  the 
receiver  first  appointed.^ 

§  651.  Removal  on  Account  of  Circumstances  existing  at  the  Time 
of  the  Appointment.  —  The  court  will  remove  a  receiver  if  facts 
are  presented  showing  that  he  was  not  a  proper  person  to  place  in 
control. 2 

The  fact  of  a  receiver's  holding  such  relations  to  some  of  the 
parties  in  interest,  that  his  sympathies  are  likely  to  predispose 
him  to  favor  them,  is  as  much  a  reason  for  removing  him  as  the 
fact  that  he  is  shown  not  to  possess  the  necessary  integrity  and 
business  qualifications.  As  was  said  by  Mr.  Justice  Miller,  while 
sitting  as  circuit  justice,  "  It  becomes  the  duty  of  the  court  to  see 
that  its  powers  are  exercised  on  principles  of  strict  neutrality  as 
regards  the  belligerents."  That  duty  will  be  discharged  by  remov- 
ing a  representative  of  any  one  of  several  hostile  interests,  and 
appointing  a  receiver  who,  in  feeling  and  in  conduct,  will  be  strictly 
neutral  and  strictly  honest.^ 

Thus  a  receiver  appointed  by  a  federal  court  under  the  belief 
that  substantially  all  interests  affected  were  united  in  the  applica- 
tion therefor  will  be  removed,  where  it  appears  that  he  is  bitterly 
opposed  by  some  of  the  parties  interested  and  was  nominated  by 
the  other  parties,  notwithstanding  a  receiver  may  have  also  been 
apj)ointed  by  a  State  court  who  is  a  partisan  of  the  parties  hostile 
to  the  receiver  in  question.* 

But  where  the  defendant  company  has  agreed  that  the  complain- 
ing bondholders,  upon  giving  a  specified  security,  shall  have  the 
possession  and  management  of  the  railroad,  and  nominate  the 
receiver,  it  cannot  afterwards  object  to  the  person  selected,  unless 
he  commits  some  overt  act  of  unfaithfulness  to  his  trust.^ 

If  the  company  has  been  deprived  of  the  opportunity  of  resist- 
ing the  application  for  a  receiver,  owing  to  the  fact  that  the  officer 
on  whom  service  of  process  was  made  fraudulently  concealed  such 
service,  the  court  will  reopen  the  case  and  allow  the  company  to 
vacate  the  appointment.^ 

So,  also,  as  it  is  an  abuse  of  the  process  of  the  court  to  procure 
the  appointment  of  a  receiver  in  a  proceeding  which  is  not  an 
adversary  one,  but  really  instituted  by  a  collusive  arrangement 
between  the  petitioner  and  the  company,  a  receiver  appointed  on 

1  Holland  Trust  Co.  v.  Con.solidated  *  Wood  v.  Oregon  Development  Co. 
Gas  &  Electric  Light  Co.  (1895),  85  Hun,     (1893),  55  Fed.  Rep.  901. 

454.  5  Cowdrey   v.    Railway   Co.    (1870),    I 

2  High  on  Rec,  §  821.  Woods,  331. 

8  Meier  v.  Kansas  Pac.  Ry.  Co.  (1878),  «  Allen  v.   Dallas   &  Wichita  R.    Co. 

5  Dill.  476,  478.  (1878),  3  Woods,  316. 


540  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  XXVI. 

the  application  of  a  judgment  creditor  will  be  discharged  upon 
proof  that  the  process  of  the  court  was  not  used  in  good  faith  to 
collect  the  judgment,  but  as  a  means  of  placing  the  property  and 
business  of  the  company  in  the  hands  of  the  court,  to  the  end  that 
the  defendant  miglit  not  be  subject  to  suits  in  the  ordinary  course 
of  judicial  proceedings,  and  in  order  to  enable  the  plaintiff  and 
defendant,  by  agreement  between  them,  through  the  receiver,  to 
apply  all  the  earnings  of  the  road  during  a  series  of  years  to  the 
improvement  and  betterment  of  the  property .^ 

The  appointment  will  also  be  vacated  where  the  defendant 
brings  forward  material  facts,  not  presented  at  the  first  hear- 
ing, and  shows  that  his  failure  to  lay  them  before  the  court 
was  due  to  mistakes,  inadvertence,  or  excusable  negelect;^  or 
where  the  proceedings  were  tainted  in  some  way  with  fraud. 
Thus  a  receivership  will  be  vacated  upon  proof  that  it  was  pro- 
cured through  the  collusive  acquiescence  of  the  defendant.^ 

But  the  mere  fact  that  the  directors,  or  some  of  them,  who 
knew  that  a  foreclosure  suit  was  in  preparation,  and  that  a 
receiver  was  to  be  applied  for  as  a  part  of  the  relief,  desired 
that  the  petition  should  be  granted,  in  the  belief  that  it  would 
be  prudent  and  wise  to  have  such  receiver  appointed,  will  not 
render  the  appointment  collusive,  nor  furnish  any  adequate  rea- 
son for  vacating  it.'* 

§  552.  Removal  of  Receiver  appointed  ex  parte. — The  rule  that 
a  receiver  should  not,  without  some  pressing  necessity,  be 
appointed  in  ^x  parte  proceedings  (see  ante)  involves  the 
correlative  proposition,  that  an  ex  parte  appointment  should  be 
vacated  if  it  is  afterwards  shown  that  it  was,  under  the  circum- 
stances, improperly  made ;  as,  for  example,  if  his  personal  in- 
terests were  such  as  to  furnish  a  strong  temptation  to  favor  one 
or  other  of  the  beneficiaries  of  the  trust  he  has  undertaken.  Thus 
a  receiver  appointed  ex  j^arte  will  be  removed  where  it  appears 
that,  though  not  the  owner  of  any  of  the  corporate  stock,  he  was 
under  agreement  to  deliver   upon   demand   a  large   number   of 

1  Sage  V.  Memphis  &  Little  Rock  R.  To.  ^  Fifth  National  Bank  of  Pittsburg  v. 
(1883),  5  McCrary,  643  ;  s.  c.  18  Fed.  Pittsburg  &  Castle  Shannon  R.  Co.  (1881), 
Rep.  571.  This  case  was  reversed  as  a  1  Fed.  Rep.  190  ;  Overton  v.  I\Iein[)his 
whole  by  the  Supreme  Court  (125  U.  S.  &.  T>ittle  Rock  R.  Co.  (1882),  10  Fed. 
361)  ;  but  the  action  and  opinion  of  the  Re]i.  8fi6  ;  Brassey  v.  New  York  &  New 
lower  court  in  regard  to  the  propriety  of  England  R.  Co.,  19  Fed.  Rep.  663;  Wil- 
the  discharge,  sufiposing  the  facts  to  be  son  v.  Barney  (1875),  5  Hun,  257. 

as  stated,  was  expressly  a])provcd.  *  Brassey  v.  New  York  &  New  England 

2  Belmont  V.  Erie  Ry.  Co.  (1869),  52     R.  Co.  (1884),  22  Blatch.  72. 
Barb.  637. 


§§  553,  554.]   APPOINTMENT,  ETC.,  OP  RECEIVERS.  541 

shares  of  such  stock,  and  that  every  appreciation  of  the  stock 
would  largely  reduce  his  private  fortune.^ 

A  receiver  will  not  be  removed  because  the  application  was 
necessarily  made  out  of  court,  and  without  notice,  for  the  purpose 
of  forestalling  adverse  attacks,  and  the  clerk  kept  the  proceedings 
secret  until  the  papers  were  filed.^ 

§  553.  Right  to  object  to  Appointment  lost  by  Delay.  —  It  has 
been  held  that,  after  a  receiver  has  gone  forwai'd  and  completed 
the  road  to  a  certain  point,  expending  money  and  materials  fur- 
nished, not  by  the  company,  but  by  other  parties  interested  in  its 
completion,  and  thereby  saved  the  charter  of  the  company,  and 
prevented  a  forfeiture  of  its  land-grant,  the  delay  of  the  company 
for  nearly  a  month  to  object  to  the  manner  in  which  it  was 
served  with  notice  of  the  foreclosure  suit  will  be  regarded  as  an 
acquiescence  in  the  action  of  the  court  and  an  estoppel  of  objec- 
tions on  its  part.  The  company's  motion  to  vacate  the  appoint- 
ment of  the  receiver  under  such  circumstances  will  be  denied.^ 

A  receiver  appointed  in  foreclosure  proceedings  will  not  be 
removed  on  the  application  of  one  appointed  receiver  in  seques- 
tration proceedings,  where  the  application  is  not  made  until  after 
the  final  judgment  and  decree  of  foreclosure,  and  until  after  the 
latter  receiver  has  lost  in  an  effort  to  defeat  such  action.^ 

§  554.  Removal  of  Receivers  on  Account  of  Circumstances  arising 
subsequent  to  the  Appointment.  —  Any  conduct  amounting  to  an 
abuse  of  his  fiduciary  position  is  a  sufficient  ground  for  removing 
a  receiver.  Thus  a  receiver  has  been  removed  on  the  ground 
that,  while  managing  the  road,  he  allowed  large  rebates  in  favor 
of  another  railway  company  owned  by  persons  whose  business 
interests  were  identified  with  his  own,  and  also  in  favor  of  a  coal 
company  in  which  he  was  a  shareholder,  and  that  he  co-operated 
with  a  purchasing  committee,  which  was  seeking  to  purchase  the 
road,  in  its  efforts  to  compel,  by  threats  of  prolonged  and  ex- 
pensive litigation,  a  minority  of  dissenting  bondholders  to  agree 
to  the  sale.^ 

But  a  receiver  of  a  railroad  will  not  be  removed  because  of  the 
organization  of  a  company  composed  of  the  officers  of  the  road, 
which  is  alleged  to  have  used  the  labor  of  the  railroad  company 


1  Olmstead  v.  Distillinsj  &  Cattle  Feed-  *  liTew  York  Security  &  Trust  Co.  v. 
ing  Co.  (1895),  67  Fed.  Eep.  24.  Saratoga  Cxas  &  Electric  Light  Co.  (1895), 

2  Ihid.  88  Hun,  569. 

3  Allen  V.  Dallas  &  Wichita  R.  Co.  6  Bppps  v.  Wabash,  St.  L.  &  Pac.  Ry. 
(1878),  3  Woods,  316,  334;  s.  c.  1  Fed.  Co.  (1886),  29  Fed.  Rep.  161;  s.  c.  26 
Cas.  465,  Case  No.  221.  Am.  &  Eng.  R.  R.  Cas.  441. 


542  RAILWAY    BONDS    AND    MORTGAGES.  [CHAP.  XXVL 

in  operating  a  mine,  where  he  is  not  shown  to  have  knowledge  of, 
or  consented  to,  such  use  of  the  labor.^ 

Nor  is  it  a  ground  for  the  removal  of  the  receivers  of  a  cor- 
poration that  one  of  them  has  become  a  member  of  a  reoi-ganiza- 
tion  scheme.  It  will  be  sufficient  if  that  receiver  retires  from 
membership  in  such  committee  when  conflict  over  the  plan  of 
reorganization  appears  imminent.^ 

Still  less  should  a  receiver  be  removed  merely  because  he  ad- 
vises, aids,  and  encourages  reorganization  schemes.^ 

The  following  have  also  been  declared  to  be  insufficient  grounds 
for  removing  a  receiver:  Making  misleading  reports  as  to  the 
condition  of  the  property,  where  it  was  shown  that  he  had  con- 
tinued the  method  of  accounting  and  reporting  employed  by  the 
directors  ;  fraudulent  conduct  of  his  agent  to  the  detriment  of 
the  estate,  where  he  was  shown  to  have  used  due  care  in  the 
selection  of  his  agents,  and  to  have  discharged  the  agent  as  soon 
as  he  had  ascertained  the  fraud ;  giving  an  unusually  low  rate  for 
the  carriage  of  certain  freight,  where  his  object  was  to  bring  an 
article  produced  on  the  line  of  the  road  into  general  demand,  and 
so  add  to  the  receipts  of  the  trust  estate ;  yielding  to  a  demand 
made  by  another  company  under  a  reasonable  construction  of  a 
contract  between  it  and  the  insolvent  company.^ 

A  court  will  remove  receivers  who  are  incompetent,  especially 
where  some  of  them  have  interests  in  other  corporations  adverse 
to  the  interests  of  a  minority  of  the  bondholders,  and,  at  the 
instigation  of  the  majority  of  such  bondholders,  are  using  their 
powers  and  influence  as  receivers  in  advancing  those  corporations 
at  the  expense  of  the  railroad.^ 

A  receiver  who  has  unjustly  discriminated  in  the  charges  im- 
posed on  rival  shippers  over  the  road  may  be  removed  for  such 
discrimination.^ 

But  a  receiver  of  a  railroad  company  will  not  be  removed  be- 
cause of  fraudulent  acts  or  misconduct  of  a  subordinate  employee, 
when  his  personal  jirescncc  and  actual  inspection  of  the  transac- 
tions of  such  agent  is  a  physical  impossibility,  and  the  agent  was 
discharged  upon  the  transactions  coming  to  the  knowledge  of  the 
receiver.'^ 

1  Clarke  v.   Central   Railroad  &,  Bkg.  &  Atkins  v.  Wabash,  St.  L.  &  Pac.  Ry. 

Co.  (1893),  66  Fed.  Rep.  16.  Co.  (1886),  29  Fed.  Rep.  161,  174. 

*  Fowler  v.  Jarvis-Conklin  Mortgage  ^  Handy  v.  Cleveland  &  M.  R.  Co. 
Co.  (1894),  63  Fed.  Rep.  888.  (1887),  31  Fed.  Rep.  689. 

8  Clarke  v.  Central   Railroad  &  Bkg.  ^  Clarke  v.  Central   Railroad  &  Bkg. 

Co.  (1893),  66  Fed.  Rep.  16.  Co.  (1893),  66  Fed.  Rep.  16. 

*  Il.id. 


§  555.]  APPOINTMENT,    ETC.,    OF    RECEIVERS.  643 

Nor  is  it  a  ground  for  the  removal  of  a  receiver  that  mort- 
gages securing  debentures  may  have  been  sold  at  a  sacrifice 
without  adequate  advertisement  or  opportunity  to  bidders,  inas- 
much as  the  power  to  sell  such  mortgages  does  not  rest  witli  the 
receivers,  but  with  the  trustees,  who  are  not  under  the  control  of 
the  court  or  the  receivers.^ 

Nor  will  such  a  receiver  be  removed  because,  in  the  exercise 
of  his  business  judgment,  for  the  purpose  of  introducing  the 
product  of  a  mine,  he  has  given  a  special  freight  rate  which  is 
too  low.2 

If  receivers  representing  two  different  interests,  who  have  been 
placed  by  agreement  in  charge  of  the  property,  cease  to  act  har- 
moniously, they  should  be  removed  and  a  single  one  appointed.^ 

When  it  is  represented  that  the  trust  property  has  fallen  into 
the  hands  of  different  receivers  accountable  to  three  different 
courts,  to  the  manifest  detriment  of  the  trust  estate,  that  fact  of 
itself  is  a  sufiticient  reason  for  the  appointment  of  a  receiver  for 
the  whole  property,  if  the  court  has  jurisdiction  to  make  such 
appointment.^ 

§  555.  Termination  of  Receivership  generally.  —  In  appointing  a 
receiver,  whether  at  the  commencement  or  during  the  progress  of 
the  suit,  the  court  may  limit  the  duration  of  the  receivership  to 
such  a  period  as  it  may  deem  to  be  expedient.^ 

If  no  such  limit  of  time  has  been  fixed  beforehand,  the  court 
acts  with  reference  to  the  principle  that  a  receiver  is  appointed 
essentially  for  the  purpose  of  winding  up  the  affairs  of  the  de- 
fendant, and  that  the  receivership  should  therefore  be  closed  at 
the  earliest  possible  moment  consistent  with  the  interests  of  the 
creditors  and  stockholders.^ 

1  Fowler  v.  Jarvi.s-Conklin  Mortgage  &  Corp.  L.  J.  362  ;  Taylor  v.  Phil.  &  Read. 
Co.  (1894),  63  Fed.  Rep.  888.  R.  Co.,  7  Fed.   Rep.  377  ;  s.  c.  3  Am.  & 

2  Clarke  v.  Central  Railroad  &  Bkg.  Eng.  R.  R.  Cas.  177  and  note;  Sewell  v. 
Co.  (1893),  66  Fed.  Rep.  19.  Cape  May  R.  Co.   (N.  J.   Eq.,   1887),  30 

8  Meier  v.  Kansas  Pac.  R.  Co.  (1878),  Am.  &  Eng.  R.  R.   Cas.  155  ;  Vermont  & 

5  Dill.    476  ;    s.   c.    16    Fed.   Cas.    1321,  Canada  R.  Co.  v.  Vermont  Central  R.  Co. 

Case  No.  9395.  (1877),  50  N.  Y.  500  ;  s.  c.  14  Am.  Ry. 

*  Wilmer  v.  Atlanta  &  Richmond  Air  Rep.  497.    In  the  last  case  the  court  stated 

Line  R.  Co.  (1875),  2  Woods,  409.  the  principle  as  follows  :   "A  receivership 

^  Oilman  v.  Illinois  &  Mississippi  Tel.  is  temporary  to  serve  an  existing  exigency 

Co.  (1875),  91  U.  S.  603,  616.  of  a  temporary  nature,  and   when  that  is 

^  Howard  v.  La  Crosse  &  Milwaukee  R.  done,  it  is  to  cease.    The  idea  that  a  court, 

Co.  (1864),  Woolworth,  49  ;  s.  c.  on  ap-  in  virtue  of  its  prerogative  in  that  behalf, 

peal,  siib  nomine  Railroad  Co.   ;;.  Soutter  is  to  take  upon  itself  the  office  of  institut- 

(1864),    2  Wall.    510;    s.    p.    Mercantile  ing  a  receivership  to  be  perpetual,  and  to 

Loan  &  Trust  Co.  v.  Missouri,  K.  &  T.  Ry.  do  the  duty  of  a  court  in  controlling,  di- 

Co.  (1888),  36  Fed.  Rep.  221  ;  4  Ry.  Rep.  recting,  and  enforcing  the  administration 


644 


RAILWAY   BONDS    AND    MORTGAGES.  [CHAP.  XXVI. 


Thus  a  receiver  should  be  discharged  when  the  accrued  in- 
terest has  been  paid  in  full,  and  the  mortgagees  have  ample 
security  for  the  remainder  of  their  debt,  and  a  speedy  and  sure 
means  of  enforcing  its  payment  in  case  default  be  made  therein. ^ 

Where  an  appointment  has  been  made  in  a  State  court  on 
an  ex  parte  application,  and  the  cause  afterwards  removed  to 
the  federal  court,  and  both  sides  heard,  the  order  will  be  re- 
scinded upon  its  being  satisfactorily  shown  that  the  property  is 
not  in  any  jeopardy  or  in  any  need  of  the  protection  of  the  court.^ 

A  receiver  is  appointed  for  the  benefit  of  the  creditor  at  whose 
instance  he  is  appointed,  and  such  creditor  is  therefore  under  no 
obligation  to  continue  the  receivership  any  longer  than  he  deems 
expedient.  When  he  petitions  to  have  the  receivership  closed,  the 
court  will  not  retain  control  of  the  property  until  the  costs  and 
expenses  of  its  management  during  the  receivership  have  been 
paid.  The  fact  that  the  indebtedness  created  by  the  receiver 
has  enhanced  the  value  of  the  property  is  no  ground  for  such 
retention.^ 

The  receivership  should  not  be  continued  any  longer  than  the 
time  required  to  obtain  and  execute  by  the  exercise  of  reasonable 


in  the  management  of  tlie  parties  inter- 
ested, and  not  to  serve  a  present  exigency, 
rendering  it  necessary  in  order  to  prevent 
a  failure  of  legal  justice  and  right,  has  not 
yet  been  propounded  in  any  book  on  the 
subject,  nor  entertained  and  acted  on  in 
any  case."  A  receiver  which  a  New  Jersey 
statute  allows  to  be  appointed  upon  the 
petition  of  any  citizen,  after  it  has  ceased 
to  operate  its  road  for  a  given  period,  will 
be  discharged,  when  the  company  satisfies 
the  court  of  its  willingness  to  resume  the 
operation  of  the  road.  In  re  Long  Branch 
&  Sea  Shore  R.  Co.  (1874),  24  N.  J.  Eq. 
398.  But  before  the  company  is  given 
possession  of  the  road,  it  must  establish 
not  only  its  ability  and  willingness  to 
operate  the  road,  but  also  its  right  to  the 
possession  of  the  property.  In  re  Long 
Branch  U.  Co.,  24  N.  J.  Eq.  402.  As  a  gen- 
eral rule  the  road  will  be  returned  to  the 
comi)any  which  was  in  poss(;ssion  when 
the  receiver  was  appointed,  and  the  right 
of  any  other  company  to  the  possession  of 
the  road  determined  in  proceedings  insti- 
tuted by  the  latter,  asking  that  the  prop- 
erty be  delivered  to  it,  especially  if  the 
other  company  is  not  made  a  party  to  the 
suit. 


See  article  Discharge  of  Receiver  — 
Effect  upon  Liabilities  incurred  during 
the  Receivership,  by  Charles  L.  Billings, 
23  Am.  L.  Reg.  N.  S.  593. 

A  disputed  claim  of  this  character  must 
be  settled  between  the  opposing  parties 
in  due  course  of  law.  Long  Branch  Sea 
Shore  Railroad  Co.  v.  Sneden  (1875),  26 
N.  J.  Eq.  539. 

^  Howard  v.  La  Crosse  &  Milwaukee  R. 
Co.  (1864),  Woolworth,  49  ;  same  case  on 
appeal,  Railroad  Co.  v.  Soutter  (1864),  2 
Wall.  510.  In  this  case  it  was  held  that  a 
road  with  annual  receipts  to  the  amount  of 
$800,000  will  not  be  retained  in  the  hands 
of  a  receiver  for  a  claim  of  $20,000,  espe- 
cially when  the  validity  of  the  lien  asserted 
is  extremely  doubtful,  and  the  creditor, 
during  the  period  of  four  years,  wliich  had 
elajised  since  the  appointment  of  the  re- 
ceiver, had  been  paid  only  $1,000  of  his 
demand,  and  taken  no  step  in  the  cause  to 
assert  his  rights.  The  ordinary  remedies 
are  sufficient  in  such  a  case. 

2  McHenry  v.  New  York,  P.  &  0.  R. 
Co.  (1885),  25  Fed.  Rep.  114. 

*  State  of.  Tennessee  v.  Edgefield  & 
Kentucky  R.  Co.  (1880),  6  Lea  (Tenn.), 
353  ;  s.  c.  4  Am.  &  Eng.  R.  R.  Cas.  87. 


§§  550-558.]    APPOINTMENT,  ETC.,  OP  RECEIVERS.  545 

dilif^ence  a  final  decree.  Any  delay  or  want  of  good  faith  in  this 
respect  on  the  part  of  the  plaintiff  should  result  in  an  immediate 
discharge  of  the  receiver.^ 

^^  5oG.  No  Formal  Discharge  by  the  Court  is  necessary  to  termi- 
nate a  Receivership.  —  This  is  SO  wlicn  the  parties  themselves  have 
by  their  own  agreement  provided  for  the  administration  of  the 
trust  estate  in  such  a  manner  that  there  is  no  longer  any  ])rui)erty 
left  in  the  custody  of  the  court  for  the  receivers  to  manage.^ 

§  557.  The  Receiver  himself  cannot  be  heard  in  Opposition  to  a 
Motion  for  the  termination  of  the  receivership,  which  is  concurred 
in  by  all  the  parties  in  interest.  He  is  not  such  a  party  himself 
until  his  accounts  come  up  for  adjustment.^ 

§  558.  Effect  of  the  Discharge  of  a  Receiver  as  regards  the  Rights 
of  Third  Parties.  —  After  ail  order  discharging  a  receiver  and 
directing  a  surrender  of  the  property  to  the  defendant  has  been 
entered  and  comi)lied  with,  the  court  cannot,  after  the  close  of 
the  term,  alter,  modify,  or  expand  such  order  in  any  way,  and  again 
obtain  jurisdiction  over  the  property  and  funds  already  surrendered, 
with  a. view  to  the  adjustment  and  payment  of  claims  against  the 
receiver  which  were  not  reviewed  in  the  order  of  discharge.* 

Nor  can  action  be  maintained  against  the  receiver  after  such 
discharge  and  surrender  of  property  upon  the  order  of  the 
court. ^ 

Upon  the  discharge  of  the  receiver,  a  party  who  may  have 
taken  a  lease  of  the  road  as  a  security  for  a  large  debt,  before 
possession  was  taken  by  the  receiver,  is  entitled  to  be  placed  in 
possession  again  ;  but  this  rule  is  not  applicable  to  a  lessee  who, 
by  reason  of  his  failure  to  pay  the  sums  stipulated  in  the  contract, 
may  have  lost  possession  shortly  before  the  appointment  of  the 
receiver,  especially  when  the  validity  of  his  lien  is  doubtful ;  and 
not  only  is  the  security  sufficient  for  any  lien  he  may  have,  but 
he  has  never,  although  a  party  to  all  the  suits  respecting  the  road 
during  a  period  of  four  years,  set  up  a  claim  to  any  relief.^ 

1  Dow  V.  Memphis  &  Little  Rock  R.  *  Davis  v.  Duucan  (1884),  19  Fed. 
Co.  (1884),  20  Fed.  Rep.  260,  269.  Rep.  477. 

2  Andrews  v.  Smith  (1881\  5  Fed  Rep.  ^  Farmers'  Loan  &  Trust  Co.  v.  Central 
833,  845;  Vermont  &  Canada  R.  Co.  v.  Railroad  of  Iowa  (1880),  7  Fed.  Rep. 
Vermont  Central  R.  Co.   (1877),   50  Vt.  537. 

500  ;  s.  c.  14  Am.  Ry.  Rep.  497.  ^  Howard  v.  La  Crosse  &  Milwaukee 

8  L'Engle   v.   Florida   Central   R.   Co.     R.  Co.   (1884),  Woolworth,  49. 
(1873),  14  Fla.  266. 

35 


546 


BAILWAY   BONDS   AND   MORTGAGES.         [CHAP.  XXVII. 


CHAPTER  XXYII. 


TITLE,   POSSESSION,    OFFICE,   AND    DUTIES   OF   RECEIVERS. 


Art.  I.  - 

§  559. 

560. 

561. 

562. 
563. 

564. 

565. 
Art.  II.- 


566. 
567. 


568. 
569. 

Art.  III. 

§  570. 
571. 

572. 

573. 


Title  and  Possession  gener- 
ally. 

Existing  Rights  not  changed  by 
Appointment  of  Receiver. 

To  what  Property  Receiver  ac- 
quires Title. 

Jurisdiction  of  Property  ille- 
gally in  the  custody  of  the 
Receiver. 

Interference  with  Possession  by 
Strikers. 

Possession  not  allowed  to  in- 
terfere with  Public  Improve- 
ments. 

Exercise  of  Corporate  Franchises 
by  Company  after  Appoint- 
ment of  Receiver. 

Duty  of  Officers  to  deliver  Cor- 
porate Property  to  Receiver. 
-Territorial  Limits  of  Juris- 
diction OF  Court  appoint- 
ing Receiver. 

General  Rule. 

General  Rule  not  affected  by 
Fact  that  Road  extends  into 
another  State  or  Judicial  Dis- 
trict. 

Ancillary  Courts  exercise  only 
Limited  Jurisdiction  over  the 
Properties. 

Operation  of  General  Rule  qual- 
ified by   Powers  of  Court  of 
Efjuity  to  act  in  Personam. 
—  Office  and  Duties  of  Re- 
ceivers. 

Nature  of  Office  generally. 

Receiver  appointed  for  Benefit 
of  all  Parties  interested. 

Receiver  represents  Creditors  in 
Litigation. 

Fiduciary  Position  of  Receivers. 


§  574.    Receiver's  Transaction  of  Busi- 
ness with  other  Lines. 

575.  Duties  and  Powers  of  Receiver 

as  to  his  Employees  gener- 
ally. 

576.  Receiver's  accounting. 

577.  Receivers    asking   Advice   from 

Court. 
Art.  IV.  —  Suits  affecting  Mortgaged 
Property  duking  the  Re- 
ceivership. 
§  578.    Right  of  Receiver  to  maintain 
Actions. 

579.  Permission  of  Court  necessary  to 

bring  Suit  in  same  Court. 

580.  Co-ordinate     Courts     precluded 

from  entertaining  Jurisdic- 
tion Suits  affecting  Trust 
Estate. 

581.  Principle  precluding  such  Inter- 

ference recognized  by  Co-ordi- 
nate Courts. 

582.  Co-ordinate  Court  will  not  ap- 

point Receiver  where  Prop- 
erty already  under  Control  of 
Receiver. 

583.  This  Rule  not  applicable  where 

Prior  Appointment  was  a 
Nullity. 

584.  Assignee  in  Bankruptcy  cannot 

dispossess  Receiver  appointed 
by  a  State  Court. 

585.  Suits   affecting   Property   main- 

tainable in  other  Courts,  if 
his  Possession  will  not  be  in- 
terfered with. 

586.  Suits    affecting    Property    after 

Termination  of  Receivership. 

587.  Suits   against    Receivers  gener- 

ally. 

588.  Rule  as  to  Suits  for  Damages. 


§  559.] 


TITLE,    DUTIES,    ETC.,    OP    RECEIVERS, 


547 


§  589.  The  Proper  Procedure  to  enforce 
Claims  against  Property  in 
Receiver's  Hands. 

590.  Failure  to  obtain   l-eave  to  sue 

Receiver  can  be  taken  Advan- 
tage of  by  him  alone. 

591.  General  License  to  sue  Receiver 

in    other    Courts     sometimes 
given. 

592.  Claims  against  Employees  of  Re- 

ceiver  subject   to   Exemption 


Laws  of  State  where  the  Re- 
ceiver was  appointed. 
§  593.    Enforcement     of     Taxes     upon 
Property    in    the     Hands    of 
Receiver. 

594.  Federal  Legislation  altering  the 

Former      Rules     of      Equity 
Courts. 

595.  Exclusive  Control  of  Receivers 

of  Federal  Courts  not  affected 
by  State  Legislation. 


Article  I.  —  Title  and  Possession  generally. 

§  559.  Existing  Rights  not  changed  by  Appointment  of  Receiver. 
— The  appointment  of  a  receiver  alters  no  existing  rights  in  respect 
to  the  property  seized.  It  merely  stays  the  enforcement  of  rights 
by  the  parties  in  interest  for  the  time  being,  and  in  this  respect 
operates  like  an  injunction  pendente  lite^  or  an  equitable  attach- 
ment, the  property  being  put  into  his  possession  for  the  benefit  of 
the  party  ultimately  entitled.^ 

A  receiver  of  a  corporation  is  vested  with  title  to  its  property 
from  the  date  of  the  order  appointing  him.^  And  from  the  time 
of  the  order  of  appointment  both  parties  are  in  possession  by  the 
hand  of  the  receiver ;  and  when  the  question  of  right  is  ultimately 
decided,  the  possession  of  the  party  prevailing  becomes  exclusive 
throughout  the  whole  period,  by  relation  to  the  date  of  the 
order.* 

The  possession  of  the  receiver,  therefore,  does  not  disturb  the 
priority  of  legal  or  equitable  liens." 

Nor  is  any  formal  assignment  to  the  receiver  requisite  to  enable 
the  court  to  pass  title  to  a  purchaser  through  a  sale  made  by  a 
receiver  actina;  under  its  orders.^ 


1  Poland  V.  Lamoille  Valley  R.  Co. 
(1879),  52  Vt.  144;  s.  c.  4  Am.  &  Eng. 
R.  R.  Cas.  408;  Willink  v.  Morris  Canal 
&  Bkff.  Co.  (1843),  4  N.  J.  Eq.  377  ;  Un- 
ion Trust  Co.  V.  Weber  (1880),  96  111. 
346;  s.  c.  3  Am.  &  Enjr.  R.  R.  Cas.  583  ; 
Fosdick  V.  Schall  (1879),  99  U.  S.  235, 
251;  Hart  v.  Barney  &  Smith  Mfg.  Co. 
(1881),  7  Fed.  Rep.  543  ;  Ellis  v.  Boston, 
Hartford,  &  Erie  R.  Co.  (1871),  107 
Mass.    1. 

2  Union  Bank  of  Chicago  v.  Bank  of 
Kansas  City  (1890),  136  U.  S.  223  ;  s.  c. 
10  Sup.  Ct."  Rep.  1013. 

8  Dickey   v.    Bates   et   al.    (1895),    13 


Misc.  Rep.  489  ;  s.  c.  35  N.  Y.  SuppL 
525. 

*  Beverley  v.  Brooke  (1847),  4  Gratt. 
(Va.)  187,  citing  Story's  Eq.   134. 

6  Wiswall  V.  Sampson  (1852),  14  How. 
52  ;  Central  Trust  Co.  i'.  Tex.  &  St.  Louis 
R.  Co.  (1885),  23  Fed.  Rep.  673  ;  Poland 
V.  Lamoille  Valley  R.  Co.  (1879),  52  Vt. 
144  ;  s.  c.  4  Am.  &  Eng.  R.  R.  Cas.  408  ; 
Chicago  Title  &  Trust  Co.  v.  Sndth  (1895), 
158  III.  417. 

6  Russell  V.  Texas  &  Pac.  Ry.  Co. 
(1837),  68  Tex.  646  ;  s.  c.  5  S.  W.  Rep. 
686. 


648  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  XXVII. 

The  general  practice  seems  to  be  that,  when  it  is  necessary  for 
the  recovery  or  preservation  of  personal  property  by  the  receiver, 
the  defendant  will  be  required  to  convey  the  property  by  proper 
written  assignments,  and  that,  when  it  is  necessary  to  execute 
leases,  or  to  bring  suits  of  ejectment,  etc.,  for  real  estate,  a  con- 
veyance shall  be  made  to  the  receiver.^ 

§  560.  Of  what  Property  a  Receiver  acquires  Title.  —  If  the  re- 
ceiver is  merely  directed  in  general  terms  to  take  charge  of  the 
property  covered  by  the  mortgage,  the  extent  of  the  protection 
afforded  by  the  receivership  must  be  determined  by  the  same 
principles  as  those  which  determine  the  scope  of  the  mortgage 
lien.  (See  previous  chapters  on  mortgages.)  Lands  not  embraced 
in  the  mortgage,  and  not  alluded  to  specifically  in  the  order  of 
appointment,  may  be  sold  on  execution.  The  mere  fact  that  the 
rents  of  such  lands  have  been  paid  to  the  receiver  is  not  sufficient 
notice  to  the  public  that  they  are  claimed  as  being  subject  to  the 
mortgage  lien.^ 

The  principle  that  the  income  of  the  road  belongs  to  the  com- 
pany as  long  as  it  is  rightfully  in  possession,  involves  the  conse- 
quence that  earnings  in  its  hands  derived  from  the  operation  of 
the  road  prior  to  the  appointment  of  the  receiver  do  not  pass  under 
the  control  of  the  latter,  though  there  may  be  provisions  in  the 
order  of  appointment  as  to  paying  past  due  claims.  Such  pro- 
visions flow  from  the  mere  discretion  of  the  Chancellor,  and  can- 
not be  made  the  basis  of  an  invasion  of  the  absolute  right  of  the 
mortgagor  .3 

Only  the  property  in  possession  of  the  company  at  the  time  of 
the  appointment  of  the  receiver  can  in  any  case  become  subject  to 
his  control.  Hence  a  receiver  who  is  directed  to  take  possession 
of  a  railroad,  "  its  depots,  etc.,  and  also  all  other  goods  and  chattels 
owned  by  such  company,"  etc.,  and  is  empowered  "  to  institute 
suits  to  recover  or  protect  any  of  its  property,"  is  not  authorized 
to  take  possession  of  lumber  and  cord-wood  sold  upon  execution 
prior  to  his  appointment.* 

1  Union  Trust  Co.  v.  "Weber  (1880),  96  3  pow  v.  Memphis  &  Litttle  P.oek  K. 
111.  346  ;  8.  c.  3  Am.  &  Eng.  R.  R.  Cas.  Co.  (1884),  20  Fed.  Rep.  768  ;  Hook  v. 
583.                                                                       Bosworth  (1894),  64  Fed.  Rep.  443;  s.  c. 

As  to  title  of  receiver,  see  Atty.-Gen.  12  C.  C.  A.  208.    Compare  Oilman  v.  llli- 

V.  Sittingbourne  &  Sheerness  Ry.  Co.,  14  nois  &  Miss.  Tel.  Co.  (1875),  91  U.  S.  603, 

L.  T.  N.  S.  Ch.  92.  614,    and    the    cases    cited    in    previous 

2  Mississippi   Valley   Co.    v,    Chicago,  chapters. 

St.    Louis,   &   N.  0.   R.  Co.    (1881),   58  *  McTlrath  r.  Snurc  (1876),  22  Minn. 

Mi.ss.  846  ;  s.  c.  2  Am.  &  Eng.  R.  R.  Cas.     391.     Tlie  court  expressly  declined  to  in- 
414.  quire  what  the  rights  of  the  trustees  were 


§§  561,  562.]         TITLE,    DUTIES,    ETC.,   OP   RECEIVERS.  549 

So  also  the  holder  of  a  judgment  constituting  a  lien  on  real 
estate  of  a  railroad,  not  enibraced  in  mortgages  under  which  a 
receiver  was  appointed,  is  entitled  to  have  such  land  discharged 
from  the  custody  of  the  receiver,  so  that  it  may  be  sold  to  satisfy 
the  judgment.^ 

It  has  been  held  that  an  order  appointing  a  receiver,  which 
includes  the  words  "  all  other  rights  or  property  whatsoever,"  does 
not  cover  certain  town  lots  afterwards  acquired,  although  the 
mortgage  itself  to  enforce  which  the  suit  was  begun  specifically 
embraces  such  property .^ 

§  561.  Jurisdiction  of  Property  illegally  in  the  Custody  of  Re- 
ceiver.—  The  court  appointing  the  receiver  has  jurisdiction  to 
decide  all  conflicting  rights  in  regard  to  property  illegally  in  the 
possession  of  its  officer,  provided  such  property  was  taken  under 
color  of  its  authority.  Personalty  not  embraced  in  the  mortgage, 
and  therefore  not  within  the  terms  of  a  decree  of  sale  not  profess- 
ing to  cover  any  property  except  that  which  was  mortgaged,  will 
be  treated  as  a  part  of  the  trust  estate,  where  all  the  parties  to  the 
suit  have  expressly  consented  to  the  decree.  Thereafter  the  court 
appointing  the  receiver  will  not  allow  any  of  those  parties  to  ob- 
tain an  unfair  advantage  over  the  other  creditors  by  instituting 
proceedings  in  another  court,  and  levying  on  personalty  which  is 
not  subject  to  the  mortgage  lien.^ 

§  562.  Interference  with  Possession  by  Strikers.*  —  Since  prop- 
erty in  a  receiver's  hands  is  in  custodla  lec/is,  any  act  which 
amounts  to  a  positive  obstruction  of  the  receiver  in  the  manage- 
ment of  the  property  may  be  treated  as  a  contempt  of  court,  and 
punished  accordingly.  This  principle  has  been  applied  several 
times  in  recent  years  in  regard  to  "  strikers."     The  rule  adopted 

in  regard  to  these  chattels.  The  rule  gov-  same  for  the  benefit  of  the  assignee,  a 
erninw  the  cases  in  which  a  levy  is  made  receiver  of  such  company  afterwards  ap- 
upon  such  chattels,  when  covered  by  the  pointed  is  under  no  legal  obligation  to 
after-acquired  clause  (it  is  not  stated  in  enforce  it,  as  the  naked  legal  title  to  the 
the  report  whether  the  lien  in  this  case  subscription  would  not  pass  to  the  re- 
covered the  subject-matter  of  the  suit),  is  ceiver,  only  the  power,  right,  and  title  to 
discussed  in  Chapter  X.  such  property  passing  to  him  by  his  ap- 

1  Scott  V.  Farmers'  Loan  &  Trust  Co.  pointment  as  is  necessary  to  a  discharge  of 
(C.  C.  A.,  1895),  69  Fed.  Eep.  17.  his  duties.    Colery.  Grainger  County  ei!  al. 

2  Gabert   v.   Olcott    (Tex.    Civ.    App.,  (1896),  74  Fed.  Rep.  16. 

189-3),  22  S.  W.  Rep.  286.     The  correct-  ^  Farmers'   Loan  &  Trust  Co.   v.   San 

ness  of  this  decision  is  clearly  doubtful.  Diego  Street  Car  Co.  (1892),  49  Fed.  P.ep. 

Where    a    municipal    subscription    to  188,  citing  Gumbel  v.  Pitkin,  124  U.  S. 

stock  of  a  railroad  company  is  transferred  131. 

to  a  contractor,  who  in  turn  assigns  it  to  *  As  to  injunction  against  strikes  by  a 
another  for  a  loan  of  money,  although  the  receiver's  employees,  see  the  note  28  Law- 
company  may  have  agreed  to  enforce  the  yers'  Rep.  Ann.  464.     See  also  §  575,  post. 


550  RAILWAY    BONDS    AND    MORTGAGES.  [CHAP,  XXVII. 

by  the  courts  for  dealing  with  such  cases  may  be  stated  thus : 
"  Where  employees  of  a  railroad  company  in  the  hands  of  a  re- 
ceiver appointed  by  the  court  are  dissatisfied  with  the  wages  paid 
by  the  receiver,  they  may  abandon  the  employment,  and,  by  per- 
suasion or  argument,  induce  other  employees  to  do  the  same  ;  but 
if  they  resort  to  threats  or  violence  to  induce  the  others  to  leave, 
or  accomplish  their  purpose  without  actual  violence,  by  overawing 
the  others  by  preconcerted  demonstrations  of  force,  and  thus 
prevent  the  receiver  from  operating  the  road,  they  are  guilty  of 
a  contempt  of  court,  and  may  be  punished  for  their  unlawful 
acts."  1 

Any  employees  who  feel  themselves  aggrieved  may  always  ap- 
ply to  the  court  which  is  managing  the  property,  and  their  com- 
plaints will  be  heard,  and  proper  instructions  given  to  the  receiver 
accordingly.^ 

§  563.  Possession  not  allowed  to  interfere  with  Public  Improve- 
ments. —  A  federal  court  will  not  allow  its  possession  of  the  property 
to  operate  as  an  obstacle  to  public  improvements  authorized  by  a 
municipality.  Permission  will,  therefore,  be  granted  to  another 
company  to  lay  its  tracts  in  front  of  the  depot,  and  across  the  line, 
of  the  company  whose  road  is  being  administered  by  the  court, 
provided  the  petitioner  is  armed  with  the  necessary  legal  powers. 
The  court  will  not  in  such  a  case  undertake  to  determine  what 
compensation,  if  any,  is  proper  for  such  injuries  as  may  result  to 
the  road  under  its  control.  Such  questions  will  be  relegated  to 
the  State  tribunals  ;  but,  in  view  of  the  temporary  character  of  the 
receiver's  control,  the  court  will  protect  the  interests  of  the  parties 

^  United  States  v.  Kane  (1885),  23  Fed.  equity  in  such  cases,  is  to  be  found  in  the 
Rej).  748  ;  s.  c.  25  Am.  &  Eug.  R.  R.  Cas.  able  and  learned  opinion  recently  delivered 
608.  To  the  same  effect,  see  hi  re  Hig- ,  by  Mr.  Justice  Harlan  for  the  Circuit  Court 
gins  (1886),  27  Fed.  Ftep.  443  ;  In  re  Wa-  of  Appeals  in  Arthur  v.  Oakes  (1894),  63 
bash  Piy.  Co.  (1885),  24  Fed.  Rep.  217  Fed.  310,  the  doctrines  of  which  case  are 
(of  which  a  summary  is  given  of  this  case  approved  and  the  case  cited  in  U.  S.  v. 
iu  the  note  appended  to  the  report  of  Elliott  (1894),  64  Fed.  Rep.  27,  32  ;  Tin- 
United  States  V.  Kane,  supra,  in  the  ion  Trust  Co.  v.  Atchison,  T.  &  S.  F.  11. 
American  and  English  Railroad  Cases);  Co.  (1894),  64  Fed.  Rep.  724,  763;  Piatt 
In  re  Doolittle  (1888),  23  Fed.  Rep.  544  ;  v.  Phil.  &  Read.  R.  Co.  (1894),  65  Fed. 
Beers  v.  Wabash,  St.  Louis,  &  Pac.  R.  Co.  Rep.  660,  663,  666  ;  U.  S.  v.  Cassidy 
(1888),  34  Fed.  Rep.  244,  1247;  Secor  v.  (1895),  67  Fed.  Rep.  698,  764;  Oxley 
T()l<'<lo,  Peoria,  &  Warsaw  Ry.  Co.  (1877),  Stave  Co.  v.  Coopers'  International  Union 
7  liiss.  513;  King  v.  Ohio  &  Mississipjn  of  N.  A.  (1896),  72  Fed.  Rep.  695,  698; 
Ry.  Co.  (1877),  7  Biss.  529.  Elder  v.  Whitesides  (1895),  72  Fed.  Rep. 

The  most  elaborate  examination  of  the  724,  725. 

ca8e.s,  and  wliat  must  now  he  regarded  as  ^  /,i  j-c  Doolittle  (1885),  23  Fed.  Rep. 

the  most   authoritative  statement  of  the  544. 
rule  governing   the  actiou  of  a  court  of 


§§  5G4,  5G5.]        TITLE,    DUTIES,    ETC.,    OF   RECEIVERS.  551 

wiio  may  subsequently  come  into  possession  of  the  mortgaged 
property  by  requiring  the  petitioner  to  give  security  for  any  dam- 
ages that  may  ultimately  be  awarded  against  it.^ 

§  5G4.  Exercise  of  Corporate  Franchises  by  Company  after  Ap- 
pointment of  Receiver.  —  The  appointment  of  a  receiver  for  a  cor- 
poration gives  him  only  the  temporary  control  of  its  affairs  under 
the  direction  of  the  court.  The  corporation  may,  notwithstand- 
ing the  appointment,  exercise  any  of  its  franchises,  provided  it 
does  not  interfere  with  the  rightful  management  of  its  affairs  by 
the  receiver,  so  far  as  his  duties  are  defmed  by  the  court  appoint- 
ing him. 2 

Sometimes  even  this  limited  exercise  of  the  franchises  is  ex- 
pressly forbidden  by  the  order  of  appointment.  But  such  a 
restriction  may  be  modified  so  far  as  to  allow  the  stockholders  to 
meet  for  the  election  of  directors ;  and  if  the  directors  then  refuse 
to  grant  an  application  of  the  stockholders  to  call  a  meeting  at 
the  time  designated  in  the  by-law,  the  court  may  direct  an  elec- 
tion conforming  as  nearly  as  possible  to  the  by-laws  of  the 
corporation.^ 

It  seems,  however,  that  a  court  will  ordinarily  confine  itself  to 
the  exercise  of  such  functions  as  will  secure  the  proper  object 
aimed  at  by  the  appointment  of  the  receiver,  viz.  the  preservation 
of  the  property,  and  will  therefore  refuse  to  entertain  jurisdiction 
of  a  question  submitted  by  the  company  as  to  the  propriety  of 
postponing  a  meeting  for  the  election  of  officers,  unless  that  ques- 
tion has  some  relation  to  the  object  for  which  the  receiver  was 
appointed.* 

The  right  of  the  stockholders  to  elect  directors  is  not  affected 
by  the  sale  of  the  corporate  property  by  the  receivers.^ 

§  565.  Duty  of  Officers  to  deliver  Corporate  Property  to  Re- 
ceiver. —  The  officers  of  the  company  cannot  justify  a  refusal 
to  account  with  the  receiver,  and  pay  over  to  him  the  corporate 
effects,  on  the  ground  that  such  accounting  and  assignment  is  not 
expressly  required  in  the  order  of  appointment.  It  is  sufficient 
that  such  order  invests  the  receiver  "  with  the  usual  rights  and 
powers  of  receivers,"  and  especially  with  power  "  to  receive  into 

1  Central  Trust  Co.  v.  Wabash,  St.  Central  Railroad  Co.  of  New  Jersey  (1882), 
Louis,  &  Pac.  Ry.  Co.  (1885),  26  Fed.  35  N.  J.  Eq.  349  ;  s.  c.  9  Am.  &  Eng. 
Rep.  3,  per  Brewer,  J.  R.  R.  Cas.   512. 

2  Ohio  &  Mississippi  R.  Co.  v.  Russell  *  Taylor  v.  Philadelphia  &  Reading  R. 
(1885),  115  111.  52  ;  s.  c.  23  Am.  &  Eng.  Co.  (1881),  7  Fed.  Rep.  381,  385. 

R.    R.    Cas.    149;   Stevenson  v.   Davison  ^  State,  ex  rel.,  etc.   v.  Merchant,   37 

(1868),  18  Gratt.  (Va.)  819.  Ohio  St.  251  ;  s.  c.  9  Am.  &  Eng.  R.  R. 

8  Lehigh    Coal   &   Navigation    Co.   v.     Cas.  516. 


552  RAILWAY   BONDS   AND   MORTGAGES.         [CHAP.  XXVII. 

his  possession  all  the  effects  and  choses  in  action  "  of  the  com- 
pany, for  this  direction  involves  the  correlative  duty  of  delivery  by 
the  officers.^ 


Article  II.  —  Territorial  Limits  op  Jurisdiction  of  Court 

APPOINTING    A    ReCEIVER.2 

§  566.  General  Rule.  —  The  process  of  a  court  cannot  be  effec- 
tive outside  the  territory  over  which  it  has  jurisdiction.^ 

Hence  a  court  cannot  acquire  extra-territorial  jurisdiction  over 
property  by  the  appointmeut  of  a  receiver  ;  and  receivers  appointed 
by  courts  of  one  jurisdiction  are  not  entitled,  as  of  right,  to 
recognition  in  another  jurisdiction.* 

This  rule  is  applicable  to  courts  of  the  same  State  whose  juris- 
diction only  extends  over  a  limited  judicial  district,^ 

The  doctrine  that  the  powers  of  a  receiver  are  coextensive  only 
with  the  jurisdiction  of  the  court  appointing  him  is  not,  however, 
to  be  applied  so  as  to  deprive  him  of  the  control  over  property 
which  he  has  once  assumed,  merely  for  the  reason  that  the  prop- 
erty is  removed  into  another  jurisdiction,  provided  such  removal 
is  in  the  regular  performance  of  his  duty,  and  not  for  an  unlawful 
purpose.^ 

A  receiver's  right  of  action  is  frequently  recognized  as  a  matter 
of  comity  in  States  other  than  that  of  his  appointment,  where  the 
right  asserted  is  not  in  conflict  with  the  rights  of  the  citizens 
of  the  latter  State,  nor  against  the  policy  of  its  laws.'' 

Thus  a  receiver  appointed  in  one  State  in  a  suit  to  foreclose  a 
mortgage  covering  the  rolling-stock  of  the  company  has  been  per- 
mitted to  assert  his  right  to  the  possession  of  a  part  of  it  by  an 
action  brought  in  another  State  where  such  part  was  temporarily 
situated. 

1  Young  V.  Rollins  (1884),  90  N.  C.  5  riori.la  v.  Jacksonville,  P.  &  M.  R. 
125;  s.  c.  25  Am.  &  Eng.  R.  R.  C'as.  646.  Co.  (1875),  15  Fla.  201. 

2  See  generally  the  notes  in  23  Law-  6  Chicago,  Milwaukee,  &  St.  Paul  Ry. 
yers'  Rep.  Ann.  52  ;  6  id.  792.  As  to  Co.  v.  Keokuk  National  Line  Packet  Co. 
the  appointment  and  removal  of  ancillary  (1884),  108  111.  317;  s.  c.  48  Am.  Rep. 
receivers,  see  (nite.  557 

8  Ableman  v.   Booth  (1859),  21   How.  7  ni„i,  n^  Rec,  §§  341  ef.  .teq.     A  note 

.506,   524;    Pennoyer   v.   Neff  (1877),    95  in  which  the  cases  illustrating  the  stricter 

U.  fc>,   714.  ^J^^\  more  liberal  views  as  to  the  recogni- 

*  Bootli  V.  Clarke  (1854),  17  How.  322  ;  tion  of  receivers  in  courts  of  other  juris- 

Beers  v.  Wabash,  St.  Louis,  &  Pac.  Ry.  Co.  diction   are  classified  will  be  found  in  i 

(1886),  34  I'Vd.  P,.p.  244  ;  s.  r.  26  Am.  &  Cent.  L.  J.  6. 
Krig.  I?.  R.  Cns.  441  ;  High  on  Rec,  §§  47 
et  seq.,  2.'59,  240. 


§  567.]  TITLE,    DUTIES,   ETC.,   OF  RECEIVERS.  553 

Where  attachments  have  been  levied  on  the  property  of  a 
foreign  corporation,  and  a  receiver  is  afterwards  appointed  in  its 
own  State,  and  takes  possession  of  all  the  property,  including  that 
levied  on,  subject  to  the  disposition  of  the  attachments,  it  is  not  a 
proper  mode  of  effecting  such  disposition  for  the  receiver  to  peti- 
tion the  courts  where  the  attachments  are  pending  to  order  the 
property  to  be  turned  over  to  him.  The  only  way  in  which  it  is 
open  to  him  to  contest  the  attachment  suits  is  to  apply  to  these 
courts,  and  obtain  permission  to  become  a  party  to  the  suits.^ 

§  567.  General  Rule  not  affected  by  Fact  that  Road  extends  into 
another  State  or  Judicial  District.  —  Except  to  the  extent  and  in 
the  manner  stated  in  the  following  section,  a  receiver  appointed 
in  one  jurisdiction  has  no  absolute  right  to  control  any  of  the 
property  of  the  company  which  lies  in  other  jurisdictions.^ 

The  admission  that  there  is  a  necessity  for  thus  calling  in  the 
aid  of  an  ancillary  jurisdiction  amounts  to  a  concession  that  the 
tribunal  having  primary  jurisdiction  is  destitute  of  power  over 
property  situated  in  another  State  or  district.^ 

A  receiver  appointed  in  such  ancillary  proceedings  may  at  any 
time  be  removed  for  cause  by  the  court  which  appointed  him, 
especially  if  the  order  of  the  appointment  reserves  the  power  to 
make  such  further  orders  as  may  be  necessary.* 

If  the  receiver  is  thus  removed,  the  court  which  originally  ap- 

1  South  Carolina  R.  Co.  v.  People's  which  limits  the  exercise  of  the  adminis- 
Savino-.s  Ins.  (1879),  64  Ga.  18  ;  s.  c.  12  trative  powers  of  a  receiver  to  the  State  or 
Am.  &  EiiCT.  R.  R.  Cas.  432.  judicial  district  over  which  the  appointing 

2  In  Owens  v.  Ohio  Central  R.  Co.  court  has  jurisdiction.  The  sweeping  rule 
(1884),  20  Fed.  Rep.  10,  the  court  having  stated  respecting  the  control  of  a  trust 
come  to  the  conclusion  that,  by  the  prior  estate  is  clearly  subject  to  this  implied 
service  of  process,  it  had  acquired  jurisdic-  qualification.  Any  official  acts  which  the 
tion  of  the  trust  estate,  entered  an  order  receiver  may  undertake  to  peiform  in 
extending  the  jurisdiction  of  the  receiver  extra-territorial  jurisdictions  are  valid 
over  that  part  of  the  line  which  lay  in  only  in  so  far  as  the  courts  ma)',  as  a 
another  circuit,  and  directing  him,  in  matter  of  comity,  sanction  them.  In 
case  he  should  be  obstructed  by  any  one  practice  this  difficulty  is  usually  obvi- 
claiming  to  act  as  receiver  in  the  latter  ated  by  the  institution  of  ancillary  pro- 
circuit,  to  apply  to  the  court  of  that  cir-  ceedings  in  the  other  States  or  districts 
cuit,  praying  it  to  modify  or  vacate  its  through  which  the  line  may  pass,  and  the 
order  appointing  such  receiver.  This  appointment  of  the  same  receivers  by  all 
course  was  justified  on  the  grounds  that  the  courts,  as  in  the  Wabash  Litigation 
"  the  court  which  first  takes  jurisdiction  Central  Trust  Co.  v.  Wabash,  St.  Louis, 
of  a  trust  estate  has  the  legal  right  to  ad-  &  Pac.  R.  Co.  (1886),  29  Fed.  Rep.  618, 
minister  upon  the  whole."  The  direction  and  in  Jennings  v.  Philadelphia  &  Read- 
given  to  the  receiver  as  to  the  course  to  ing  P.  Co.  (1884),  23  Fed.  Rep.  569. 

be  adopted,  if  he  should  be  obstructed  in  ^  Texas  &  Pac.  Ry.  Co.  v.  Gay  (1894), 

the  second  circuit,  .shows  that  the  learned  86  Tex.  571  ;  s.  c.  26  S.  W.  Rep.  599. 
judge  who  decided  this  case  did  not  intend  *  Atkins  v.  Wabash,  St.  Louis,  &  Pac. 

to  enunciate  any  doctrine  opposed  to  that  R.  Co.    (1886),  29  Fed.  Rep.  161. 


5<j4:  EAILWAY   BONDS   AND   MORTGAGES.         [CHAP.  XXVII. 

pointed  him  will  direct  him  to  surrender  all  that  portion  of  the 
property  which  lies  within  the  jurisdiction  of  the  second  court, 
and  make  such  orders  as  may  be  necessary  to  apportion  the  ex- 
penses already  incurred  during  the  receivership  among  the  several 
sections  of  the  system,  and  in  other  ways  to  protect  the  sections 
which  still  remain  under  control.  The  first  court  will,  however, 
retain  its  jurisdiction  of  any  causes  pending  therein.^ 

As  to  the  appointment  of  receivers  in  ancillary  proceedings  in 
other  districts  or  States,  see  ante,  Chap.  XXVI. 

§  568.  Ancillary  Courts  exercise  only  a  Limited  Jurisdiction  over 
the  Property.  —  It  has  been  asserted  in  one  case  that,  althougli 
ancillary  proceedings  for  the  appointment  of  receivers  may  have 
been  taken  in  other  courts,  the  court  which  has  control  of  the 
main  suit  and  of  the  funds  of  the  receivership  is  the  proper  tribu- 
nal in  which  to  litigate  claims  which  may  affect  the  disposition  of 
those  funds.^ 

In  the  light  of  the  other  authorities,  however,  it  seems  that  this 
rule  can  scarcely  be  sustained  in  all  its  strictness.  It  has  been 
declared  that  a  Circuit  Court  which  appoints  the  original  re- 
ceivers in  ancillary  proceedings  to  take  charge  of  the  property  in 
its  own  district  has  jurisdiction  to  determine  the  validity  and 
amount  of  the  claims  of  citizens  of  that  district  against  the  receiv- 
ers and  the  corporation,  the  broad  ground  being  taken  that  citizens 
of  one  district  will  not  be  required  to  go  into  another  to  assert 
their  claims.^ 

In  another  case  the  ancillary  court  consented  to  sign  an 
order  for  the  payment  of  a  certain  claim  for  supplies  for  the  com- 
pany prior  to  the  receiver's  appointment,  making  it  payable  out 
of  the  income  of  the  road,  but  declined  to  charge  it  upon  the 

1  Central  Trust  Co.  v.  Wabash,  St.  Fed.  Rep.  260  ;  s.  c.  17  Am.  &  Eng.  R. 
Louis,  &  Pac.  R.  Co.  (1886),  29  Fed  Rep.  R.  Cas.  324,  where  Judge  Caldwell  de- 
618,  where  the  several  orders  to  be  made  clared  that  the  saving  of  expense  to  the 
under  the  cii'cumstances  are  stated  in  company  and  the  bondholders,  which  will 
infomial  terms  by  Judge  Brewer.  result  if  the  litigation  growing  out  of  the 

2  Central  Trust  Co.  v.  East  Tennessee,  operation  of  the  line  of  railroad,  with  its 
Va.  &  Ga.  R.  Co.  (1886),  30  Fed.  Kep.  manifold  and  complicated  business  rela- 
895.  tions,  is  concentrated  in  a  single  court,  is 

'  Ames  V.  Union  Pac.   R.   Co.    (1894),  not  sufficient  to  outweigh  the  inconven- 

60  Fed.   Uep.  966.     The   reason  here  as-  iences   which   persons   dealing    with    the 

signed  is  somewhat  analogous  to  that  which  road  will  be  put  to  by  such  an  arrange- 

hivs  led  to  the   insertion    in   some   orders  ment,  and  that  it  is  not  necessary,  for  the 

of  a[tpointment  of  a  ])rovision  authorizing  accomplishment  of  the  purposes  for  which 

suits   against   a    receiver   appointed   in    a  receivers  arc   appointed,   to    impose  such 

federal  court  in  any  county  through  which  burdens  and  deprivations  upon  tlie  citizen, 

till!  road  iKiNses.     .See,  for  example,  Dow  v.  and  neither  the  railroad  company  nor  the 

Memphis  &  Little  Rock  R.  Co.  (1884),  20  bondholders  have  any  equity  to  ask  it. 


§  569.]  TITLE,   DUTIES,   ETC.,   OF   RECEIVERS.  556 

corpus,  except  upon  an  order  by  the  court  in  which  the  principal 
receivership  was  created.^ 

Possibly,  too,  the  ancillary  court  may  enforce  a  claim  which  has 
been  reduced  to  judgment  before  the  appointment  of  a  receiver,  if 
by  the  law  of  the  State  that  judgment  constitutes  a  lien  on  the 
real  estate  of  the  company.''^ 

§  569.  Operation  of  General  Rule  qualified  by  Povrers  of  a  Court 
of  Equity  to  act  in  Personam.  —  A  COurt  which  has  jurisdiction  of 
a  consolidated  corporation  created  by  the  concurrent  legislation  of 
sevei'al  States  over  which  a  line  of  railway  extends,  may  appoint 
a  receiver  for  the  whole  property,  and  through  its  personal  con- 
trol of  the  corporation  reach  the  corporate  property  which  lies 
outside  the  territorial  limits  of  its  own  jurisdiction.^ 

For  this  purpose  it  may  compel  the  corporation  to  execute  as- 
signments to  the  receiver.* 

If  the  court's  personal  control  of  the  company  is  not  adequate 
for  the  purpose  of  enabling  the  receiver  to  obtain  possession  of 
property  outside  the  territorial  jurisdiction  of  the  court,  as  where 
such  property  has  been  seized  by  other  persons,  it  will  of  course 
be  necessary  to  ask  the  assistance  of  the  court  in  whose  jurisdic- 
tion those  persons  are  living ;  but  ordinarily  such  assistance  will 
be  freely  given  as  a  matter  of  comity.^ 

1  United    States    Trust    Co.     v.    New  Va.  &  Ga.  R.  Co.,  supra,  the  court  points 

York,  W.  S.  &  B.  R.  Co.  (1885),  25  Fed.  out,  arguendo,  that  if  "any  one  has  a  lien 

Rep.   797.  on  such  funds,  or  on  the  property  of  the 

2  Jennings  v.  Philadelphia  &  Reading  company  by  reason  of  such  funds,  say  for 

E.    Co.   (1884),   23  Fed.   Rep.   569.     The  a  judgment  recovered  against  the  company 

application  in  this  case  was  supported  on  prior   to  the  receivership,    an  accounting 

the  ground  that  the  plaintiff  had  acquired  and  marshalling  of   liens   must  be  had  ; 

a  lien  at  the  time  the  receivership  began,  and  accounting  and  marshalling  must  be 

The  court  held  that  no  such  lien  had  been  had  in  one  court  or  inextricable  confusion 

acquired,  and  therefore  denied  the  applica-  would  result."     The  main  principle  is  not 

tion.      But    the   opinion    does    not   show  disputed  that  the  receivers  must  report  to 

quite  clearly  whether,  if  the  lien  had  been  and  be  governed  by  the  court  from  which 

shown  to  exist,  the  plaintiff  would  have  the  original  order  of  appoiutment  issued 

been  given  relief  in  the  ancilhiry  tribunal,  in    all   matters   relating    to    the   general 

or  referred    to  the  one  in  which  the  re-  management   of    the   trust,    their  general 

ceivers  had  first  been  appointed.     If  the  accounting,  and  their  general  operation  of 

first  course  had  been  adojited,    it  would  the  road  within  the  territorial  limits  of 

apparently  have  been  in  deference  to  the  that  court's  jurisdiction.      Ames  v.  Union 

peculiar   effect   of  the  State   law;  for  it  Pac.  R.  Co.  (1894),  60  Fed.  Rep.  966. 
seems  clear  that  the  mc-re  fact  of  a  claim  ^  Wilmer  v.   Atlanta  &  Richmond  Air 

having  been  reduced   to  judgment   ought  Line  R.  Co.  (1875),  2  Woods,  409. 
not  to  affect  the  operation  of  the  general  *  Muller  v.  Dows  (1876),  94  U.  S.  444; 

principle  which  makes  the  original  court  Northern    Indiana    R.    Co.    v.    Michigan 

the  proper  forum  for  the  settlement  of  all  Central  R.  Co.  (1853),  15  How.  233. 
claims  upon  the  funds  of  the  receivership.  ^  Wilmer  v.  Atlanta  &  Richmond  Air 

In  Central  Trust  Co.  v.  East  Tennessee,  Line  R.  Co.  (1875),  2  Woods,  409. 


556 


RAILWAY    BONDS    AND    MORTGAGES.  [CHAP,  XXVII. 


Article  III.  —  Office  and  Duties  of  Receivers. 

§570.  Nature  of  Office  generally. — "The  jurisdiction  of  the 
court  to  appoint  receivers  of  property  has  for  its  primary  object 
the  care  and  custody  of  the  property  which  is  the  subject  of  the 
receivership,  pending  the  determination  of  the  questions  involved 
in  the  litigation,  and  to  enable  the  court,  by  placing  the  property 
under  the  control  of  its  officer,  to  preserve  it  to  answer  the  final 
decree  which  may  be  made  in  the  action."  ^ 


1  Vilas  V.  Page  (1887),  106  N.  Y.  439, 
per  Andrews,  J.  In  England  a  distinction 
is  drawn  batween  a  receiver  and  a  man- 
ager. A  receiver  means  ' '  a  person  who 
receives  rents  or  other  income,  but  does 
not  manage  the  property  in  the  sense  of 
buying  or  selling,  or  anything  of  that 
kind."  If  it  is  desired  to  continue  the 
business,  it  is  necessary  to  appoint  a  man- 
ager, or  a  receiver  and  manager.  In  re 
Manchester  R.  Co.,  L.  R.  14  Ch.  Div.  653 
(per  Jessel,  M.  R.).  This  principle  was 
established  in  regard  to  railroads  by  the 
leading  case  of  Gardner  v.  London,  C.  & 
D.  Ry.  Co.,  L.  R.  2  Ch.  201,  where  applica- 
tion was  made  by  the  mortgagees  for  a 
receiver.  Lord  Cairns  summed  up  the 
opinion  of  the  court  in  the  following 
words:  "  In  addition  to  the  general  prin- 
ciple that  the  Court  of  Chancery  will  not 
in  any  case  assume  the  permanent  man- 
agement of  a  business  or  undertaking, 
there  is  that  peculiarity  in  the  undertaking 
for  a  railway  which  would,  in  my  opinion, 
make  it  improper  for  the  Court  of  Chan- 
cery to  assume  the  management  of  it  at 
all.  When  Parliament,  acting  for  the 
public  interest,  authorizes  the  construc- 
tion and  maintenance  of  a  railway,  both 
as  a  highway  for  the  public,  and  as  a  road 
on  which  the  company  may  themselves 
become  carriers  of  passengers  and  goods, 
it  confers  powers  and  imposes  duties  and 
responsibilities  of  the  largest  and  most 
important  kind,  and  it  confers  and  im- 
poses them  upon  the  company  which 
Parliament  has  before  it,  and  upon  no 
other  body  of  persons.  These  powers 
rau.st  be  executed  and  these  duties  dis- 
charged by  the  company.  They  cannot 
be  delegated  or  transfernjd.  The  com])any 
will,  of  course,  act  by  its  servants,  for  a 
corporation  cannot  act  otherwise ;  but  the 


responsibility  will  be  that  of  the  company. 
The  company  could  not,  by  agreements, 
hand  over  the  management  of  the  railway 
to  the  debenture-holders.  It  is  impossible 
to  suppose  that  the  Court  of  Chancery 
can  make  itself  or  its  officer,  without 
any  parliamentary  authority,  the  hand  to 
execute  these  powers  ;  and  all  the  more 
impossible  when  it  is  obvious  that  there 
can  be  no  real  and  correlative  responsi- 
bility for  the  consequences  of  any  imper- 
fect management.  It  is  said  that  the 
railway  company  did  not  object  to  the 
order  for  a  manager.  This  may  well  be 
so ;  bat  in  the  view  I  take  of  the  case, 
the  order  would  be  improper,  even  if  made 
on  the  express  agreement  and  request  of 
the  company." 

For  English  cases  showing  difference  be- 
tween managers  and  receivers  of  railroads, 
and  the  rules  governing  English  courts 
in  appointing  managers,  etc.,  see  Edwards 
V.  Standard  Rolling  Stock  Syndicate,  41 
Wkly.  Rep.  343  ;  Peck  i'.  Trinsmaran 
IronCo.  (1876),  2  Ch.  Div.  115  ;  Truman 
&  Co.  V.  Redgrave  (1881),  18  Ch.  Div. 
547  ;  Makins  v.  Percy  Ibotson  &  Son 
(1891),  1  Ch.  313;  Boyle  v.  Bettws 
Llantwit  Colliery  Co.  (1876),  2  Ch.  Div. 
720  ;  Morton,  Rose,  &  Co.  v.  Barbadoes 
Water  Supply  Co.,  37  Sol.  J.  729  ;  Whit- 
ley V.  Challis  (1892),  1  Ch.  64;  rules 
governing  the  court  in  its  management  of 
the  property  :  Day  v.  Sykes,  Walker,  & 
Co.  (1886),  55  L.  T.  Rep.  763  ;  Securities 
Investment  Corporation  v.  Brighton  Al- 
hambra  (1893),  68  L.  T.  Rep.  249. 

This  distinction  between  a  receiver  and 
a  manager  seems  to  have  been  ignored  in 
this  country,  except  in  Langdon  v.  Ver- 
mont &  Canada  R.  Co.  (1882),  54  Vt.  593, 
605,  where  Judge  Redfield  took  the  same 
view  as  Sii'  George  Jessel  and  Lord  Cairns. 


I 


§  571.]  TITLE,    DUTIES,   ETC.,   OP   RECEIVERS.  557 

A  receiver  has  often  been  called  by  the  judges  the  "  hand  "  of 
the  coui't  which  appoints  him,  and  this  term  indicates,  by  way  of 
analogy,  with  reasonable  precision  the  character  of  his  office.  A 
controlling  authority  is  vested  in  the  court  itself.  The  receiver  is 
merely  the  agent  through  whom  that  authority  is  exercised. 

§  671.  Receiver  appointed  for  Benefit  of  Parties  interested.  — 
The  aj)j)ointment  of  the  receiver  is  made  for  the  benefit  of  all  the 
parties  in  interest,  and  not  for  the  advantage  of  plaintiff  or  de- 
fendants only.-^ 

He  has  no  jiersonal  interest  whatever  in  the  distribution  of  the 
funds,  possession  of  which  he  obtains  as  receiver.  When  the  dis- 
tribution is  made,  it  is  for  the  various  parties  concerned  to  contest 
it,  if  they  so  desire.^ 

No  preferences  are  to  be  shown  by  him,  no  practices  tolerated 
that  will  give  an  advantage  to  one  class  of  creditors  to  the  detri- 
ment of  another  class ;  but  the  whole  business  must  be  man- 
aged on  a  basis  of  the  broadest  equity.  A  receiver  should  not 
become  a  partisan  in  favor  of  any  particular  interest,  nor  ad- 
minister his  trust  at  the  expense,  or  to  the  prejudice,  of  any 
interests.^ 

But  it  is  not  improper  for  a  receiver  to  advise,  aid,  and  encour- 
age reorganization  schemes  which  offer  the  largest  measure  of 
protection  to  the  various  interests  connected  with  or  concerned  in 
the  property  and  assets  in  his  possession.* 

So  also  a  receiver  may  without  impropriety  act  as  the  selling 
agent  of  the  mortgage  trustees.^ 

As  a  receiver  is  under  the  duty  of  protecting  the  interest  of  the 
mortgagor  company,  a  bondholder  who  is  proceeding  to  foreclose 
his  lien  some  years  after  the  commencement  of  the  receivership 
cannot  object  to  an  answer  by  the  receiver  which  goes  to  the 
validity  of  the  lien,  or  the  consideration  of  the  debt  secured 
thereby.  It  is  immaterial  in  such  a  case  that  the  receiver  has  so 
far  discharged  his  trust  that  he  deems  it  safe  to  allow  the  com- 
plainant, who  had  become  owner  of  all  the  claims  against  the 
company,  to  take  charge  of  the  railroad  and  all  the  corporate 

1  Williamson  v.  New  Albany,  etc.  R.  ^  Plinckle}' u.  Railroad  Co.  (1879),  100 

Co.  (1857),  1  Biss.  198,  205  ;  Herring  v.  U.  S.  153,  156. 

New  York,  L.  E.  &  W.  R.  Co.  (1887),  105  ^  ckrk  v.  Central  Railroad  &  Bkg.  Co. 

N.  Y.    340  ;  s.   c.    12   N.  E.    Rep.    763  ;  (1893),  66  Fed.  Rep.  16. 
Libby  v.  Rosekrans  (1869),  55  Barb.  202  ;  *  Clark  v.  Central  Railroad  &  Bkg.  Co. 

Davis  V.  Gray  (1872),  16  Wall.  203  ;  Cen-  (1893),  66  Fed.  Rep.   16.     See  also  chap- 

tral  Trust  Co.  v.  Wabash,  St.  L.  &  Pac.  ter  on  reorganization. 
Ry.    Co.  (1891),  46  Fed.   Rep.   26  ;  s.  c.  ^  Fowler  v.   Jarvis-Conklin    Mortgage 

46  Am.  &  Eng.  R.  R.  Cas.  301.  Co.  (1894),  63  Fed.  Rep.  888. 


558  RAILWAY   BONDS   AND    MORTGAGES.  [CHAP.  XXVII. 

assets,  and  has  thus  relieved  himself  of  all  trust  property,  so  far 
as  was  possible.^ 

In  a  New  Jersey  case  it  appeared  that  the  receiver  of  a  rail- 
road had  so  far  discharged  his  trust  as  to  deem  it  safe  to  allow 
the  complainant,  who  had  become  the  owner  of  all  the  claims 
against  the  company,  to  take  charge  of  the  I'ailroad,  and  entered 
into  an  agreement  with  the  complainant  as  to  the  payment  of  the 
costs  of  the  receivership  and  the  receiver's  commissions.  This 
was  done  without  aid  of  the  court,  and  the  complainant  called  for 
an  answer  to  his  bill  from  the  receiver,  and,  when  made,  excepted 
to  the  answer.  The  Chancellor  held  that,  as  long  as  the  receiver- 
ship continued,  and  the  corporation  was  thereby  incapacitated 
from  the  discharge  of  its  ordinary  functions,  the  court  would 
not  prohibit  the  receiver  from  setting  up  any  defence  to  the 
foreclosure  suit,  which  would  be  available  in  the  company 
itself.2 

§  572.  Receiver  represents  Creditors  in  Litigation.  —  A  receiver 
derives  his  authority  from  the  act  of  the  court  appointing  him, 
and  not  from  the  act  of  the  parties  at  whose  suggestion  or  by 
wliose  consent  he  is  appointed.^ 

The  receiver  is  to  some  extent  the  representative  of  the  credit- 
ors for  the  purpose  of  binding  them  by  what  is  done  in  the  course 
of  proceedings  in  which  he  appears.  Thus  it  has  been  held  that 
a  motion  to  dismiss  an  appeal  from  an  order  made  in  proceed- 
ings in  intervention  will  be  denied  where  all  the  parties  thereto, 
and  also  the  receiver,  have  been  served  with  notice.* 

So  also  a  judgment  rendered  against  a  receiver  by  a  court 
of  competent  jurisdiction  is  binding  upon  the  interests  of  the 
bondholders.^ 

So  also  the  mortgagees  and  bondholders  who  are  duly  made 
parties  to  an  action  in  which  a  receiver  is  appointed  cannot,  after 
acquiescing  for  several  years  in  the  receiver's  exercise  of  the 
powers  conferred  upon  him  by  orders  made  in  the  course  of  the 
proceedings,  be  heard  to  dispute  or  question  the  propriety  of  any- 
thing which  he  may  do  under  the  authority  thus  conferred  upon 
him.^ 

^  III  re  Fifty-four  First  Mortgage  Bonds  *  Kadehangh    v.   Tacoma   &    Puyallup 

(1881),  15  S.  C.  304  ;  s.  c.  9  Am.  &  Eng.  R.  Co.  (1894),  8  Wash.  570 ;  s.  c.  36  Pac. 

R.  R.  fas.  337.  Rep.  460. 

2  Ryan  v.  Anglesea  R.  Co.  (N.  J.  Ch.,  ^  Turner  v.  Indianapolis,  B.  &  W.  R. 

Feb.  16,  1888),  3  Ry.  &  Corp.  L.  J.  426.  Co.  (1879),  8  Biss.  527. 

8  Railroad  Co.   v.    Humphries  (1892),  »  Woodruff  v.  Erie   R.  Co.  (1883),   93 

115  U.  S.  82,  97  ;  s.  c.  12  Sup.  Ct.  Rep.  N.  Y.  609  ;  s.  c.  16  Am.  &  Eng.   R.  R. 

787.  Gas.  501. 


I 


§§  573,  574,]        TITLE,    DUTIES,   ETC.,    OF    RECEIVERS.  659 

§  573.  Fiduciary  Position  of  Receivers.  —  The  fiduciary  position 
of  the  receiver  precludes  him  from  making  a  personal  profit  out 
of  the  trust  property. 

Thus  a  receiver  cannot  enforce  an  accounting  from  those  who 
join  with  him  in  a  scheme  for  the  purchase  of  outstanding  bonds, 
with  a  view  to  using  the  same  in  buying  the  railroad  at  the  fore- 
closure sale,  where  it  is  shown  that  the  receiver  was  to,  and  did, 
give  to  the  other  parties  information  respecting  the  bonds  pos- 
sessed by  himself  alone,  and  that  the  fact  that  the  receiver's  inter- 
est in  and  connection  with  such  purchases  was  suppressed  at  the 
time  of  the  foreclosure  sale.  The  rule  which  forbids  one  charged 
with  an  official  duty  of  a  fiduciary  nature  to  betray  his  trust 
for  private  gain  involves  the  corollary  that  he  must  bear  what- 
ever loss  may  fall  upon  him  through  the  dishonesty  of  his 
confederates.^ 

So  also,  even  if  a  purchase  of  the  bonds  by  a  company 
occupying  the  position  of  the  lessee,  and  also  of  receiver  and 
manager  of  the  insolvent  road,  is  made  in  an  emergency  to  save 
the  property  from  destruction,  and  not  with  any  view  to  personal 
gain,  the  receiver  cannot,  if  the  property  is  redeemed,  charge 
against  the  mortgagor  more  than  the  sum  actually  paid.  If  the 
property  is  not  redeemed,  and  it  appears  that  the  purchase  was 
made  at  the  request  of  the  security -holders  themselves,  the  receiver 
should  be  allowed  to  share  in  the  assets  pro  rata  with  the  other 
holders  of  like  securities.^ 

But  it  is  not  fraudulent  per  se  for  the  receiver  to  supply  ma- 
terials for  the  repair  of  the  road  out  of  a  stock  belonging  to 
himself.  The  court  will  not  disallow  an  item  in  his  accounts 
claiming  compensation  for  such  supplies  unless  some  specific  evi- 
dence is  given  that  an  excessive  price  has  been  charged.^ 

§  574.  Receiver's  Transaction  of  Business  with  other  Lines.  — 
The  rights  and  duties  of  a  receiver  in  charge  of  a  railroad  are 
those  of  a  common  carrier.  He  is  bound  to  afford  to  all  railroad 
companies  whose  lines  connect  with  his  own  equal  facilities  for 
the  exchange  of  traffic.  It  is  his  own  duty  to  receive  from  and 
deliver  to  other  connecting  roads  both  loaded  and  empty  cars. 
He  cannot  discriminate  against  one  road  by  maintaining  a  policy 
of  non-intercourse  with  it.^ 

1  Farley  v.  St.  Paul,  Minnesota,  &  '  Farmers*  Loan  &  Trust  Co.  r.  Central 
Manitoba  R.  Co.  (1882),  4  McCrary,  138.  Railroad  Co.  of  Iowa  (1881),  8  Fed.  Rep.  60. 

2  Lanjrdon  v.  Vermont  &  Canada  R.  *  Beers  u.  Wabash,  St.  L.  &  Pac.  Ry. 
Co.  (1882),  54  Vt.  .593  ;  s.  c.  II  Am.  &  Co.  (1886),  34  Fed.  Rep.  244,  247  ;  s.  C. 
Eng.  R.  R.  Gas.  688.  26  Am.  &  Eng.  R.  R.  Cas.  441. 


660  RAILWAY   BONDS   AND   MORTGAGES.         [CHAP.  XXVII. 

Especially  is  the  court  bound  to  discountenance  any  discrimina- 
tion when  it  is  expressly  forbidden  by  statute.^ 

§  575.  Duties  and  Po"wrers  of  Receiver  as  to  his  Employees  gen- 
erally.'-^ —  In  nearly  all  matters  pertaining  to  the  operation  of  a 
railroad  the  action  of  the  receiver  must  necessarily  be  conclusive.^ 
But  exceptions  to  this  rule  will  be  made  in  cases  of  unusual  im- 
portance. Thus  the  employees  of  the  receiver  will  be  permitted 
to  apply  to  the  court  for  relief  from  any  substantial  grievance 
suffered  by  them  in  the  operation  of  the  road  under  the  authority 
of  the  court.'^ 

So  the  court  may,  in  its  discretion,  grant  employees  leave  to 
file  a  petition  directing  the  receiver  to  rescind  an  order  reducing 
their  wages." 

But  unless  a  receiver  abuses  his  discretion  he  will  not  be  inter- 
fered with  by  the  court  in  such  a  matter  as  fixing  the  schedules 
of  wages,^  or  the  selection  and  discharge  of  his  employees.' 

A  receiver  is  not  bound  by  stipulation  of  the  officers  of  the 
company  respecting  the  discharge  of  employees.^ 

A  court  of  equity  undoubtedly  has  the  right  to  restrain  its 
receiver  from  treating  his  employees  unjustly  or  oppressively ; 
but  no  case  for  interference  on  this  ground  is  established  by  proof 
that  the  receivers  have  undertaken  to  enforce  a  long-standing 
rule  made  by  the  company,  to  the  effect  that  no  member  of  a 
labor  organization  would  be  employed  after  a  certain  date,  the 
evidence  showing  clearly  that  all  the  employees  then  in  the  ser- 
vice of  the  receivers  had,  before  being  employed,  whether  by  the 
company  or  the  receivers,  signed  a  statement  that  they  were  not 
members  of  such  organization,  or  that,  if  they  were,  they  would 
withdraw  therefrom.^ 

Employees  of  a  receiver  of  a  railroad  who  join  in  a  sympathetic 
strike,  constituting  a  boycott,  absolve    their  employer  from    all 

1  Jlissonri  Pac.  Ry.  Co.  v.  Texas  Pac.  (1893),  .55  Fed.  Rep.  149  ;  Farmers'  Loan 
Ky.  Co.  (1887),  30  Fed.  Rep.  2  ;  Cutting  &  Trust  Co.  v.  Northern  Pac.  Ry.  Co. 
V.  Florida  Ry.  &  Navigation  Co.  (1890),  (1894),  60  Fed.  Rep.  803  ;  Ames  v.  Union 
43  Fed.  Rep.  747.  Pac.  Ry.  Co.  (1894),  62  Fed.  Rep.  7. 

2  As  to  the  power  of  the  court  to  re-  ^  Thomas  v.  Cincinnati,  N.  0.  &  T. 
strain  strikes,  see  ayite.  P.  Ry.  Co.  (1894),  62  Fed.  Rep.  669. 

8  Thomas  v.  Cincinnati,  N.  0.  &  T.  P.  6  Continental  Trust  Co.  v.  Toledo,  St. 

Ry.  Co.  (1894),  62  Fed.  Rep.  669.  Louis,  &  K.   R.  Co.  (1894),  59  Fed.  Rep. 

4  Thomas  v.  Cincinnati,  N.  0.  &  T.  P.  514  ;  Ames  v.  Union  Pac.  Ry.  Co.  (1895), 

R.  Co.  (1S94),  62  Fed.  Rep.  17;   Conti-  4  Interst.  Comm.  Rep.  625. 
nental  Trust  Co.  v.  Toledo,   St.   Louis,  &  "^  In   re   Seattle,  L.    S.    &   E.  R.   Co. 

K.  R.  Co.  (1894),  59  Fed.  Rep.  514  ;  Frank  (1894),  61  Fed.  Rep.  541. 
V.  Denver  &  Hio  Grande  Ry.  Co.  (1885),  8  ii,i,l. 

23  Fed.  K.-p.  757  ;  In  re  Doolittle  (1885),  9  Piatt  v.   Philadelphia  &  Reading  R. 

2:j  Fed.  R.J..  544  ;  Waterhouse  v.  Comer  Co.  (1894),  65  Fed.  Rep.  660. 


§  575.]  TITLE,    DUTIES,    ETC.,    OF    RECEIVERS.  561 

obligations  to  accord  them  any  preferential  right  to  employment 
by  reason  of  their  past  services.^ 

Nor  will  a  court  direct  its  receiver  to  enter  into  any  contract 
with  the  members  of  a  labor  organization  who  hold  themselves 
bound  by  a  rule  which  is  invalid  by  reason  of  its  being  in  restraint 
of  commerce.^ 

With  a  view  to  an  orderly  and  economical  management  of  the 
trust  property,  the  receiver  of  a  railroad  should  adopt  and  main- 
tain rules  and  regulations  governing  the  conduct  and  establishing 
the  wages  of  all  persons  in  his  service  ;  but  if  he  deems  it  advisable 
to  make  any  change  in  those  rules  which  were  observed  while  the 
company  was  operating  the  road,  there  should,  in  the  first  place, 
be  a  hearing  before  him  as  to  the  proposed  alterations,  and  all  the 
employees  to  be  affected  thereby  should  be  notified  of  the  pro- 
ceedings, and  given  an  opportunity  to  point  out  to  him  any  ine- 
quality there  may  be  in  schedules  of  wages,  or  any  injustice  which 
would  result  from  the  regulations.  Any  matters  of  difference 
which  may  still  remain  unsettled  after  such  negotiations  are  to  be 
referred  to  the  court  for  final  determination.  If  the  receiver  un- 
dertakes to  reverse  and  rearrange  the  rules,  regulations,  and 
schedules  without  allowing  the  employees  to  present  their  objec- 
tions to  the  proposed  changes,  the  court  will  decline  to  sustain  his 
action.^ 

He  cannot  renounce  old  schedules  of  wages  and  adopt  new  ones 
on  the  ground  that  the  old  ones  were  mere  executory  contracts  by 
which  they  were  not  bound,  where  they  do  not  absolve  the  men 
from  the  duty  of  continuing  to  work,  but  ask  that  the  new  sched- 
ules be  confirmed  by  the  court,  and  all  the  employees  directed 
to  conform  thereto.* 

Where  the  employees  are  faithful  and  competent,  and  the  wages 
paid  to  them  are  not  higher  than  tlie  wages  paid  to  like  employees 
on  other  lines,  operated  under  conditions  essentially  similar,  the 
court  will  not,  ay'ainst  the  protest  of  the  employees,  approve  a 
reduction  of  wages  proposed  by  the  receiver  merely  on  the  ground 
that  the  reduction  will  turn  a  present  operation  of  the  road  at  a 
loss  into  an  operation  without  loss,  even  though  it  is  shown  that 
new  employees  may  be  obtained  at  the  lower  rate  of  wages.    "  The 

1  Booth  V.  Brown  (1894),  62  Fed.  Rep.  3  ^mes  v.  Union  Pac.  Ry.  Co.  (1894), 
794.     As  to  boycotts  generally,  see  note  to     60  Fed.  Rep.  674. 

53  Am.  &  Eng.  R.  R.  Cas.  32.5.  Compare  United    States  Trust   Co.  v. 

2  Waterhouse  v.  Comer  (1893),  55  Fed.  Omaha  &  St.  Louis  R.  Co.  (1894),  63  Fed. 
Rep.  149  ;   s.  c.   53  Am.  &  Eng.   R.   R.     Rep.  737. 

Cas.  329.  4  Ames  v.  Union  Pac.  Ry.  Co.  (1894), 


36 


62  Fed.  Rep.  7. 


562  KAILWAY   BONDS    AND   MORTGAGES.         [CHAP.  XXVII. 

retention  of  faithful,  intelligent,  and  capable  employees  is  of  much 
more  importance  than  temporary  decrease  in  earnings,  or  present 
ability  to  secure  other  employees  at  reduced  wages."  ^ 

An  order  relative  to  the  wages  of  employees  should  be  for  the 
benefit  of  all  parties  similarly  situated,  whether  belonging  to  any 
of  the  labor  organizations  applying  for  it  or  not.^ 

§  576.  Receiver's  Accounting.^  —  It  is  always  the  duty  of  the 
receiver  to  file  his  accounts  when  required  by  the  court,  and, 
whether  specially  ordered  or  not,  to  make  a  full  report,  and  pass 
his  accounts  at  least  once  a  year,  since  in  no  other  way  can  the 
parties  in  the  cause  be  informed  as  to  their  rights,  or  the  court  act 
understandingly.* 

But  inasmuch  as  he  is  the  officer  of  the  court,  and  neither  party 
is  responsible  for  his  misfeasance  or  malfeasance,  if  any  such 
exists,  the  bondholders  cannot  l)e  delayed  in  the  collection  of  their 
debts  until  the  receiver's  accounts  have  been  adjusted.^ 

When  a  report  upon  a  receiver's  account  is  submitted  by  a  mas- 
ter, the  duty  of  the  court  consists  in  reviewing  the  principles  aud 
rules  ado))ted  by  the  master  in  allowing  the  accounts,  rather  than 
in  examining  the  items  in  detail,  or  the  evidence  on  which  they 
are  founded.^ 

As  a  general  rule,  the  court  will  not  consider  exceptions  to  the 
report  unless  first  made  before  the  master  ;  but  this  rule  is  subject 
to  the  qualification  that  the  court  will  direct  an  account  to  be 
reformed  where  it  contains  manifest  errors  or  charges  clearly 
imi>roper.'^ 

Receivers'  accounts  passed  before  the  master  are  not  subject  to 
re-examination,  and  are  only  assailable  by  a  direct  proceeding  in 
court  alleging  error,  fraud,  mistake,  or  the  like.^ 

Like  other  trustees,  the  receiver  must  keep  the  funds  in  his 
charge  entirely  sep;irate  and  distinct  from  his  individual  funds. 
Any  breach  of  this  rule  will  be  at  his  own  jieril.  Thus  a  receiver 
was  charged  with  interest  on  a  sum  withdrawn  by  him  from  the 


1  United   States  Trust  Co.  v.  Om;ilia  &  7   Il,i,l. 

St.    Louis   U.    Co.    (1894),    Gli  Fed.   Kep.  «  Furniers' Loan  &  Trust  Co.  v.  Central 

737.  Railroail  Co.  of  Iowa  (1880),   1   McCrary, 

2  Ames  V.  Union  Pac.  Ry.  Co.  (ISQ.'^),  S.'iS.     For  a  case  in  which  an  order  of  tlie 
4  Iiiterst.  Coinni.  Kep.  62.5.  court  requiring  receivers  to  account  before 

'  See  generally  High  on  Rec,  ch.  xix.  a  master  was  construed  as  meaning  that 

*  High  oil  Rfc,  §  802.  accounts  presented  already  by  any  of  the 

6  Milwaukee!   &    Minnesota   R.    Co.  v.  receivc7"s  need  not  be  presented  again,  see 

Soutter  (IBGl),  2  Wall.  .IIO.  Farmers'    Loan    &   Trust   Co.    v.   Central 

6  Cowdrey  v.   Railroad  Co.   (1870),   1  Railroad  Co.  of  Iowa  (1880),  2  Fed.  Rep. 

Woods,  331.  751 


§  577.]  TITLE,    DUTIES,    ETC.,    OP    RECEIVERS.  563 

bank  in  which  the  trust  funds  were  on  deposit,  and  placed  in 
another  bank,  where  he  declined  to  explain  the  transaction  on 
his  examination  before  the  master  to  whom  the  matter  was 
referred.^ 

A  statutory  receiver  appointed  in  a  suit  to  enforce  the  lien  of 
the  State  cannot  escape  any  accounting  demanded  by  the  stock- 
holders by  showing  that  the  judgment  creditors  will  absorb  the 
fund,  or  that  he  is  authorized  by  law  to  report  to  the  governor, 
and  that  the  latter  was  satisfied  with  his  report.  But  where  it 
appears  that  such  stockholders  have  in  no  way  been  injured  by  the 
generality  of  the  statements  of  the  account,  and  the  failure  to  file 
vouchers  in  the  Executive  Department,  and  there  is  no  other 
showing  of  false  or  fraudulent  conduct,  a  court  of  equity  will  not, 
for  the  purpose  of  merely  satisfying  the  desire  of  the  complainants 
for  information,  require  the  receiver  to  account  more  in  detail, 
and  file  his  vouchers,  after  they  have  been  foreclosed  of  their 
interest  by  the  salc.^ 

A  receiver  cannot  be  called  to  an  account  in  any  other  court 
than  that  which  appointed  him.^  (As  to  what  expenditures  the 
receiver  will  be  allowed  in  passing  his  accounts,  see  ^os^.) 

§  577.  Receivers  asking  Advice  from  Court.  —  Receivers  can, 
by  applying  to  the  court,  obtain  general  advice  and  instructions, 
and,  in  special  cases,  particular  advice  and  instructions  as  to  their 
operation  of  a  railroad.  If  there  are  parties  in  interest,  and  they 
have  their  days  in  court,  the  advice  may  be  decisive.  But  if  the 
matter  is  ex  parte,  the  value  of  the  advice  depends  largely  upon 
the  information  and  ability  of  the  judge,  and  is  probably  binding 
only  on  the  receivers,  for  the  judge  may  change  his  mind  on  hear- 
ing a  full  argument.'* 

A  receiver  should  always  refer  to  the  court  (or  a  master  ap- 
pointed on  that  behalf,  if  there  is  such  an  official)  for  advice  and 
authority  in  any  matter  of  importance  which  may  involve  a  con- 
siderable outlay  of  money .^ 


1  Hinckley  v.  Railroad  Co.  (1879),  100  the  meaning  of  the  "long  haul"  clauses 
U.  S.  1.53.  of  the  Internal  Commerce  Act,  and  Judge 

2  Lafayette  Co.  v.  Neely  (1884),  21  Pardee  contented  himself  with  referring 
Fed.  Rep.  738  ;  s.  c.  17  Am.  &  Eng.  R.  them  to  a  decision  by  the  conmiission, 
R.  Cas.  242.  which    he  deemed   to  be   sufficiently  ex- 

3  Conkling  v.  Butler  (186."i),  4  Biss.  plicit  to  enable  a  traffic  manager  to  pro- 
22.  tect  himself  against  any  serious  complaint 

*  Missouri  Pac.  Ry.  Co.   v.  Tex.  Pac.  of  unlawful  discrimination. 
Ry.  Co.   (1887),  31  Fed.  Rep.  862  ;  s.  c.  5  Cowdrey    v    Railroad    Co.    1870),   1 

2  Ry.  &  Corp.  L.  J.  424.     In  that  case  Woods,  331. 
the  receivers  asked  for  instructions  as  to 


5G4  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  XXVII, 

A  federal  court  should  not  order  its  receiver  to  disregard  a  State 
law  regulating  freight  and  passenger  trafiic,  while  its  validity  is 
still  sub  jitdlce.  Under  such  circumstances  it  is  proper  to  instruct 
him  to  accept  the  rates  fixed  by  the  statute,  so  far  as  he  considers 
them  to  be  an  adequate  compensation  for  the  service,  and  reject 
the  rest.  No  one  will  then  be  injured,  as  the  court  will  have  the 
funds  in  hand,  and  allow  suits  against  the  receiver  for  overcharges, 
and  damages  will  be  recoverable,  if  the  constitutionality  of  the 
law  is  sustained.^ 


Article  IV.  —  Actions  affecting  the  Mortgaged  Property 
DURING  the  Receivership. 

§  578.  Right  of  Receiver  to  maintain  Actions.  —  The  decided 
weight  of  authority  sustains  the  rule  that,  where  there  has  been 
no  enlargement  of  the  powers  of  a  receiver  by  legislative  enact- 
ment, they  have  in  general  the  same  rights  of  action  —  neither 
greater  nor  less  —  which  were  possessed  by  the  persons  or  cor- 
porations upon  whose  estates  they  administer.^ 

He  may  therefore  maintain  an  action  to  determine  the  validity 
of  the  bonds ;  ^  and  he  is  as  much  entitled  to  recover  moneys  due 
upon  contracts  made  with  the  railroad  company  as  with  himself.'* 

But  a  receiver  cannot  take  charge  of  any  proceeding  in  a  foreign 
jurisdiction  by  commencing  an  action,  or  defending  an  existing 
action  without  the  express  authority  of  the  appointing  court,  so 
as  to  bind  any  property  in  his  hands  as  receiver.^ 

§  579.  Permission  of  Court  necessary  to  bring  Suit  in  same 
Court.  —  Suits  affecting  the  disposal  of  the  property  cannot  be 
brought  in  the  court  which  appointed  the  receiver,  unless  its  per- 
mission is  first  obtained. 

Thus,  if  a  receiver  is  appointed  in  a  suit  to  foreclose  a  prior 
mortgage,  subsequent  mortgagees  being  made  parties  to  the  same, 
the  latter  cannot  file  bills  afterwards  to  foreclose  the  equity  of 
redemption  subject  to  their  mortgages  without  leave  of  the  court. 
The  property  being  in  custodia  ler/is,  the  court  can,  and  should,  by 
proper  proceedings  in  the  original  suit,  protect  the  interest  of  all 

1  In  re  McElratli,  2  Dill.  460.  »  Huhhcll    v.    Syracuse     Iron    Works 

2  Republic    Life    Ins.    Co.    v.   Swigort     (1886),  42  Hun,  182. 

(1890),  l.'J;')   ill.  l.^O;   s.  c.  25  N.  E.  Kep.  ■>  Sunflower  Oil  Co.  v.  "Wilson  (1892), 

680;    9  Ky.   &  Corp.    L.  J.   22;    32  Am.     142  U.   S.    313;  s.  c.   12  Sup.  Ct.  Rep. 
&  Kng.   Corp.   Cas.   555  ;  High  on  liec,     235  ;  48  Am.  &  En^.  R.  H.  Cns.  664. 
§  201.  6  Pendleton    v.     Ru.ssell    (1891),    144 

U.  S.  640  ;  s.  c.  12  Sup.  Ct.  Kep.  743. 


§  580.J  TITLE,    DUTIES,    ETC.,    OF   RECEIVERS.  565 

parties,  and  the  prior  mortgagee  is  entitled  to  the  protection  of 
the  court  against  niunerous  suits  and  increased  costs.^ 

§  580.  Co-ordinate  Courts  precluded  from  entertaining  Jurisdic- 
tion of  Suits  affecting  Trust  Estate.  —  The  principle  that,  if  twO  OF 
more  courts  have  concui-runt  jurisdiction,  that  which  first  obtains 
control  of  the  subject-matter  of  litigation  is  entitled  to  retain  it 
to  the  conclusion  of  the  others,  has  been  already  discussed  in  its 
most  general  aspects.  This  principle  is  jealously  enforced  by 
courts  of  equity,  which  assume  control  of  corporate  property 
through  a  receiver.  After  the  receiver  is  fully  vested  with  the 
possession  of  the  property,  any  attempt  to  disturb  his  possession 
by  proceedings  in  a  co-ordinate  court,  without  obtaining  the  per- 
mission of  the  court  which  appointed  him,  is  a  contempt  of  that 
court.2 

Whenever  in  the  course  of  a  receivership  the  court  makes  an 
order  which  the  parties  consider  injurious  to  their  interests,  it  is 
their  duty  to  (ile  a  motion  at  once  asking  the  court  to  cancel  or 
modify  it.^ 

Any  proceedings  which  cannot  be  effectual  without  assumption 
of  control  over  the  rea  ai^e  within  the  purview  of  this  rule.  Prop- 
erty in  a  receiver's  hands,  therefore,  is  not  subject  to  execution ;  * 
nor  to  the  process  for  tho  enforcement  of  a  mechanic's  lien  ;^  nor 
to  attachment,  although  the  suit  in  which  he  was  appointed  is 
subsequently  dismissed,  where  before  such  dismissal  another  re- 
ceiver has  been  appointed,  and  the  property  sold  under  the 
direction   of  the  court.^ 

So  the  claim  of  a  party  who  asserts  that  the  execution  of  the 
mortgage  was  a  breach  of  trust  by  which  the  property  reverted  to 

1  Sutherland  v.  Lake  Superior  Ship  Under  the  Revised  Statutes  of  New  York, 
Canal,  Railroad,  &  Iron  Co.  (1873),  9  N.  which  authorize  the  court  to  restrain  hy 
B.  R.  298.  injunction  all  proceedings  at  law  by  any 

2  De  Visser  v.  Blackstone  (1868),  6  creditor  against  a  corporation  after  its 
Blatch.  235.  property  has  been  placed  in  tlie  hands  of 

^  United  States  Trust  Co.  v.  Wabash  a  receiver,  it  has  been  held  that  a  cred- 
Western  Rv.  Co.  (1893),  150  U.  S.  287  ;  itor  who  has  not  joined  in  the  application 
s.  c.  14  Sup.  Ct.  Rep.  86,  where  the  rule  for  a  receiver  may  be  enjoined  from  prose- 
was  ai>]>iied  against  the  trustees  under  a  cuting  an  action  against  a  stockholder  for 
divisioTial  mortgage  on  a  line  leased  to  the  amount  of  his  unpaid  subscription  to 
the  company  at  whose  instance  the  re-  the  capital  .stock.  Otherwise  the  creditor 
ceiver  was  appointed,  ina-smuch  as  they  would  obtain  a  preference  over  other  cred- 
failed  to  object  to  an  order  made  with  itors  in  direct  violation  of  the  spirit  of  the 
respect  to  the  payment  of  preferential  provision  of  the  act. 
debts  before  the  rentals  of  the  leased  line.  ^  De   Visser   v.    Blackstone    (1868),  6 

4  Robinson  v.  Atlantic  &  Great  West-  Blatch.  235. 
em  Rv.  Cn.  (1870),  66  Pa.  St.  160  ;  R^m-  ^  Texas  Trunk  Ry.  Co.  v.  Lewis  (1891), 

kiue   y.    Elliott   (1857),    16   N.   Y.  377.  81  Tex.  1  ;  s.  c.  16  S.  W.  Rep.  647. 


666  RAILWAY   BONDS   AND    MORTGAGES.  [CHAP.  XXVII. 

him,  is  a  claim  which  must  be  prosecuted  in  the  court  where  the 
receiver  was  appointed.^ 

To  be  entitled  to  the  protection  of  the  court,  it  is  not  necessary 
that  the  property  should  actually  have  been  reduced  to  possession 
by  the  company  at  the  time  the  receiver  assumes  control.  For 
this  reason  money  due  to  the  company  cannot  be  garnisheed  in 
the  hands  of  the  debtor  without  the  permission  of  the  court.^ 

Where  the  possession  of  a  federal  court  through  its  receiver  can 
be  traced  back  through  several  prior  receivers  to  a  time  antedat- 
ing the  appointment  of  a  receiver  by  a  State  court,  the  federal 
court  will  not  surrender  the  trust  property  to  the  latter,  though 
the  last  of  the  successive  receivers  was  appointed  after  the  one  in 
the  State  court. ^ 

§  581.  Principle  precluding  such  Interference  recognized  by  Co- 
ordinate Courts.  —  This  right  of  the  court  which  first  obtains 
jurisdiction  to  retain  it  for  all  purposes  imposes  on  other  courts  a 
correlative  duty  not  to  interfere  with  that  jurisdiction.  A  co- 
ordinate court  in  which  a  second  suit  is  brought  upon  the  same 
matter  should,  upon  being  advised  of  the  pendency  of  the  first 
suit,  dismiss  the  case,  and,  if  the  receiver  has  been  appointed, 
discharge  him,  leaving  the  tribunal  which  has  first  acquired  juris- 
diction to  adjudicate  between  the  parties.* 

A  federal  court  will  not  entertain  a  bill  against  the  stockhold- 
ers of  an  insolvent  corporation  for  a  fraudulent  misappropriation 
of  a  part  of  the  assets,  the  concern  being  at  the  time  when  the 
suit  is  instituted  in  the  hands  of  a  receiver  appointed  by  the  State 
court.^ 

So  a  petition  to  have  the  judgment  of  a  State  court  establish- 
ing a  mechanic's  lien  declared  a  paramount  lien  on  the  property 
in  the  hands  of  a  receiver  appointed  by  a  federal  court  will  not 
be  entertained  by  the  latter  court  where  the  petitioner  obtained 
his  judgment  after  such  appointment,  even  though  the  action  in 
the  State  court  may  have  been  begun  before  the  appointment.^ 

1  Union  JIutual  Life  Ins.  Co.  v.  Uiii-  *  Keep  v.  Michigan  R.  Co.  (1873),  6 
versity   of  Chicago    (1881),   6    Fed.    Rep.     Chicago  L.  News,  101. 

442.  &   Hamilton  v.  Chouteau  (1881),  2  Mc- 

2  PucharJs   V.    People    (1S76),    81    111.     Crary,  509. 

551  ;    Newport   &  Cincinnati   Bridge  Co.  ''  Blair  v.  St.   Louis,  H.  &  K.  R.  Co. 

V.  Douglass  (1877),  12  Bush  (Ky.),  673.  (1885),  25  Fed.  Rep.  2.     "The  parties," 

The  extent  to  which  actual  caption  of  the  it  was  said,  "  prefeired  to  proceed  in  the 

property  is  necessary  to  confer  on  a  court  State   court,    without   the   leave    of    this 

exclusive  jurisdiction  is  discussed  in  the  court,  and  they  must  lie  in  the  bed  which 

chapter  on  jurisdiction.  they    have   made."      s.    p.    De    Visser  v. 

8  Central  Trust  Co.  v.  Chattanooga  R.  Blackstone  (18G8),  6  Blutch.  235. 
k  C.  R.  Co.  (1894),  62  Fed.  Rep.  950. 


§  582.]  TITLE,   DUTIES,   ETC.,    OF   RECEIVERS.  567 

Nor  will  a  federal  court  take  cognizance  of  a  foreclosure  suit 
involving  property  which  has  already  passed  into  the  hands  of  a 
receiver  appointed  in  a  similar  suit  in  a  State  court. ^ 

The  same  principle  is  applicable  where  the  second  suit  is 
brought  in  a  State  court,  after  a  receiver  has  been  appointed  in  a 
federal  court.  Under  such  circumstances,  it  is  immaterial  whether 
the  lien  which  the  receiver  was  appointed  to  enforce  was  prior  or 
subsequent  to  that  sought  to  be  enforced  in  the  second  court.^ 

Provided  the  second  court  is  one  of  merely  concurrent  jurisdic- 
tion for  the  purposes  of  the  application  made  to  it,  it  will  not  assume 
any  greater  power  to  interfere  with  the  pending  suit  for  the  reason 
that  it  is  an  appellate  court  as  well,  and  may  therefore  ultimately 
be  called  upon  to  review  the  proceedings  in  the  first  court.^ 

Fractions  of  a  day  may  be  taken  into  account  in  determining  the 
priority  of  the  appointments  of  receivers.* 

Whether  the  second  court  defers  to  the  principle  of  non-inter- 
ference or  not  the  possession  of  the  receiver  cannot,  in  any  case, 
be  affected  by  proceedings  taken  in  another  court  than  that  which 
appointed  him.^ 

§  bS'2.  Co-ordiiiate  Court  vrill  not  appoint  Receiver  ■wrhere  Prop- 
erty is  already  under  Control  of  Receiver.  —  That  a  receiver  will 
not  be  appointed  to  administer  property  already  in  charge  of  a 
receiver  duly  appointed  by  a  court  of  concurrent  jurisdiction  is  a 
rule  to  which  there  is  no  exception.^ 

The  fact  that  the  receiver  appointed  by  the  sister  court  is  not 
doing  his  duty  is  not  a  sufficient  reason  for  departing  from  this 
rule ;  for  one  who  has  a  complaint  against  such  a  receiver  may, 
and  must,  appeal  to  the  court  which  appointed  him.'^ 

Nor  will  such  application  be  entertained  upon  the  ground  that 
the  complainant  raises  questions  not  raised  in  the  previous  suit.^ 

1  Hammock  v.  Farmers'  Loan  &  Trust  ^  Paissell    v.    Texas    &    Pac.    Ry.    Co. 

Co.  (1881),  13  Fed.  Rep.  189.  (1887),   68  Tex.  646;  s.  c.  5  S.  W.   Rep. 

■■2  Milwaukee  &  Minnesota   R.   Co.    v.  686. 
Milwaukee  &  Western   R.  Co.  (]865),  20  ^   Blake  y.  Alabama  &  Chattanooga  R. 

Wis.   165.  Co.  (1871),  6  N.  B.  R.  331. 

'  People,  e.r  re?.,  etc.  v.  McLane  (1882),  '^  Alabama  &   Chattanooga    R.   Co.   v. 

62  Cal.  616.     There  the  Supreme  Court  of  Jones  (1872),  7  N.  B.  R.  145. 
California,   which  has  concurrent  powers  ^  Alabama   &    Chattanooga  R.    Co.   v. 

with  the  Superior  Courts  as  to  the  issue  of  Jones   (1872),   7   N".    B.    R.    145.      "This 

writs  of  viandamus,  declined  to  grant  one  court,"  said  Woods,  J.,  "may  pass  upon 

to  compel  a  receiver  to  operate  the  road,  questions  not  raised  in  the  other  courts, 

holding  that  there  was  a  plain,  speedy,  and  even  between  the  same  parties  and  relating 

adequate  remedy  in  the  court   in    which  to  the  same  subject-matter,  but  no  case  can 

the  receiver  was  appointed.  be  found  authorizing  this  court   to  inter- 

*  Eiist  Tenn.,  V.  &  G.   R.   Co.  v.  At-  fere  with   pro]ierty  in    the   ]iossession    of 

lanta  &   Florida  R.   Co.    (1892),  49  Fed.  other  courts  of  concurrent  jurisdiction." 
Rep.  608. 


568  RAILWAY    BONDS    AND    MORTGAGES.  [CHAP.  XXVII. 

Still  less  can  one  court  entertain  a  direct  application  for  the 
removal  of  a  receiver  appointed  by  another.^ 

The  cases  in  which  receivers  are  appointed  in  ancillary  pro- 
ceedings rest,  of  course,  upon  a  different  principle.     (See  below.) 

§  583.  This  Rule  not  applicable  w^here  Prior  Appointment  "was  a 
Nullity.  —  If  the  appointment  of  a  receiver  was  for  any  reason  a 
nullity,  it  will  be  no  bar  to  the  subsequent  appointment  of  a  re- 
ceiver by  a  co-ordinate  court.^ 

§  584.  Assignee  in  Bankruptcy  cannot  dispossess  Receiver  ap- 
pointed by  a  State  Court,  unless  he  first  discharges  the  mortgage 
lien.  To  allow  him  to  do  so  would  result  in  depriving  the  mort- 
gagees of  a  vested  right.^ 

The  only  circumstances  under  which  the  possession  of  such  a 
receiver  can  be  interfered  with  is  where  his  title  is  subject  to  im- 
peachment for  some  cause  within  the  provisions  of  the  Bankruptcy 
Act.4 

As  to  the  somewhat  analogous  rules  prevailing  in  the  English 
courts  respecting  the  official  liquidator  and  a  receiver,  see  Chap. 
XXVI.  (appointment  of  receivers  in  same  court). 

§  oS5.  Suits  affecting  Property  maintainable  in  other  Courts,  if 
his  Possession  will  not  be  interfered  with.  —  The  mere  fact  that 
the  property  of  a  railroad  company  is  being  administered  upon  in 
proceedings  taken  in  a  State  court  does  not  prevent  citizens  of  the 
State  from  applying  to  the  federal  court  to  establish  their  claims 
and  obtain  relief,  if  entitled  to  it.^ 

1  Young  V.  jVIontgoraery  &  Eufaula  R.  legally  or  judicially  taken  before  proceed- 
Co.  (1875),  2  Woods,  606.  i'lgs-     Hence  the  action  of  the  bankrupt 

2  Hammock  v.  Loan  &  T.  Co.  (ISSl),  court  in  this  case  in  taking  the  property 
105  U.  S.  77  ;  Owens  v.  Ohio  Central  K.  in  question  out  of  the  hands  of  the  re- 
Co.  (1884),  20  Fed.  Rep.  10.  ceiver  was  unwarranted  and  illegal." 

8  Davis    V.     Railroad    Co.     (1873),    1  *  Alden   v.   Boston,   Hartford,  &  Erie 

Woods,    661.      The    court    said:     "The  R.  Co.  (1871),  5  N.  B.  R.  230.     Li   this 

rights  which  supervene  upon  a  mortgage  case    an   injunction    directed   against   the 

or  other  si)ecific    lien   accompanied    with  receivers  was  so  far  modified  as  to  allow 

po.ssession    before    jjroceedings    in    bank-  them  to  enter  upon  the  discharge  of  their 

ruptcy  are  very  dillVreut  from  those  aris-  duties. 

ing  from   proceedings  in  State  courts  in  '»  Griswold  v.  Central  Vermont  R.  Co. 

cases  of  general   insolvency.     A  mere  in-  (1881),  9  F(h1.  Rep.  797.     There  the  facts 

solvent  j)roceeding,  or  a  proceeding  of  thiit  were  as  follows:  Some  of  the  defendants 

nature,  and    possession    of    the   bankrupt  sued   with    the   company,    together    with 

property  taken    in    pursuance    thereof,  is  other    persons,    had   been    appointed    re- 

antiigonistical  and  re])ugnant  to  the  bank-  ceivers  of  various  roads  in  a  cause  pend- 

ruptcy  law,  and  will  V)e  avoided  by  regular  ing  between  the  defendant  company  and 

proceedings  in   bankruptcy.     But   a  pro-  the  holders  of  its  bonds  in  a  State  court, 

cceding  to  enforce   a   mortgage   or  other  While  those  persons  were  thus  in  yiosses- 

sfiecific  lien  involves  the   rights  of  prop-  .sion,  an  agreement  was  made  between  the 

erty  and   po.s.ses.sion  in   jiursuance  thereof  parties  and  embodied  in  a  decree  of  tbj 


§  585.] 


TITLE,   DUTIES,   ETC.,   OP   RECEIVERS. 


>Qd 


Hence,  as  a  decree  of  foreclosure  merely  cuts  off  the  mortgagor's 
equity  of  redemption,  a  bondholder  acting  in  behalf  of  his  co- 
bondholders  may  sustain  a  bill  for  foreclosure  and  the  removal  of 
the  trustees  in  a  federal  court,  although  these  trustees  have  already 
commenced  a  suit  to  foreclose  another  mortgage  on  the  same 
property,  and  have  obtained  the  appointment  of  a  receiver.^ 

So,  although  a  receiver  of  the  property  may  have  been  aj (pointed 
in  a  State  court,  and  a  reorganized  company  placed  in  possession, 
a  bondholder  who  has  not  come  into  the  reorganization  scheme 
may  maintain  a  bill  against  the  mortgagor  company  and  its  suc- 
cessor for  an  accounting  as  to  the  income.  The  decree  sought  in 
such  a  proceeding  is  virtually  a  personal  judgment  for  a  sum  of 


court,  whereby  those  in  possession  and 
their  successors  were  contiaued  iu  posses- 
sion, and  the  cause  kept  in  court,  with 
liberty  to  any  party  to  apply  to  the  court 
for  further  orders.  The  loans,  the  repay- 
ment of  which  was  sought  in  the  action, 
were  subsequently  authorized,  and,  as  a 
part  of  the  decrees  under  which  they  were 
issued,  it  was  provided  that,  upon  de- 
fault of  principal  or  interest,  the  cred- 
itors might  apply  to  the  courts  for  aid  in 
realizing  their  securities.  These  facts 
were  held  not  to  show  the  retention  of 
that  exclusive  control  of  the  railroad 
property  by  a  State  court  which  a  federal 
court  is  bound  to  respect.  Judge  Wheeler 
said  :  "The  jurisdiction  of  courts  is  given 
by  the  law  and  not  by  the  parties,  and 
can  neither  be  conferred  nor  taken  away 
by  their  mere  consent  or  agreement.  If 
the  conditions  prescribed  by  the  law  for 
jurisdiction  exist,  the  jurisdiction  exists, 
the  conditions  prescribed  for  giving  this 
court  jurisdiction  of  the  parties  exist,  and 
jurisdiction  of  the  case  must  follow,  unless 
the  subject  is  out  of  reach.  Neither  by 
the  terms  of  the  securities,  as  set  forth 
in  the  bill,  nor  as  shown  in  the  plea,  nor 
by  the  conditions  of  the  proceedings,  w^as 
anything  to  be  done  by  the  court,  before 
the  defendants  could  carry  out  their  obli- 
gation to  set  apart  the  earnings  of  the 
rolling-stock  as  agreed,  and  apply  them 
to  the  satisfaction  of  these  notes.  They 
were  at  liberty  to  do  it,  and,  so  far  as 
appears,  were  bound  to  do  it.  If  there 
was  a  failure,  the  holders  of  the  notes 
would  have  a  right  to  apply  to  the  courts 


of  the  land  for  relief,  and  they  would  not 
be  deprived  of  the  right  to  apply  to  any 
one  court  because  they  had  the  right  to 
apply  to  another.  Those  which  were  pro- 
vided were  provided  for  the  purpose  of 
giving  the  right  to  apply  to  them.  There 
is  nothing  to  prevent  applying  to  tins 
court,  unless  it  may  be  that,  as  is  argued, 
the  property  is  in  the  course  of  adminis- 
tration of  the  State  court.  It  is,  however, 
well  settled  that  the  fact  that  the  property 
is  being  administered  in  State  proceedings 
does  not  prevent  citizens  of  other  States 
from  pi-oceeding  in  the  Circuit  Courts  of 
the  United  States  to  establish  their  claims 
and  obtain  relief  if  entitled  to  it." 

1  Mercantile  Trust  Co.  v.  Lamoille 
Valley  R.  Co.  (1879),  16  Blatch.  324. 
The  court  did  not  question  the  general 
] principle  that  a  court  which  has  acquired 
jurisdiction  by  proceedings  involving  the 
possession  of  specific  property  cannot  be 
disturbed  in  that  possession  while  the 
proceedings  which  involve  the  possession 
are  pending,  but  held  that  any  I'elief 
which  the  court  can  give  without  infring- 
ing that  principle  was  within  the  scope  or 
its  powers.  Such  a  course  would  not,  it 
was  held,  violate,  either  in  letter  or  in 
spirit,  the  United  States  statute  (Rev. 
Stat.  720)  which  prohibits  a  federal  court 
from  enjoining  proceedings  in  a  State 
court.  Nor  would  there  be  any  danger 
of  a  conflict  between  the  two  courts  or 
their  officers,  if  the  relief  was  moulded 
with  due  respect  to  the  possession  of  the 
State. 


570  RAILWAY   BONDS   AND    MORTGAGES.  [CHAP.  XXVII. 

money  against  the  corporation,  and  does  not  interfere  with  the 
possession  of  the  receiver.^ 

So  a  suit  for  an  accounting  may  be  maintained  in  a  federal 
court  against  parties  who  have  been  acting  as  receivers  under  an 
appointment  by  a  State  court,  where  it  is  apparent  that  the  account- 
ing relates  to  a  period  subsequent  to  the  time  when  the  receiver- 
ship had  come  to  a  close.^ 

The  usual  injunction  in  cases  of  a  receivership,  by  which  inter- 
ference with  the  trust  property  is  restrained,  may  be  modified 
so  far  as  to  allow  a  creditor  to  enforce  a  judgment  against  any 
property  which  may  have  been  attached  before  the  receiver's 
appointment  .2 

§  586.  Suits  affecting  Property  after  Termination  of  the  Receiver- 
ship.—  The  termination  of  the  receivership,  whether  by  a  formal 
decree  or  by  the  acts  of  the  parties,^  will  divest  the  court  which 
appointed  the  receiver  of  its  exclusive  jurisdiction  of  litigation 
affecting  the  property.^ 

But  the  court  not  infrequently  reserves  jui-isdiction  after  the 
receiver  is  discharged  for  tlie  purpose  of  facilitating  the  enforce- 
ment of  debts  and  liabilities  incurred  by  the  receiver.  In  that  case 
suits  to  enforce  unsatisfied  claims  against  the  receiver,  which,  if 
established,  will  constitute  liens  upon  the  property,  are  to  be 
pi'osecuted  against  the  property  as  proceedings  in  rem,  upon  proper 
notice  to  the  purchaser,  and  not  against  the  receiver.^ 

If  tliere  is  no  reservation  of  jurisdiction  in  regard  to  such  suits, 
the  court  cannot,  after  the  end  of  the  term  during  which  the  order 
of  discharge  was  made,  alter  or  suspend  that  order,  and  so  regain 
jurisdiction  of  the  property  as  to  enable  a  claim  for  injuries 
received  during  the  receivership  to  be  prosecuted  against  the 
discliarged  receiver." 

Ordinarily,  it  is  only  after  the  actual  completion  of  the  sale  and 
the  final  conveyance  of  the  property  to  the  purchasers  that  the 
court  loses  its  exclusive  power  to  manage  the  property.^ 

If  a  receiver  is  illegally  deprived  of  his  possession  of  the  prop- 

1  Brooks  V.  Vermont  Central  R.  Co.  ^  Andrews  v.  Smith  (1881),  5  Fed. 
(1884),  22  Fed.  Rep.  211.  Rep.   833. 

2  Andrews  v.  Smitli  (1881),  5  Fed.  6  Fiirmcrs' Loan  &  Trust  Co.  v.  Central 
Rep.  833.  Railroad  Co,  of  Iowa  (1881),  2  M(^Crary, 

'  Woerishoffer    v.    North    River   Con-     181. 
struction  Co.  (1885),  99  N.  Y.  398;  s.  c.  M)avis   v.    Duncan    (1884),    19    Fed. 

2  N.  E.  liep.  47.  Rep.  477.       See  also  chapter  on  liability 

*  Moliile    &    Oliio    R.     Co.     v.    Davis     of  receivers. 
(1884),  02  Miss.  271.  »  Vilas  v.  Pajre  (1887),  106  N.  Y,  439  ; 

8.  c.  13  N.  E.  Rep.  743. 


§  587.]  TITLE,    DUTIES,   ETC.,    OP   RECEIVERS.  G71 

crty  placed  in  his  charge,  the  court  which  appointed  him  is  not 
thereby  deprived  of  its  rights  to  determine  what  shall  be  done 
with  that  proi)erty.i 

§  587.  Suits  against  Receivers  generally.^  —  The  possession  of 
a  receiver  being  the  possession  of  the  court  ai)pointing  him,  all 
actions  involving  a  claim  upon  the  corporate  property  })laced  in 
his  charge  must  be  prosecuted  in  that  court.^ 

Except  in  so  far  as  the  rule  may  have  been  altered  by  statute, 
a  receiver  is  not  amenable  to  suit  with  resi)ect  of  the  j^roperty 
lawfully  in  his  possession,  either  in  the  appointing  court,*  or  in 
another  without  the  leave  of  the  appointing  court.^ 

This  principle  is  embodied  in  the  statutes  of  some  of  the  States. 
See,  for  example,  the  Ohio  Code,  §  256. 

A  grant  of  leave  to  bring  suit  against  a  receiver  by  the  court 
appointing  him  reserves  the  right  to  the  receiver  to  set  up  any 
defence  he  may  have,  which  can  be  done  by  plea,  answer,  or 
demurrer.^ 

All  the  defences  which  would  have  been  available  for  the  com- 
pany if  it  has  continued  to  operate  the  road  are  available  to  the 
receiver,  who  within  the  sphere  of  his  functions  as  manager  repre- 
sents the  company.  He  is,  therefore,  entitled  to  claim  the  benefit 
of  the  Statute  of  Limitations.' 

Conversely,  if  the  action  was  originally  begun  against  the  com- 
pany, and  the  receiver  substituted  as  defendant,  the  court  will 

1  Minnesota  Co. -y.  St.  Paul  Co.  (1S64),  23  Fed.  Rep.  858.     In  the  last  case  the 

2  Wall.  609.  court  denied  the  petition  of  a  stockholder 

'^  For  a  resume  of  the  law  as  to  actions  in  another  coriioration  to  have  its  receiver 

by  and  against  receivers,  see  25  Am.  L.  made  a  party  to  litigation  conducted  by 

Reg.  N.  S.  289.  that  stockholder  in  another  jurisdiction, 

3  Peale   V.    Phipps    (1852),    14    How.  holding  that,  as  to  the  question  involved, 

368,  372;    Beverley  v.  Brooke   (1847),   4  viz.    the  validity  of  the  guaranty  of  cer- 

Gratt.  (Va.)  187.  tain   bonds,  the  court  itself  would  settle 

*  Fifth  National  Bank  of  Pittsburg  v.  it,  upon  its  being  proiierly  brought  before 

Pittsburg  &  Castle  Shannon  R.  Co.  (1880),  it. 

1  Fed.  Rep.  190,    192.     There  the  court         Where  a  State  is  divided  into  j\idicial 

refused  to  sustain  an  action  of  ejectment  districts  like  those  of  New  York,  a  motion 

brought  in  clear  contempt  of  court,  but  for  leave  to  sue  a  receiver  cannot  be  made 

granted  the  plaintiff   time  to  institute  a  in  one  of  those  districts,  while  a  general 

new  action.  order  restraining  all  interference  with  the 

6  Melendy  v.   Barbour  (1884),  78  Va.  receiver   is   in    force  ;    the   general   order 

544  ;  s.  c.   25  Am.   &  Eng.    R.    R.    Cas.  must  fiist  be   vacated  or  modified.     Wil- 

622  ;    Fort  Wayne,  Muiicie,  &  Cincinnati  kinson  v.  North  River  Construction  Co. 

R.  Co.  V.  Mellett  (1883),  92  Ind.  535  ;  17  (1880),  66  How.  Pr.  423. 
Am.  &  Eng.  R.  R.  Cas.  293  ;  Mass.   Mut.  ^  Davis   v.    Duncan    (1884),    19    Fed. 

Life  Ins.  v.  Chicago  &  A.  R.   Co.   (1880),  Rep.  477,  483. 

13  Fed.  Rei..  857,  861  ;  Central  Trust  Co.  ^  Bartlett  v.  Keim  (1888),  50  N.  J.  L. 

V.  Wabash,  St.  L.  &  Pac.  R.  Co.  (1885),  260  ;  s.  c.  13  Atl.  Rep.  7. 


572  RAILWAY    BONDS    AND    MORTGAGES.  [CHAP.  XXVII. 

restrain  him  from  setting  up  the  Statute  of  Limitations  as  a  de- 
fence where  the  claim  was  not  outlawed  when  the  proceedings 
were  instituted.^ 

In  an  action  against  a  receiver,  an  order  of  court  appointing  the 
receiver  is  admissible  in  evidence  where  the  fact  of  such  appoint- 
ment is  put  in  issue  by  the  pleadings,  without  the  permission  of 
the  court  which  appointed  him/'^ 

A  court  of  the  United  States  will  not  permit  its  receiver  to  do 
any  unlawful  act,  nor  any  act  which  amounts  to  violence  or  a 
breach  of  tlie  peace ;  and  when  such  act  shall  first  come  to  the 
knowledge  of  the  court,  and  at  the  first  opportunity,  regardless  of 
any  technical  pleading,  will  make  such  order  as  provides  for  full 
restitution,  and  will  not  permit  its  receiver  to  continue  the  unlaw- 
ful act,  nor  obtain  any  advantage  thereby.  The  court,  in  such 
case,  properly  holds  that  its  officer  and  receiver,  clothed  with 
power  from  the  court,  shall  not  use  that  power  oppressively  nor 
unlawfully,  but  that,  as  such  officer,  he  is  under  the  highest  obli- 
gation at  all  times  to  set  an  example  of  obedience  to  law,  and  of 
the  pursuit  of  strictly  peaceable  methods  in  his  conduct.^ 

Where  a  railway  company  controlling  a  system  of  leased  roads 
covered  by  mortgages,  and  the  leases  of  which  are  for  a  rental 
to  cover  interest  on  their  bonds,  has  executed  a  mortgage  on 
its  system  of  roads,  and  the  mortgage  is  being  foreclosed,  it  is 
not  proper  to  allow  the  receiver  to  disaffirm  these  contracts  of 
lease  on  the  ground  of  deficiency  of  the  income  of  the  different 
roads,  when  shown  that  the  latter  are  important  as  feeders  of  the 
main  line.* 

§  588.  Rule  as  to  Suits  for  Damages.  —  The  general  prohibitory 
rule  stated  in  the  last  section  is  applicable  not  only  to  cases  in 
which  the  plaintiff  seeks  to  establish  a  claim  to  a  specific  portion 
of  the  property  in  the  receiver's  hands,  but  also  to  an  action  to 

1  Lehigh  Coal  &  Navigation  Co.  v.  other  points  to  the  disadvantage  of  the 
Central  R.  Co.  (1887),  42  N.  J.  E(i.  591  ;  other  company.  The  court  issued  against 
s.  c.  8  Atl.  Rep.  649.  Compare  Texas  &  him  a  prohilntory  injunction,  and  a  man- 
Pacific  Ry.  Co.  V.  HufJinan  (1892),  83  datory  injunction  to  restore  the  switches 
Tex.  286;  s.  c.  18  S.  W.  Rep.  741.  of  the   other   company    to   the  condition 

2  Allen   V.  Central  R.  Co.   (1876),   42  they  were  in  when  he  removed  them. 
Iowa,  683.  4  Mercantile  Trust  Co.  v.  St.  Louis  & 

8  Clark,  I).  . I.,  in  Chattanooga  Terminal  S.  F.  Ky.  Co.  (1896),   71   Fed.   Rep.  601. 

Ry.  Co.  V.   Felton   (1895),   69  Fed.   Rep.  Thecourtdi.stinguished  the  cases  of  Qnincy, 

273,  284,  in  which  case  the  receiver  of  the  M.  &  P.  R.  Co.  v.  Humiihreys  (1891),  145 

court  had,  by  his  employees,  entered  upon  U.  S.  82  ;  s.  c.  12  Sup.  Ct.  Rep.  787  ;  and 

the  right  of  way  of  another  railway  com-  St.  Joseph  &St.  Louis  R.Co.  i;.  Humphreys, 

pariy,  removed  certain  of  its  switches  ai;d  145  U.   S.   145  ;    s.  c.  12  Sup.  Ct.  Rep. 

made  connectioua  between  his   road   and  795. 


5  589.1 


TITLE,   DUTIES,    ETC.,   OP   RECEIVERS. 


573 


recover  damages  for  injuries  resulting  from  the  operation  of  the 
road.  Such  an  action  is  virtually  one  the  purpose  of  which  was, 
and  the  effect  of  which  might  be,  to  take  the  property  of  the  trust 
from  the  receiver's  hands,  and  to  apply  it  to  the  payment  of  the 
plaintiff's  claim,  without  regard  to  the  rights  of  other  creditors 
or  the  orders  of  the  court  which  is  administering  the  trust 
property.! 

The  objection  to  the  power  of  any  other  court  than  the  one  ap- 
pointing him  to  entertain  a  suit  on  this  ground  against  a  receiver 
may  be  taken  by  a  plea  to  the  jurisdiction.^ 

§  589.  The  Proper  Procedure  to  enforce  Claims  against  Property 
in  Receiver's  Hands,  under  the  ordinary  rules  of  equity  practice, 
where  parties  have  claims  against  funds  in  the  hands  of  a  receiver. 


1  Barton  v.  Barbour  (1881),  104  U.  S. 
12(j.  To  the  same  effect  see  Davis  v.  Gray 
(187-2),  Ifj  Wall.  203  ;  Meara's  Admr.  v. 
Holbrook  (1870),  20  Ohio  St.  137;  De 
Graffenied  v.  Brunswick  &  Albany  R.  Co. 
(1876),  57  Ga.  22;  Thompson  v.  Scott 
(1876)  4  Dill.  508;  s.  c.  3  Cent.  L.  J. 
737  ;  Kennedy  v.  I.  C.  &L.  R.  Co.  (1880), 
3  Fed.  Rep.  97  ;  Rogers  v.  Mobile  &  Ohio 
R.  R.  Co.  (Tenn.,  1883),  12  Am.  &  Eng. 
R.  H.  Cas.  442  ;  s.  c.  16  Rep.  536  ;  and 
the  note  to  High  on  Rec,  §  254, 

2  Barton  v.  Barbour  (1881),  104  U.  S. 
126.  Justice  Miller  dissented,  adopting 
the  theory  of  Kinney  v.  Crocker,  18  Wis. 
74,  which  liolds  that  in  such  cases  "it  is 
not  a  question  of  jurisdiction  in  the  courts 
of  law,  but  only  a  question  whether  equity 
will  exercise  its  own  acknowledged  juris- 
diction of  restraining  suits  at  law  under 
such  circumstances,  and  dispose  of  the 
matter  involved,  the  failure  of  the  plain- 
tiff to  obtain  leave  to  bring  suit  merely 
involving  the  consequence  that  he  thereby 
renders  himself  liable  to  have  the  proceed- 
ings arrested  by  an  injunction."  See, 
generally.  High  on  Rec,  §  254  a,  where 
numerous  cases  are  cited  showing  that  the 
rule  laid  down  by  the  Supreme  Court  of 
the  United  States  is  not  sanctioned  by  all 
courts.  A  lengtliy  criticism  of  the  au- 
thorities will  also  be  found  in  Lyman  v. 
Central  Vermont  R.  Co.  (1886),  59  Vt. 
167,  where  the  doctrine  of  Barton  v.  Bar- 
bour is  repudiated.  The  court,  referring 
to  the  ruling  in  Palys  v.  Jewett  (1880),  32 
N.  J.  Eq.  302,  that  the  court  which  ap- 
points a  receiver  will  in  a  proper  case  grant 


leave  to  sue  him,  not  ex  gratia,  but  ex 
dchito  justiticc,  draws  the  inference  that  "a 
rule  requiring  the  plaintiff  to  go  thi'ough 
the  meaningless  ceremony  of  applying  for 
a  privilege  that  he  already  by  right  pos- 
sesses, to  a  court  powerless  in  itself  to  give 
him  relief  in  the  premises,  has  no  sub- 
stantial ground  to  rest  upon."  This  rea- 
soning is  not  altogether  conclusive,  for 
there  would  appear  to  be  equally  strong 
objectiows  to  admitting  the  propriety  of 
a  course  which  places  a  court  in  the  in- 
congruous and  not  very  dignified  jiosition 
of  rendering  a  judgment  which  it  is  abso- 
lutely powerless  to  enforce  without  the 
consent  of  the  court  appointing  the  re- 
ceiver. As  leave  either  to  prosecute 
the  claim  in  the  first  instance,  or  to  en- 
force it  after  a  favorable  termination  of 
the  suit,  must  be  obtained  from  the  ap- 
pointing court,  it  is  not  so  irrational  as 
the  critics  of  Barton  v.  Barbour  declare  to 
maintain  that  this  leave  should  be  given 
before,  rather  than  after,  the  proceedings 
in  the  court  of  law.  It  must  be  admitted, 
however,  that  as  a  matter  of  ju'actical 
convenience  to  suitors,  it  is  advisable  that 
the  interference  of  the  appointing  coui't 
should  be  limited  to  the  preventive  func- 
tions of  seeing  that  the  trust  estate  is  not 
impaired  by  the  payment  of  unwarrantable 
claims.  From  this  point  of  view  legisla- 
tion of  the  same  character  as  that  which 
now  permits  claimants  to  sue  the  receivers 
of  a  federal  court  without  first  obtaining 
leave  from  that  court  is  entirely  proper. 
(See  §  594,  post.) 


574  RAILWAY    BONDS    AND    MORTGAGES.  [CHAP.  XXVII, 

is  to  bring  their  demands  into  the  appointing  court,  wliich  will 
direct  him  to  be  examined  pro  intei-esse  suo  before  the  master.  If 
upon  auditing  the  claim  the  court  finds  it  to  be  a  just  one,  it  will 
direct  the  receiver  to  pay  it  without  litigation  ;  but  if  the  court 
finds  the  claim  to  be  a  doubtful  one,  it  will  give  the  claimant 
leave  to  prosecute  it  before  some  competent  court,  consulting 
herein  the  convenience  of  parties,  and  exercising  a  judicial 
discretion.! 

To  assist  it  in  coming  to  a  correct  conclusion  as  to  disputed 
facts,  the  court  may,  in  its  discretion,  call  in  a  jury,  this  being 
the  regular  course  where  the  action  involves  a  claim  for  damages. 
But,  apart  from  statute,  the  court  is  not  compelled  to  resort  to  a 
trial  by  jury.^ 

The  assistance  of  a  master  may  be  invoked,  or  such  other  steps 
be  taken,  for  a  judicial  ascertainment  of  the  facts  as  may  be 
deemed  most  appropriate  to  the  particular  case.^ 

A  master's  report  upon  the  liability  of  receivers  in  cases  ordi- 
narily triable  by  a  jury  will  not  be  set  aside  by  the  court  on  an 
issue  of  fact,  unless  the  testimony  on  which  the  finding  is  based 
is  of  such  a  character  as  to  produce  a  firm  conviction  in  the  minds 
of  the  court  that  the  finding  is  erroneous.^ 

It  was  strenuously  contended  in  one  noted  case  that  the  doc- 
trine by  which  the  person  desiring  to  establish  a  demand  against 
a  receiver  is  precluded  from  bringing  an  action  against  him  with» 
out  the  permission  of  the  court  which  appointed  him  may  some- 
times operate  so  as  to  deprive  the  claimant  of  his  constitutional 
right  of  trial  by  jury.  This  view  did  not  prevail  with  the  majority 
of  the  Supreme  Court  of  the  United  States.  It  was  pointed  out 
that  this  right,  considered  as  an  absolute  one,  does  not  extend  to 
cases  of  equity  jurisdiction;  and  the  practice  of  the  court  in 
regard  to  issues  of  fact  in  patent  and  bankruptcy  cases  was  spe- 
cially referred  to  as  an  illustration  of  the  rule  that,  in  the  time  of 
certain  classes  of  issues,  a  court  of  equity  had  jurisdiction  to  try 
them  according  to  its  own  course  of  practice.^ 

1  Thompson  r.  Scott  (1876),  4  Dill.  Missouri  Pae.  R.  Co.  v.  Tex.  Pac.  R.  Co. 
508  ;   liartoii  v.  Barbour  (18S1),  104  U.  S.     (1888),  33  Fed.  Rep.  803. 

126;  Parker  v.  Brovvniiig  (1840),  8  Paige  ^  Barton  v.  Barbour  (1881),  104  U.   S. 

Ch.  (N.  Y.)  388.  126.     Mr.    Justice    Miller    expressed    his 

2  Duncan  v.  Atlantic,  Mississippi,  &  dissent  as  follows:  "I  know  of  no  prin- 
Ohio  R.  Co.  (1880),  4  Hughes,  125.  ciple,  nor   of   an}'  precedent,   whereby   a 

8  Kennedy  v.  1.  G.  &  P.  R.  Co.  (1880),  court  of  law,  having  before  it  a  cause  of 

3  Fed.  Rep.  10."),  following  Davis  v.  Gray  action  of  which  that  court  has  jurisdic- 

(1872),  16  Wall.  203.  tion,  and  a  defendant  charged  in  regard  to 

*  Central  Ti-ust  Co.  v.  Tex.  &  St.  Louis  his  own  act,  also  within  the  jurisdiction, 

R.   Co.    (1887),  32  Fed.   Rep.   448,   450  ;  is  bound,  or  is  even  at  liberty,  to   deny 


§  589.]  TITLE,    DUTIES,    ETC.,    OF   RECEIVERS.  575 

By  tiic  general  law  one  injured  by  a  railroad  operated  by  a 
receiver  is  empowered  to  sue  a  receiver  of  a  federal  court,  and  he 
has  a  right  to  prosecute  the  suit  until  by  its  final  act  the  court 
controlling  the  receivership  shall  have  j)ut  an  end  to  his  liability 
as  such.  So  long  as  that  court  controls  the  receiver  and  funds 
in  his  hands,  it  may  provide  for  the  payment  of  liabilities  in- 
curred by  him  ;  and  so  long  as  it  may  do  this,  it  cannot  be  said 
that  his  liability  to  suitors  has  ended.  It  is  the  judgment  fmally 
discharging  the  receiver  that  protects  him  against  the  judgment 
of  othc]"  courts.^ 

Where  a  person,  under  the  provisions  of  the  act  of  Congress  of 
March  3,  1887,  brings  a  suit,  without  leave  of  the  court  appoint- 
ing a  receiver  of  a  railroad  company,  against  the  receiver  in  the 
State  court  for  damages  for  personal  injuries  caused  by  the  negli- 
gence of  the  receiver's  employees,  and  has  a  judgment,  notwith- 
standing the  case  is  tried  by  the  court  and  not  by  a  jury,  a  jury 
not  having  been  demanded  by  either  party,  the  judgment  is  con- 
clusive against  the  receiver  as  to  the  amount  of  damages.^ 

Service  of  summons  in  an  action  for  injuries  to  property  on  an 
agent  of  receivers  of  a  railroad  company  has  been  held  not  to  be 
justified  by  the  statute  of  Alabama  (Acts  1887,  February  26)  which 
provides  for  service  of  summons  where  a  railroad  corporation  has 
permitted  its  road  to  be  used  by  any  other  person  or  corporation  ; 
the  statute  applies  only  where  use  of  the  road  is  permitted  to  a 
natural  person  or  another  corporation,  and  has  no  application 
where  possession  is  given  |o  receivers.^ 

If  it  is  once  shown  that  the  case  is  one  of  equity  cognizance,  the 
trial  of  questions  involved  in  it  belonged  to  the  court  itself,  no 
matter  what  might  be  their  importance  or  complexity.  The  right 
not  being  an  absolute  one,  the  propriety  of  trying  actions  against 
the  receiver,  with  or  without  a  jury,  was  necessarily  a  matter  to 
be  decided  by  the  court  in  the  exercise  of  its  discretion. 

The  doctrine  of   Barton  v.  Barbour  is  perhaps  not  intended  to 

the  party  his  lawful  right  to  a  trial  of  his  erly  before  them  the  trial  of  their  rights 
cause  bfcause  the  defendant  is  receiver  of  whieh  justice  requires,  and  which  the  con- 
some  other  court,  and  to  leave  the  suitor  stitution  and  law  guaranty." 
to  that  court  for  remedy,  where  it  is  known  ^  Houston  &  Texas  Central  Ry.  Co.  v. 
that  some  of  the  most  important  guaranties  Strycharski  (Tex.  Civ.  App.,  1896),  35  S. 
of  the  trial  to  which  he  is  entitled,  and  W.  Rep.  8.')1. 

which  are  appropriate  to  the  nature  of  his  -  St.  Louis  S.  W.  Ry.  Co.  v.  Holbrook 

case,  will  be  denied  him.     Whatever  courts  (1896),  73  Fed.  Rep.  112,  following  Dil- 

of  equity  may  have  done  to  protect  their  lingham  v.  Hawk  (1892),  9  C.  C.  A.  101  ; 

receivers,  and  may  do  to  protect  the  fund  s.  c.  60  Fed.  Rep.  494,  495. 
in  their  hands,  it  is  no  part  of  the  duty  ^  Ex  parte  Charles  (Ala.,  1895),  18  So. 

of  courts  of  law  to  deny  to  suitors  prop-  Rep.  73. 


576  RAILWAY   BONDS   AND   MORTGAGES,         [CHAP.  XXVII. 

apply  to  cases  where  the  question  raised  is  one  which  the  adverse 
party  has  an  absolute  right,  under  a  special  provision  of  a  State 
constitution,  to  have  decided  by  a  jury.  In  California  it  has  vir- 
tually been  held  that  the  ordinary  rules  of  equity  practice  must 
give  way  to  the  peremptory  terms  of  a  provision  that  the  amount 
of  compensation  to  be  paid  in  proceedings  in  eminent  domain  shall 
be  assessed  by  a  jury.^ 

Under  such  circumstances,  the  power  of  the  court  is  as  much 
curtailed  in  this  particular  class  of  cases  as  it  has  been  in  Georgia 
in  all  classes  of  cases.^ 

Whether  the  exclusive  jurisdiction  of  the  court  is  also  by  impli- 
cation curtailed  by  such  a  provision  is  not  so  clear,  and  remains 
to  be  judicially  settled. 

It  is  admitted  on  all  hands  that  in  cases  where  the  receiver  is 
charged  with  a  tort,  "  it  is  more  in  accordance  with  the  spirit  of 
our  institutions  to  permit  the  parties  complaining  to  proceed 
at  law,  where  they  may  have  the  benefit  of  a  jury  trial,  than  to 
attempt  to  settle  their  rights  by  a  reference  to  a  master."  ^ 

The  remedy  by  action  is  especially  proper  in  a  State  whose  Code 
confers  on  a  receiver, "  under  the  control  of  the  court,  power  to 
bring  and  defend  actions  in  his  own  name,  as  receiver."  ^ 

Where  an  action  has  been  brought  against  a  receiver  in  a  com- 
mon-law court,  and  a  verdict  rendered  against  him,  it  will  be 
assumed,  on  appeal,  that  whatever  was  necessary  to  sustain  the 
case  stated  in  the  declaration  was  proved  on  the  trial,  and  that 
such  leave  was  srranted.^ 


1  Pacific  Ry.  Co.  v.  Wade  (1891),  91  *  Meara's  Admrs.  v.  Holbrook  (1870), 
Cal.  449  ;  s.  c.  27  Pac.  Rep.  768.  There  20  Oliio  St.  137.  In  this  case  the  action 
the  actual  ruling  of  the  court  was  that  was  brought  against  the  receivi'rs.  in  their 
the  amount  to  be  paid  for  the  joint  use  capacity  as  such,  by  leave  of  the  court, 
of  a  street-railway  track  in  the  hands  of  a  and  they  entered  their  appearance  pur- 
receiver  ma)'  be  determined  by  the  court  suant  to  an  order  of  the  court,  and  de- 
on  a  petition,    the    right   of  the   adverse  fended  in  their  official  capacity. 

party  to  a  jury  being  denied  on  the  ground  ^  Little  v.  Dusenberry  (1884),  46  N..T.  L. 

that  such  a  proceeding  did  not  involve  the  614.    This  was  held,  in  its  practical  effect, 

exercise  of  the  right  of  eminent  domain,  to  be  merely  a  statutory  method  of  procur- 

where  the  statute,  as  in  California,  made  ing  redress,  substantially  the  same  as  that 

the  [>ayment  of  half  the  cost  of  construe-  under  the  practice  in  Courts  of  (^hancery, 

tiou   the  sole  condition   precedent   to  ob-  where  it  was  ordinarily  obtained  by  pro- 

taining  the  use  of  the  track.  ceedings  pro  intercsse  suo.     The  court,  for 

2  Clews  V.  First  Mortgage  Bondholders  the  same  reason,  pronounced  that  there 
(1874),  51  Ga.  1.31.  was  no  merit  in  the  objection   that  any 

3  Paiker  v.  Browning  (1810),  8  Paige  remedy  which  the  plaintiffs  might  have 
Cli.  .'ISS,  per  Chancellor  Walworth.  Com-  could  be  obtained  only  by  direct  applica- 
jiare  Palys  ".  Jewett  (1S80),  32  N.  J.  Eq.  tion  to  the  court  which  had  control  of  the 
302.  receivers,  and  not  by  action  against  them. 


§^  o00-593.]         TITLE,    DUTIES,    ETC.,    OF    RECEIVEllS. 


577 


§  590.  Failure  to  obtain  Leave  to  sue  Receiver  can  be  taken  Ad- 
vantage of  by  him  alone.  —  Fuilurc  to  obtain  leave  to  sue  a  reeeiver 
can  bo  taken  advantage  of  by  the  receiver  only,  and  docs  not 
affect  the  jurisdiction  of  the  court  where  the  receiver  waives  the 
requirement.^ 

§  591.  General  License  to  sue  Receiver  in  other  Courts  sometimes 
given. — -  A  general  license  to  sue  the  receiver  in  any  tribunal  that 
would  be  open  to  the  plaintiff,  if  the  controversy  had  arisen  be- 
tween him  and  the  company,  may  probably  be  inserted  in  the 
order  of  appointment.^ 

^  592.  Claims  against  Employees  of  Receiver  subject  to  Exemption 
La-ws  of  State  v^here  the  Receiver  -was  appointed.  —  Creditors  of  a 
receiver's  employees  will  not  be  allowed  to  evade  the  exemption 
laws  of  the  State  where  the  receiver  was  appointed  by  instituting 
garnishment  proceedings  in  another  State  into  which  the  railroad 
extends.  No  injunction  will  be  issued  ;  the  court  will  merely  de- 
clare that  such  claimants  will  not  be  allowed  to  receive  from  the 
receiver  any  wages  or  funds  that  may  belong  to  the  debtors."^ 

§  593.  Enforcement  of  Taxes  upon  Property  in  the  Hands  of  Re- 
ceiver. —  Taxes  levied  by  a  State  upon  property  in  the  hands  of  a 
receiver  appointed  by  a  federal  court  can  be  enforced  only  by  an 
application  to  the  court  itself.* 


1  Tobias  v.  Tobias  (1895),  51  Obio  St. 
519  ;  s.  c.  38  N.  E.  Rep.  317. 

2  Dow  V.  Mcmi.his  &  Tittle  Kock  R. 
Co.  (1884),  20  Fed.  Rep.  260;  s.  c.  17  Am. 
&  Ens.  R-  K.  Cas.  324. 

2  Til  re  Barnard,  United  States  Trust 
Co.  V.  Omaha  &  St.  Louis  R.  Co.  (1894), 
61  Fed.  Rep.  531. 

As  to  garnishment  of  money  due  from 
reeeiver,  see  note  to  26  Lawyers'  Rep.  Ann. 
218. 

i  Jn  re  Tyler  (1893),  149  U.  S.  164; 
s.  c.  13  Sup.  Ct.  Rep.  785,  in  which  the 
authorities  were  very  fully  reviewed  by 
Chief  Justice  Fuller.  This  decision  lays 
down  a  much  more  rigorous  doctrine  as  to 
the  exclusive  nature  of  the  court's  control 
of  such  suits  than  some  of  the  earlier  cases. 
In  Stevens  v.  New  York  &  Oswego  Midi. 
E.  Co.  (1875),  13  Blatch.  104,  an  injunc- 
tion restraining  collectors  from  executing 
tax  warrants  was  asked  on  the  ground  of 
irregularities  in  the  assessment.  The  court 
refused  to  interfere,  as  the  warrants  were, 
so  far  as  appeared,  regular  on  their  faces. 


and  collectors  were  acting  thereunder  in 
good  faith  iu  the  discharge  of  their  duty. 
No  question  of  jurisdiction  was  raised. 
In  Central  Trust  Co.  v.  Wabash,  St.  L. 
&  Pac.  R.  Co.  (1886),  26  Fed.  Rep.  11, 
Judge  Brewer  laid  down  the  general  rule 
that,  as  the  State  in  collecting  taxes  is 
exercising  its  sovereign  power,  there  should 
be  no  interference  with  its  collection  of 
those  taxes  in  the  prescribed  and  regular 
methods,  even  by  a  court  having  property 
in  the  jiossession  of  its  receivers,  unless  it 
is  first  charged  that  the  taxes  are  in  some 
way  illegal  or  oppressive.  Accordingly  he 
declined  to  issue  an  attachment  against 
the  collector.  In  Central  Trust  Co.  v. 
New  York  City  &  Northern  R.  Co.  (1888), 
110  N.  Y.  250  ;  s.  c.  18  N.  E.  Rep.  92  ;  13 
Cent.  Rep.  404,  the  court  merely  claimed 
for  the  court  which  is  administering  the 
property  an  alternative  right  to  entertain 
an  application  for  payment  of  the  taxes 
through  the  receiver,  the  special  proceed- 
ings prescribed  by  statute  not  being  exclu- 
sive in  cases  of  receivership. 


37 


578  RAILWAY    BONDS    AND    MORTGAGES.  [CHAP.  XXVII. 

Where  an  act  authorizing  tlie  taxation  of  railroad  companies 
prescribes  a  certain  penalty  for  a  default  in  payment,  a  court 
which  is  administering  the  property  through  a  receiver,  even  if  it 
decides  that  the  provision  is  not  applicable,  will  see  that  the  State 
does  not  suffer,  and  direct  the  receiver  to  pay  interest  from  the 
time  that  the  tax  was  in  default. ^ 

§  594.  Federal  Legislation  altering  the  Former  Rules  of  Equity 
Courts.  —  So  far  as  the  federal  courts  are  concerned,  the  old  rule 
as  to  suits  against  receivers  has  been  greatly  changed  by  a  recent 
enactment  of  Congress,^  which  provides  that  "  every  receiver  or 
manager  of  any  property,  appointed  by  any  court  of  the  United 
States,  may  be  sued  in  respect  of  any  act  or  transaction  of  his  in 
carrying  on  the  business  connected  with  such  property,  without 
the  previous  leave  of  the  court  in  which  such  receiver  or  manager 
was  appointed  ;  but  such  suit  shall  be  subject  to  the  general  equity 
jurisdiction  of  the  court  in  which  such  receiver  or  manager 
was  appointed,  so  far  as  the  same  shall  be  necessary  to  the  ends 
of  justice.'"  The  object  of  this  act  has  been  explained  as  follows : 
"  This  act  was  intended  to  correct  abuses  that  had  grown  up 
under  the  old  practice,  some  of  which  were  pointed  out  before  the 
passage  of  the  act  in  the  opinion  of  this  court  in  Dow  v.  Railroad 
Co.,  20  Fed.  Rep.  260,  267.  The  act  abrogates  the  old  rule  on  the 
subject  of  suing  receivers.  It  is  no  longer  unlawful  to  sue  a  re- 
ceiver appointed  by  a  United  States  court  without  leave  of  the 
court  appointing  the  receiver.  The  court  now  has  no  discre- 
tion to  say  when  its  receiver  may  be  sued.  The  act  gives  the 
right  without  condition  or  qualification.  It  is  a  right  not  to  be 
nullified,  evaded,  or  abridged.  No  conditions  can  be  imposed  on 
its  exercise.  The  court  must  give  effect  to  that  act.  It  has  no 
discretion  to  do  anything  else."  It  was  accordingly  held  that 
where  receivers  had  been  appointed  for  a  railroad  in  a  State 
through  which  the  road  ran,  but  had  removed  into  another  State, 
suits  in  the  State  court  against  them  would  be  authorized ;  also 
that  service  might  be  made  on  their  station  agents  or  clerks 
therein,  the  receivers  taking  the  place  of  the  railroad  company  in 
the  operation  of  the  road,  and  that  such  service,  being  a  good 
service  on  the  company,  would  be  good  on  them.^ 

1  Ketcluira  v.  Pacific  R.  Co.  (1876),  4  v.  Watts  (Tex.),  18  S.  W.  Rep.  312,  where 
Dill.  41.  it  was   held  that   an   order   of  a   federal 

2  'J.')  IJ.  S.  Stat.  436,  §  3,  eh.  866  (March  court  requiring  claims  to  be  presented  be- 
3,  1887).  fore  it  by  intervention   was  void,   as  an 

8  Central  Trust  Co.  v.  St.  Louis,  A.  &     attem])t  to  destroy  the  right  conferred  by 
T.    R.    Co.    (1889),  40   Fed.  Rep.  426,  per     the  act  of  Congress. 
Caldwell,  J.     Compare  Texas  &  Ry.   Co. 


§  595.]  TITLE,    DUTIES,    ETC.,   OF   RECEIVERS.  679 

In  a  later  case  the  same  court  had  occasion  to  construe  the  pro- 
vision of  this  act  to  the  effect  that  when  a  receiver  is  sued,  the 
"  suit  shall  be  subject  to  the  general  equity  jurisdiction  of  the 
court  in  which  such  receiver  or  manager  was  appointed,  so  far  as 
the  same  shall  be  necessary  to  the  ends  of  justice,"  and  explained 
it  as  follows:  "  This  clause  of  the  act  establishes  no  new  rule, but 
is  merely  declaratory  of  the  previously  existing  law^s.  The  receiver 
holds  the  property  for  the  benefit  of  all  persons  having  any  inter- 
est in  or  lien  upon  it.  The  road  is  a  unit.  Broken  into  parts,  or 
deprived  of  its  rolling-stock,  its  value  would  be  greatly  impaired. 
Suits,  therefore,  which  seek  to  deprive  the  receiver  of  the  posses- 
sion of  the  property,  and  all  process  the  execution  of  which  would 
have  that  effect,  are  subject  to  the  control  of  the  court  appointing 
the  receiver  so  far  as  may  be  necessary  to  the  ends  of  justice. 
The  marshalling  of  the  assets  and  the  orderly  distribution  of  the 
fund  or  property  according  to  the  rights  and  equities  of  the  sev- 
eral parties  in  interest,  is  not  to  be  interfered  with  by  the  judg- 
ment or  process  of  the  State  court.  The  judgment  of  the  State 
court  is  conclusive  as  to  the  amount  of  the  debt,  but  the  time  and 
mode  of  its  payment  must  be  controlled  by  the  court  appointing 
the  receiver.! 

This  act  applies  to  any  suit  which  was  commenced  after  the 
date  of  its  enactment,  though  the  cause  of  action  accrued  before 
that  date.2 

The  right  to  sue  in  State  courts  receivers  appointed  in  federal 
courts,  without  obtaining  leave  from  the  appointing  court,  can  only 
be  exercised  with  reference  to  transactions  of  theirs  concerning 
the  management  of  the  estate.^ 

Under  the  act,  the  judgment  rendered  by  a  State  court  having 
jurisdiction  of  the  parties  and  the  subject-matter  against  a  receiver 
appointed  by  a  State  court  is  as  final  and  conclusive  as  it  is 
against  any  other  suitor.     See  case  last  cited,* 

§  595.  Exclusive  Control  of  Receivers  of  Federal  Courts  not 
afiFected  by  State  Legislation.  —  Since  a  federal  court  cannot  be 
affected  by  State  legislation,  a  statute  giving  one  who  has  recovered 
judgment  against  a  railroad  company  controlled  by  a  receiver  the 
right  to  collect  the  judgment,  by  obtaining  an  order  from  the 

1  Central  Trast  Co.  (,-.  St.  Louis  A.  ^  Hayes  v.  Columbus,  L.  &  M,  Ey.  Co, 
&  T.  K.  Co.  (1890),   41  Fed.  Rep.  551,     (1895),  67  Fed.  Rep.  630. 

555.  *  Central  Trust   Co.   v.  St.    Louis,  A. 

2  Texas  &  Pac.  R.  Co.  v.  Cox  (1892),  &  T.  R,  Co,  (1890),  41  Fed,  Rep.  551, 
145  U.  S.   593  ;    s.   c.   12  Sup.  Ct.  Rep.     555, 

905, 


580  RAILWAY   BONDS   AND   MORTGAGES.         [CHAP.  XXVII. 

State  court  upon  the  receiver  for  its  payment  out  of  the  current 
receipts  of  the  railroad,  cannot  be  made  applicable  to  a  case  where 
the  receiver  has  been  appointed  by  a  federal  court.  The  proper 
remedy  under  such  circumstances  is  to  obtain  leave  to  sue  the 
receiver,  or  to  apply  to  the  federal  court  for  an  order  upon  the 
receiver  to  pay  the  judgment.^ 

1  Ohio  &  Mississippi  R.  Co.  v.  Fitch  (1863),  20  Ind.  498. 


CHAP.  XXVIII.] 


PREFERRED   DEBTS. 


581 


CHAPTER  XXVIII. 


PREFERRED    DEBTS. 


Art.  I.  - 

§  596 

597 

598 

599 

600. 

601. 

602. 

Art.   II. 
§  603. 

604. 
605. 

606. 
607. 

608. 

609. 
610. 


-  General  Principles. 
Introductory. 

Substance  of  Leading  Case,  Fos- 
dick  V.  Schall. 

Preferred  Debts  not  Liens. 

Superior  Eij^uity  of  Preferred 
Debts  based  upon  the  Charac- 
ter of  Kailroad  Business. 

What  Corporations  are  Subject 
to  the  Rule. 

Anomalies  of  the  Doctrine  as 
now  administered. 

Theory  that  Company  becomes 
Agent  stcb  Modo  of  Bond- 
holders, if  allowed  to  remain 
in  Possession. 

—  The     Priority     of     Back 

Claims. 

Power  of  Court  on  Appointment 
of  Receiver  to  impose  Con- 
ditions as  to  Payment  of 
Back  Claims. 

Limits  of  Discretionary  Power 
of  Court  to  impose  Conditions 
as  to  payment  of  Back  Claims. 

Claimants  referred  to  in  Order 
of  Appointment  not  invested 
with  Absolute  Right  as  against 
Bondholders. 

Upon  whom  Conditions  of  Order 
are  binding. 

Back  Claims  to  be  preferred 
need  not  be  particularized  in 
the  Order. 

Limits  of  Power  to  prefer  Unse- 
cured Debts  when  no  Provi- 
sion is  made  for  their  Payment 
in  Order  appointing  a  Re- 
ceiver. 

Assignee  of  Preferred  Debt  en- 
titled to  Preference. 

Debts  will  not  be  preferred 
merely  because  Bondholder 
has  promised  Priority. 


§  611.  Judgment  of  another  Court  not 
conclusive  as  to  whether  a 
Claim  is  to  be  preferred. 

612.  Back  Claims  not  ordinarily  Lien 

on  Corpus. 

613.  Back   Claims    Lien    on   Corpus 

where  Diversion  of  Earnings 
is  established. 

614.  Payments  of  Interest,  when  not 

Diversion  of  Earnings. 

615.  Back  Claims  may  be  made  Lien 

on  Corpus  if  Preservation  of 
Property  requires. 

616.  Assumption  of  Floating  Indebt- 

edness by  Purchasers  does  not 
create  Lien,  etc. 

617.  Back  Claims  not  Lien  on  Corpus, 

because  Income  of  Receiver- 
ship insufficient  to  pay  them. 

618.  Preferential  Debts  of  any  Part  of 

Composite  System   a   Charge 
on  wliole  Property. 

619.  Doctrine  of  Diversion  not  appli- 

cable to  Ordinary  Creditor's 
Suit. 
Art.  III.  — Within  what  Period  Back 
Claims  must  have  accrued 
to  be  allowed  Prefer- 
ence. The  Six  Months' 
Rule. 
§  620.   Generally. 

621.  The  Six  Months'  Rule. 

622.  Rule  where  there  is  a  Running 

Account. 

623.  Payment   of  Unsecured  Claims 

antedating    Period    fixed    in 
Order. 
Art.  IV.  Classes  of  Back  Claims  en- 
titled TO  Priority. 
§  624.  Generally. 

625.  Debts    for   Freight   and   Ticket 

Balances. 

626.  Debts  incurred    in   Transporta- 

tion of  Passengers  and  Freight 


582 


RAILWAY   BONDS   AND   MORTGAGES.         [CHAP.  XXVIII. 


§  627.  Debts  for  Wages  due  Employees. 
628.   Claims   for   Legal  Services  not 
preferred    unless    they    have 
inured   to    Benefit   of  Bond- 
holders. 
Debts    for    Supplies    and    Ma- 
terials. 
Debts   for   ^Materials  or   Equip- 
ments furnished  on  Credit  not 
preferred. 
631.  Rentals  due  by  Moi-tgagor  Com- 


629. 


630. 


pany   as   Lessee    of    another 
Line.     Rule. 
§  632.   Diversion  of  Earnings  immaterial 
where  CieJit  is  given  for  Ma- 
terials furnished. 

633.  Debts    contracted    for   Original 

Construction  not  preferred. 

634.  Damages  for  Breach  of  Coutract 

not  preferred. 

635.  Debts   for   Damages   caused   by 

Operation  of  Road. 


Article  I.  —  General  Principles. 

§  596.  Introductory.  —  In  a  preceding  chapter  (XXV.)  it  has 
been  shown  that  the  overwhehning  weight  of  authority  is  in  favor 
of  the  doctrine  that  the  fact  of  the  income's  being  made  specifi- 
cally subject  to  the  lien  of  the  mortgage  does  not  in  any  way 
limit  the  power  of  the  company,  so  long  as  it  is  rightfully  in  pos- 
session, to  use  that  income,  as  it  may  deem  expedient,  in  the 
conduct  of  the  business.  That  power,  however,  is  not  entirely 
unrestricted,  for  the  principle  is  now  firmly  established  in  the 
jurisprudence  of  this  country  that  a  court  of  equity,  when  asked 
to  administer  the  assets  of  an  insolvent  railroad  corporation  for 
the  benefit  of  the  mortgagees,  will  mould  its  relief  upon  the  theory 
that  there  are  certain  classes  of  unsecured  creditors  which  the 
mortgagor  not  only  may,  but  must  satisfy,  before  it  can  rightfully 
use  any  portion  of  the  earnings  for  paying  the  bonded  interest, 
or  for  permanent  improvements  which  will  augment  the  value 
of  the  corpus  of  the  estate,  and  thus  inure  to  the  benefit  of  the 
mortgagees. 

A  court  administering  the  rights  of  litigants  in  accord  with 
the  principles  of  law  and  equity  has  no  inherent  right  simply  by 
virtue  of  its  judicial  authority  to  displace  valid  mortgage  liens 
that  are  fixed  upon  the  property  and  which  is  subject  to  the  liens, 
and  require  that  such  liens  shall  be  postponed  to  claims  which 
were  not  in  existence  at  the  time  the  mortgage  liens  were  created, 
or  are  not  based  upon  some  contract  or  provision  of  the  law  which 
gives  them  a  prior  right  over  the  mortgage  licns.^ 

A  general  creditor  of  an  insolvent  corporation,  by  the  levy  of 
an  attachment  prior  to  a  receivership,  will  not  acquire  any  prefer- 
ence, right,  or  lien  that  will  deprive  the  court  of  the  power  to 
equitably  apportion  the  income  from  the  property  to  claims 
classed  as  operating  expenses.'^ 

1  Farmers'  &  Merchants'  Nat.  Bank  v.  Waco  Electric  Ry.  &  Light  Co.  (Tex.  Civ. 
App.,  1890),  3G  S.  W.  Rep.  131.  2  lijiJ. 


§  596.] 


PREFERRED    DEBTS. 


583 


Where  a  bonclholclcr  of  a  corporation  seeks  by  a  bill  to  preser^-e 
a  railroad  system  from  disintegration,  etc.,  to  have  a  receiver 
appointed  for  it,  if  one  is  appointed  and  the  court  takes  thereby 
control  of  the  property,  such  a  receiver  will  in  reality  represent 
the  corporation  and  not  the  creditors,  and  his  acts  will  be  just 
such  as  the  corporation  itself  can  do,  in  the  matter  of  contracting 
and  payment  of  debts,  connected  with  carrying  on  its  business. 
And  the  court  may,  on  their  appointment,  authorize  them,  in 
their  discretion,  from  time  to  time,  to  pay  the  current  pay-rolls, 
vouchers,  and  supply  accounts  incurred  in  the  operation  of  the 
road  prior  to  their  appointment,  and  to  apply  funds  coming  into 
their  hands  as  the  company  may  have  applied  them.^ 

And  where  mortgage  trustees  afterwards  proceed  in  the  same 
court  for  the  foreclosure  of  their  mortgages,  and  procure  a  modi- 
fication of  the  order,  and  have  receivers  appointed,  the  court  then 
has  power  to  make  a  claim  for  supplies  furnished  shortly  before 
the  first  appointment  of  receivers  a  lien  upon  the  corpus  of  the 
property  .2 


1  New  England  R.  Co.  v.  Carnegie  Steel 
Co.  (Lim.),  75  Fed.  Eep.  54  (1896). 

-  New  England  R.  Co.  v.  Carnegie  Steel 
Co.  (Lim.).  75  Fed.  Rep.  54  (1896). 

The  equitable  doctrine  is  not  applica- 
ble in  a  proceeding  to  distribute  the  assets 
of  .Tu  insolvent  corporation  under  Ga. 
Coile,  §  3149  et  seq.,  forbidding  the  ac- 
quisition of  any  preference  after  the  ap- 
pointment of  a  receiver,  especiallj'  where 
the  mortgagee  conies  in  to  make  defence 
only.  Central  Trust  Co.  v.  Tliurmau 
(1894),  94  Ga.  735  ;  s.  c.  20  S.  E.  Rep. 
141. 

In  England,  so  far  as  is  known,  no 
doctrine  resembling  that  discussed  in  this 
chajiter  has  ever,  apart  from  statute,  been 
recognized  by  the  courts,  except  in  re- 
gard to  the  payment  of  wages.  According 
to  Lord  Denman  (in  Thomas  c.  "Wil- 
liams, 1  Ad.  &  El.  690),  there  had  grown 
up  a  "  humane  practice  "  of  paying  clerks 
and  servants  a  full  si.\;  months'  wages  out 
of  a  bankrupt  estate,  and  this  practice 
was  legalized  by  the  Bankruptcy  Act  of 
6  Geo.  IV.,  ch.  16,  §  48.  A  similar  doc- 
trine prevailed  in  Scotland  prior  to  the 
passage  of  the  Scotch  Bankruptcy  Act, 
the  debts  due  to  servants  for  the  term 
running  when  death  or  bankruptcy  super- 
vened being  classed  among  the  "  privileged 


debts "  recognized  under  the  doctrine  re- 
specting "tacit  hypothecs."  See  Bell's 
Principles,  §§  1387,  1404.  Considering 
all  the  exhaustive  discussion  which  has 
attended  the  introduction  of  the  rule  as 
to  ])referential  debts  in  the  courts  of 
this  country,  it  is  somewhat  remarkable 
that  these  precedents  for  at  least  a  portion 
of  the  rule,  have  never  been  alluded  to,  so 
far  as  is  known.     See  post. 

The  propriety  of  adopting  the  doctrine 
of  preferential  back  claim's  has,  apparently, 
not  been  <lirectly  discussed  in  Canada,  but 
in  Wallbridge  v.  Farwell,  18  S.  C.  Can.  1 
(1890),  Justice  Strong  used  some  language 
which  would  seem  to  show  a  disposition 
to  follow  the  lead  of  the  courts  of  this 
country.  In  Gooderham  v.  Toronto,  etc. 
Ry.  Co.,  8  Ont.  App.  Rep.  685,  the  "  work- 
ing expenses  and  outgoings  of  a  railway," 
for  which  the  receiver  was  directed  to  pro- 
vide before  submitting  his  accounts,  and 
passing  in  the  balance,  were  held  to  in- 
clude working  expenses  which  were  not 
regularly  payable  in  the  ordinary  course 
of  the  business  until  after  his  appointment, 
but  not  those  already  in  default  at  the 
time  of  the  appointment.  But  the  doc- 
trine of  the  courts  of  equity  in  the  United 
States  was  not  alluded  to. 

Useful  articles  on  the  subject  of  prefer- 


584 


RAILWAY    BONDS    AND    MORTGAGES.         [CHAP,  XXVIII. 


§  597.    Substance    of    Leading    Case,    Fosdick    v.    Schall.  —  The 
leading  case   on  this  doctrine   is   Fosdick   v.  Schall/   in   which, 


ential  claims  will  be  found  in  6  Southern 
Law  Review,  N.  S.  535;  12  Am.  Law  Re- 
view, 660  ;  13  Am.  Law  Rnview,  40. 

1  99  U.  S.  235  ;  s.  c.  7  Rep.  449  (1879). 
The  principles  formulated  in  tiiis  de- 
cision had  been  foreshadowed  with  more 
or  less  distinctness  in  a  few  earlier  cases, 
Thus  in  Clark  v.  Williamsport  R.  Co.  (an 
uurejiorted  case  in  the  Supreme  Court  of 
Pennsylvania),  Judge  Strong  (afterwards 
Associate  Justice  of  the  Sui)reme  Court  of 
the  United  States)  declined  to  accede  to 
the  re(juest  of  some  intervening  bondhold- 
ers, who  asked  him  to  strike  out  of  an 
order  a]ipointing  a  receiver  a  direction  to 
pay  all  sums  "due  and  maturing"  for 
materials  and  supplies  about  the  opera- 
tion of  the  road,  and  the  amounts  "  due 
and  maturing"  for  wages  of  employees. 
The  conclusion  of  the  learned  judge  was 
that,  as  to  the  tolls  and  income,  out  of 
which  the  claims  were  directed  to  be  paid, 
the  mortgagees  had  no  rights  paramount 
to  those  possessed  by  the  claimants  for 
wages  and  for  the  price  of  supplies.  The 
mortgagees,  it  was  admitted,  were  en- 
titled under  the  mortgage  to  the  income, 
but  only  to  the  net  income,  left  after  pay- 
ing current  expenses. 

In  Duncan  v.  Trustees,  9  Am.  Ry.  Rep. 
386  ;  3  Centr.  L.  J.  57  (Circuit  Court  Va., 
1876),  the  court  granted  a  petition  for  au- 
thority to  apply  the  surplus  earnings  of 
the  road,  then  in  a  receiver's  hands,  to  the 
payment  of  arrears  of  wages  due  before  the 
receiver's  appointment.  The  decison  was 
placed  on  two  grounds.  Firsf.,  because 
"  the  laws  of  humanity,  the  polic}^  and 
laws  of  two  States,  overriding  all  ques- 
tions of  pecuniary  interest  in  stockholders 
or  bondholders,"  forbade  the  relaxation  of 
any  means  necessary  to  the  maintenance 
and  safe  operation  of  the  roi\(\;  and,  seconrlly, 
because,  after  default,  "while  the  bond- 
holders stood  aloof  without  asserting  their 
rights  to  possession,  the  officers  of  the 
road  were  to  be  considered  pro  tanto  as 
agents  of  the  bondholders." 

In  Douglass  v.  Cline  (1877),  12  Bush, 
608;  s.  c.  18  Am.  Ry.  Rep.  273,  certain 
claim.s  of  labor  ami  supply  creditors  were 
prefernil  to  the  inortgage  lien,  the  ground 


being  distinctly  taken  that  the  appoint- 
ment of  a  receiver  was  a  discretionary  ex- 
ercise of  power,  and  that  the  bondholders, 
having  elected  to  avail  themselves  of  the 
equitable  remedy  of  foreclosure,  instead  of 
taking  possession  of  the  property,  as  they 
were  entitled  to  do,  could  not  be  heard  to 
com[)lain  that  the  court,  in  granting  them 
equitable  relief,  had  imposed  conditions  as 
to  the  payment  of  the  meritorious  claims 
of  piersons  whose  services  had  contributed 
to  the  preservation  of  the  property.  To 
ask  the  court  not  only  to  apply  the  pro- 
ceeds of  the  property  thus  preserved  to 
the  payment  of  the  mortgage  debt,  but 
also  to  hold  the  fund  accumulated  by  the 
receiver,  and  refuse  to  apply  any  portion 
of  it  to  paying  for  services  thus  resulting 
to  their  direct  and  substantial  advantage, 
was  held  to  be  a  request  incompatible 
with  the  maxim,  "  He  who  seeks  equity 
must  do  equity."  In  this  case  it  would 
seem  from  the  report  that  there  was  no 
.specific  pledge  of  the  income,  for  one  link 
in  the  chain  of  the  reasoning  was  that  a 
mortgagee  who  has  no  specific  pledge  of  tlie 
rents  and  jn'ofits  cannot  claim  them  as  a 
legal  incident  or  a  legal  right  growing  out 
of  his  mortgage.  But  in  view  of  later  de- 
cisions this  point  is  immaterial.  See  the 
remarks  of  Justice  Harlan  in  Thomas  v. 
Peoria  &  R.  I.  R.  Co.  (Western  Car  Co., 
Intervener),  (188S),  36  Fed.  Rep.  808  ; 
s.  c.  36  Am.  k  Eng.  R.  R.  Cas.  381,  touch- 
ing upon  this  very  jioint. 

In  Turner  v.  Indianapolis,  B.  &  "W. 
R.  Co.  (1878),  8  Biss.  315,  the  court 
expressed  its  views  in  words  which  in- 
dicate that  the  doctrine  had  now  reached 
its  full  development,  and  was  merely 
awaiting  the  sanction  of  the  Supreme 
Court  of  the  United  States  (which  was 
given  the  following  year  in  Fosdick  v. 
Scliall)  to  claim  a  definite  position  in  the 
equity  jurisprudence  of  the  federal  courts. 
"The  mortgagees  have  come  into  court  ask- 
ing it  to  assume  possession  of  the  road  to 
])rotect  their  interests.  Are  the  interests 
of  all  others,  operatives  and  supply  men, 
who  happen  to  have  claims  against  it  at 
the  time  to  be  absolutely  ignored  in  the 
case  of  insolvent  companies  ?    I  thiidc  not. 


§  597.] 


PREFERRED    DEBTS. 


58^ 


after  an  exhaustive  argument  by  some  of  the  ablest  lawyers  in 
the  country,  its  jjrccise  scope  was  clearly  defined.  In  the  opinion 
written  for  a  unanimous  court.  Chief  Justice  Waite  said,  amongst 
other  thing's  :  "  We  have  no  doubt  that  when  a  Court  of  Chancery 
is  asked  by  railroad  mortgagees  to  appoint  a  receiver  of  railroad 
proj)erty,  pending  proceedings  for  foreclosure,  the  court,  in  the 
exercise  of  a  sound  judicial  discretion,  may,  as  a  condition  of 
issuing  the  necessary  order,  imj^ose  such  terms  in  reference  to 
the  payment  from  the  income  during  the  receivership  of  out- 
standing supplies,  equipment,  or  permanent  improvement  of  the 
property,  as  may,  under  the  circumstances  of  tlic  particular  case, 
appear  to  be  reasonable.  .  .  .  The  business  of  all  railroad  com- 
panies is  done  to  a  greater  or  less  extent  on  credit.  This  credit 
is  longer  or  shorter,  as  the  necessities  of  the  case  require  ;  and 
when  companies  become  embarrassed,  it  frequently  happens  that 
debts  for  labor,  supplies,  equipment,  and  improvements  are  per- 
mitted to  accumulate,  in  order  that  bonded  interest  may  be  paid, 
and  a  disastrous  foreclosure  postponed,  if  not  altogether  avoided. 
In   this  way  the  daily  and   monthly   earnings,  which  ordinarily 


The  appointment  of  a  receiver  is,  to  a 
great  extent,  a  matter  of  discretion  in  the 
court,  and  it  has  been  thought  that  the 
court  might  require  the  receiver  to  pay 
certain  of  these  claims,  and  even  to  hokl 
tlie  property  subject  to  them  ;  not  as  a 
lien  on  the  road,  but  in  the  exercise  of  the 
equitable  discretion  of  the  court  in  dealing 
with  property  which  is  of  a  peculiar  char- 
acter, and  under  circumstances  of  which 
the  past  history  of  litigation  affords  no 
example  or  precedent.  Railways  do  not 
come  within  the  control  of  the  court  until 
after  default  on  the  bonds  or  coupons, 
and,  generally,  after  aVisolute  insolvency. 
There  are,  therefore,  when  application  is 
made  to  the  court  for  the  a]ipointment  of 
a  receiver,  in  all  cases,  large  balances  due 
to  operatives,  and  for  sup])lies  and  ma- 
terials furnished.  There  are  also  con- 
tracts running  with  other  railways  upon 
which  balances  are  due,  and  which  con- 
tracts must  often  be  continued  in  force  to 
preserve  the  security  of  the  mortgagees. 
The  receiver  takes  the  road  with  the  bene- 
fits accruing  from  such  contracts,  and  uses 
any  supplies  or  materials  which  are  on 
hand  and  not  paid  for.  It  therefore  early 
became  a  question  in  this  species  of  litiga- 
tion what  rule  should  be  adopted  by  the 


court  as  to  such   claims  against  railway 
companies." 

On  the  other  hand,  in  Kitchen  i\  Pacific 
Railroad  Co.,  4  Centr.  L.  J.  458,  an  appli- 
cation for  the  payment  of  some  back  claims 
was  refused,  as  it  was  opposed  by  the  bond- 
holders, though  some  similar  claims  had 
previously  been  paid  with  their  consent. 

In  Denniston  v.  Chicago,  A.  &  St.  L. 
R.  Co.  (1864),  4  Biss.  414,  an  attempt 
was  made  by  certain  sni)ply  creditors  to 
obtain  the  payment  of  their  claims  in 
preference  to  the  bonded  debt  out  of  the 
])roceeds  of  the  foreclosure  sale,  but  Judge 
Drummond  declined  to  make  an  order  to 
that  effect.  This  case  is  still  good  law, 
except  in  so  far  as  the  rule  may  have  been 
altered  by  statutes.  See  below  in  this 
chapter. 

In  many  of  the  federal  courts  during 
the  years  immediately  preceding  the  ren- 
dition of  this  decision  in  Fosdick  v.  Schall, 
it  had  already  grown  into  a  custom  to 
provide  for  debts,  labor  and  supplies,  and 
the  like,  when  a  receiver  was  appointed, 
but,  apparently,  this  was  usually  done 
with  the  consent  of  the  bondholders. 
Such,  at  least,  was  the  rule  adopted  by 
one  eminent  jurist,  Judge  Dillon.  See 
3  Cent.  L.  J.  636. 


586  KAILAVAY   BONDS   AND   MORTGAGES.        [CHAP.  XXVIII. 

should  go  to  pay  the  daily  and  monthly  expenses,  are  kept  from 
those  to  whom  in  equity  they  belong-,  and  used  to  pay  the  mort- 
gage debt.  The  income  out  of  Avhich  the  mortgagee  is  to  be  paid 
is  the  net  income,  obtained  by  deducting  from  the  gross  earnings 
what  is  required  for  necessary  operating  and  managing  expenses, 
proper  equipment,  aud  useful  improvement.  Every  railroad  mort- 
gagee, in  accepting  his  security,  impliedly  agrees  that  the  current 
debts  made  in  the  ordinary  course  of  business  shall  be  paid  from 
the  current  receipts  before  he  has  any  claim  upon  the  income.  If, 
for  the  convenience  of  the  moment,  something  is  taken  from  what 
may  not  improperly  be  called  the  current  debt  fund,  and  put  into 
that  which  belongs  to  the  mortgage  creditors,  it  certainly  is  not 
inequitable  for  the  court,  when  asked  by  the  mortgagees  to  take 
possession  of  the  future  income  and  hold  it  for  their  benefit,  to 
require,  as  a  condition  of  such  an  order,  tliat  what  is  due  from 
the  earnings  to  the  current  debt  sball  be  paid  by  the  court  from 
the  future  current  receipts  before  anything  derived  from  that 
source  goes  to  the  mortgagees.  In  this  way  the  court  will  only 
do  what,  if  a  receiver  should  not  be  appointed,  the  company  ought 
itself  to  do.  .  .  .  We  think,  also,  that  if  no  such  order  is  made  when 
the  receiver  is  appointed,  and  it  appears  in  the  progress  of  the 
cause  that  bonded  interest  has  been  paid,  additional  equipments 
provided,  or  lasting  and  valuable  improvements  made  out  of  earn- 
iugs  which  ought  in  equity  to  have  been  employed  to  keep  down 
debts  for  labor,  supplies,  and  the  like,  it  is  within  the  power  of 
the  court  to  use  the  income  of  the  receivership  to  discharge  obli- 
gations which,  but  for  the  diversion  of  funds,  would  have  been 
paid  in  the  ordinary  course  of  business.  This,  not  because  the 
creditors  to  whom  such  del)ts  are  due  have  in  law  a  lien  upon 
the  mortgaged  property  or  the  iucomc,  but  because,  in  a  sense, 
the  officers  of  the  company  are  trustees  of  the  earnings  for  the 
benefit  of  the  different  classes  of  creditors  and  the  stockholders, 
and,  if  they  give  to  one  class  of  creditors  that  which  properly 
belongs  to  another,  the  court  may,  on  an  adjustment  of  the  ac- 
counts, so  use  the  income  which  comes  into  its  own  hands  as,  if 
practicable,  to  restore  the  parties  to  their  original  equitable  rights. 
While  ordinarily  this  power  is  confined  to  the  appropriation  of 
the  income  of  the  receivership,  and  the  proceeds  of  the  moneyed 
assets  that  have  been  taken  from  the  company,  cases  may  arise 
whei-e  equity  will  require  the  use  of  the  proceeds  of  the  sale  of  the 
mortgaged  property  in  the  same  way.  ...  No  fixed  and  inflexible 
rule  can  be  laid  down  for  the  government  of  tlie  courts  in  all  cases. 
Each  case  will  necessarily  have  its  own  peculiarities,  which  must 


§  598.] 


PREFERRED    DEBTS. 


587 


to  a  greater  or  less  extent  influence  the  Chancellor,  when  he 
comes  to  act." 

The  effect  of  the  opinion  of  Fosdick  v.  Schall  has  been  tersely 
stated  by  Judge  Hughes  to  be  that  "  a  court  may  for  certain  pur- 
poses stand  in  the  shoes  of  the  com])any  whose  property  it  has 
sequestrated,  and  satisfy  equities  which  the  company  necessarily 
contracted  for  the  benefit  of  all  parties  interested  in  keeping  the 
railroad  alive  and  in  operation."  ^ 

§  598.  Preferred  Debts  not  Liens.  —  Preferred  dcl)ts  are  not 
ranked  above  the  bonded  interest  because  they  are  a  lien,^  but  on 
the  ground  that  the  application  of  the  income  to  debts  incurred  to 
keep  the  road  in  operation  is  the  paramount  duty  of  the  company, 
and  that  its  failure  to  perform  that  duty  is  inequitable  conduct, 
the  results  of  which  a  Chancellor  is  justified  in  correcting,  if  he 
is  asked  by  the  mortgagees  to  sequestrate  the  income  for  their 
benefit  by  tlie  appointment  of  a  receiver.  This  theory  has  been 
justly  characterized  as  a  "  new  departure."  ^ 


1  Atkins  V.  Petersburg  Railroad  Co. 
(1879),  3  Hughes,  307;  s.  c.  2  Fed.  Cas. 
90,  Case  Xo.  604. 

2  See  the  extract  given  above  from  the 
opiuiou  in  Fosdick  v.  Schall.  So  also  in 
Turner  v.  Indianapolis,  B.  &  W.  R.  Co. 
(1876),  8  Biss.  315,  the  court  said:  "  Dur- 
ing the  discussions  which  have  taken  place 
on  this  subject,  the  allowance  of  these 
'  back  '  claims  has  been  sometimes  called 
a  lien,  but  in  point  of  fact  it  never  has 
been,  nor  can  it  be  justly  so  considered, 
but,  as  already  stated,  is  an  exercise  of 
the  eiputahle  power  of  the  court  in  the 
premises."  To  the  same  effect  are  the 
remarks  of  the  court  in  Addison  v.  Lewis 
(1882),  75  Va.  701  ;  s.  c.  9  Am.  &  Eng. 
R.  R.  Cas.  702  ;  Union  Trust  Co.  v. 
Walker  (1882),   107  U.  S.  596. 

^  Williamson  v.  Washington  City,  Va. 
Midland,  &  Cxreat  Southern  R.  Co.  (1881), 
33  Gratt.  624  ;  s.  c.  1  Am.  &  Eng.  R.  R. 
Cas.  498;  Addison  v.  Lewis  (1882),  75 
Va.  701  ;  s.  c.  9  Am.  &  Eng.  R.  R.  Cas. 
702. 

The  view  taken  by  the  profession  at 
large  as  to  preferred  debts,  before  the  de- 
cision in  Fosdick  v.  Schall,  is  perhaps 
fairly  well  expressed  in  the  article  in  3 
Central  L.  J.  636.  Up  to  the  time  when 
that  was  written,  it  seems  that  the  pay- 
ment of  these  debts  had  been  made  with 
the  consent  of  the  bondholders,  and  the 


general  doctrine  as  to  a  special  equity, 
which  might  be  enforced  by  imposing  con- 
ditions at  the  appointment  of  a  receiver, 
had  only  been  announced  in  one  case,  — 
Douglass  V.  Cline,  supra. 

In  one  of  the  earlier  cases  on  the  sub- 
ject, the  following  theory  was  projjounded 
as  an  additional  reason  for  the  court's  as- 
sumption of  the  right  to  apply  the  earnings 
to  back  claims:  "There  is  a  distinction 
between  the  net  earnings  of  a  railroad 
operated  by  a  receiver  and  the  ordinary 
rents  and  profits  of  lands  and  tenements. 
The  receiver  of  a  line  of  railways  is  not 
the  mere  passive  agent  or  officer  of  the 
court  charged  with  the  single  duty  of  pre- 
serving the  property  and  collecting  the 
rents,  etc.  The  net  earnings  of  a  railway 
in  the  hands  of  a  receiver  depend  very 
greatly  upon  his  experience  and  skill  as  a 
railway  operator,  and  upon  the  energy  and 
fidelity  he  may  display  in  the  discharge  of 
his  duties.  The  mortgagees  have  no  claim 
or  lien  upon  the  experience,  skill,  energy, 
and  fidelity  of  the  court's  receiver,  who 
represents  the  interests  as  well  of  the 
mortgagors  or  of  its  creditors."  Douglass 
V.  CUne  (1877),  12  Bush,  608  ;  s.  c.  18 
Am.  Ry.  Rep.  273.  But  this  theory  is 
open  to  the  obvious  objection  that  the 
court  does  no  more  than  its  duty  in  secur- 
ing the  best  possible  management  for  the 
property  which  is  taken  out  of  the  owner's 


588 


RAILWAY    BONDS    AND    MORTGAGES.         [CHAP.  XXVin. 


To  allow  arrears  of  wages  or  other  debts  for  operating  expenses 
to  accumulate  is  not  inequitable  in  any  sense  in  which  that  term 
is  used  in  relation  to  the  administration  of  an  insolvent  estate  by 
a  Court  of  Chancery.  Nor,  apart  from  some  statute,  has  it  ever 
been  maintained  in  regard  to  any  other  business  than  that  of  a 
railroad  that  a  debtor  is  not  entitled  to  favor  one  or  more  credit- 
ors in  the  disposition  of  his  income.  Least  of  all  has  a  debtor's 
right  to  favor  secured  creditors  ever  been  denied  prior  to  the  de-  . 
cision  of  Fosdick  v.  Schall. 

§  599.  Superior  Equity  of  Preferred  Debts  based  upon  the  Char- 
acter of  Railroad  Business.  —  Such  being  the  general  principles 
governing  the  rights  of  the  parties  in  similar  cases,  the  superior 
equity  thus  predicated  of  preferential  claims  must  evidently  rest 
upon  some  entirely  special  ground,  and  the  courts  have  found 
what  they  deem  an  adequate  basis  for  that  equity,  the  peculiar 
nature  of  the  business  conducted  by  a  railroad  company.^ 


control.  To  infer  that  the  performance  of 
that  duty  can  give  the  court  any  extraor- 
dinary rights  as  regards  the  displacement 
of  vested  liens  is,  to  say  the  least,  rather  a 
startling  proposition. 

1  The  unique  characteristics  of  that 
business  have  perhaps  never  been  stated 
with  more  vigor  and  clearness  than  by 
Judge  Caldwell,  in  the  following  passage 
of  his  opinion  in  the  recent  case  of  Farm- 
ers* Loan  &  Trust  Co.  v.  Kansas  City, 
W.  &  N.  W.  Ry.  Co.  (1892),  53  Fed.  Eep. 
182:  — 

"  Railroads  and  railroad  mortgages  are 
of  modern  origin.  The  courts  at  first 
failed  to  distinguish  between  a  mortgage 
on  a  railroad  and  a  mortgage  on  a  house 
and  lot,  and  receivers  were  appointed 
without  making  any  provision  to  pay  even 
the  current  wages  of  the  employees  of  the 
company,  or  to  pay  for  the  most  essential 
supplies,  however  recently  furnished.  Ex- 
perience and  observation  demonstrated  the 
inequity  of  this  mode  of  proceeding. 
Courts  of  equity  were  compelled  to  in- 
quire into  the  nature  of  railroad  property 
and  railroad  mortgages.  It  was  jn'rceived 
that,  as  a  security  for  a  debt,  there  was 
mucli  more  analogy  between  a  railroad 
and  a  sliip  than  there  was  between  a  rail- 
road and  a  house  and  lot.  It  was  per- 
ceived that  railroads  jierformed  on  land 
the  same  ofFnies  that  ships  did  on  the  sea. 
Tlii'V    are    both   great    and    indis[)ensable 


instruments  of  commerce.  Their  chief 
difference  as  such  instruments  is  the 
chemical  composition  of  the  elements 
upon  which  they  are  operated.  One 
moves  in  the  water,  and  the  other  on 
iron  rails.  It  is  said  of  ships  that  they 
are  made  to  plough  the  seas,  and  not  to 
rot  at  the  wharves  ;  and  railroads  are  built 
to  be  actually  operated  in  carrying  the 
commerce  of  the  country,  and  not  to  rust 
out.  Unless  it  is  kept  in  operation,  a  rail- 
road does  not  fulfil  the  purpose  of  its  cre- 
ation, and  is  comparatively  valueless  as  an 
instrument  of  commerce,  or  for  any  other 
purpose,  without  incurring  daily  expenses 
for  \\ork,  supplies,  and  materials.  These 
debts  are  never  paid  at  the  time  they  are 
contracted.  That  is  impossible  from  the 
nature  of  the  business.  In  the  case  of 
solvent  companies,  the  time  of  payment 
varies,  and  it  varies  with  the  same  com- 
pany at  different  times.  It  is  longer  or 
shorter,  depending  on  the  financial  condi- 
tion of  the  company,  the  length  of  its 
line,  and  other  causes.  The  labor,  sup- 
]ilies,  and  materials  are  absolutely  essen- 
tial to  the  operation  of  the  road,  and,  as  a 
matter  of  fact,  are  in  most  cases  furnished 
on  its  credit,  in  the  same  sense  that  the 
supplies  of  a  ship  are  furnished  on  the 
credit  of  the  ship.  For  these  and  other 
like  reasons  there  has  been  a  growing  ten- 
dency among  the  courts  and  legislatures 
in  this  country  to  give  such  debts  of  a 


§  ^9^-] 


PREFERRED   DEBTS. 


589 


It  is  true  that  Chief  Justice  Waite  in  his  opinion  in  Fosdick  v. 
Schall  bases  the  more  extreme  application  of  the  doctrine,  viz. 
that  rekiting  to  the  restoration  of  divei'ted  earnings,  upon  the 
principles  that  the  directors  are  "  trustees  of  the  stockholders  and 
creditors."  But  the  implied  duty  of  the  directors  to  postpone 
even  the  lien  creditors  to  those  of  the  preferred  class  must,  it  is 
plain,  be  ultimately  referred  to  the  existence  of  some  peremptory 
equity  which  is  recognized  for  some  anterior  and  distinct  reason, 
apart  from  the  fiduciary  position  of  the  directors.  The  mere  fact 
that  they  are  trustees  does  not  of  itself  obligate  them  to  pay 
debts  in  an  unusual  way.^  A  similar  remark  is  applicable  to  the 
supposed  correlative  duty  of  the  mortgagees  to  refuse  to  be  favored 
at  the  expense  of  the  preferred  creditors,  or,  if  they  have  been  so 
favored,  to  acquiesce  in  the  restoration  of  the  diverted  funds.^ 


railroad  company  priority  over  tlie  lien  of 
a  mortgage.  It  seems  probable  that  the 
courts  will  not  have  to  deal  with  the  ques- 
tion on  general  principles  of  equity  much 
longer.  Some  of  the  States  have  already 
passed  acts  giving  all  obligations  incurred 
in  the  construction  and  ojieration  of  a 
railroad  priority  over  mortgages,  and  sim- 
ilar statutes  will  probably  soon  be  x>assed 
in  other  States,  unless  the  practice  and 
decisions  of  their  courts  shall  render  them 
unnecessary.  Undoubtedly,  under  the  op- 
eration of  these  statutes,  and  the  later  and 
sounder  practice  of  a  condition  of  the  ap- 
pointment of  a  receiver  for  a  railroad,  the 
payment  of  the  class  of  debts  mentioned, 
the  ends  of  justice  have  been  promoted, 
and  a  stop  put  to  some  practices  which 
were  extrenjely  inequitable  and  injurious 
alike  to  the  company,  the  mortgagee,  and 
the  general  creditors.  It  occurs  less  fre- 
quently now  than  formerly  that  railroad 
receivers  are  appointed,  and  mortgages 
foreclosed,  leaving  unpaid  in  whole  or  in 
part  those  whose  labor  and  materials  built 
the  road  and  created  the  securit}"^,  —  for 
railroad  mortgages  are  sometimes  executed 
before  a  shovelful  of  earth  has  been  thrown 
towaids  the  construction  of  the  road,  —  or 
kept  it  in  repair  and  operation  after  its 
construction.  When  it  is  known  that  a 
misapplication  or  fraudulent  use  of  the 
jiroceeds  of  the  bonds,  or  the  earnings  of 
the  road,  cannot  be  visited  upon  the  inno- 
cent persons  whose  labor  and  materials 
build  the  road,  or  keep  it  in  repair  and 
operation,  the  mortgagee  will  see  to  it  that 


the  revenues  of  the  company,  derived  from 
these  and  all  other  sources,  are  expended 
for  legitimate  purposes.  Honesty  and 
economy  in  railroad  building  and  man- 
agement will  thus  be  promoted,  and  the 
company,  the  mortgagee,  and  the  public 
will  alike  be  benefited." 

1  This  objection  is  independent  of  that 
which  arises  from  the  difficulty,  or  rather 
perhaps  impossibility,  of  finding  any  au- 
thorities, apart  from  those  under  review, 
or  those  which  turn  upon  some  statute,  for 
extending  the  doctrine  that  the  directors 
of  a  corporation  are  trustees  for  the  cred- 
itors after  insolvency,  to  cases  in  which 
the  corporation  is  merely  in  an  embar- 
rassed position,  but  not  actually  insolvent. 
Until  insolvency  supervenes  the  directors 
have  usually  no  fiduciary  duties  except  as 
regards  the  stockholders.  Thus  the  presi- 
dent of  a  railroad  company  sustains  no 
fiduciary  relation  to  holders  of  its  bonds, 
which  requires  him  as  trustee  or  agent  of 
such  bondholders  to  see  to  the  proper  ap- 
plication of  the  funds  received  from  the 
sale  of  the  bonds,  or  to  account  to  the 
bondholders  for  any  surplus  from  the  pro- 
ceeds of  the  bonds  they  may  hold  after 
constructing  the  works  for  which  tliey 
were  issued.  His  relations  and  duties  in 
this  respect  are  to  the  company  and  its 
stockholders,  not  to  creditors.  Van  AVeel 
V.  Winston  (1885),  115  U.  S.  228  ;  Beach 
V.  Miller  (1889),  130  111.  162;  s.  c.  22 
N.  E.  Rep.  464. 

2  Of  course  the  terms  of  the  mortgage 
may  be  such  as  to  justify   imputing  to 


590  RAILWAY   BONDS   AND    MORTGAGES.       [CHAP.  XXVIII. 

There  is,  however,  some  lack  of  clearness  in  the  cases  with  re- 
gard to  the  question  what  that  precise  characteristic  of  a  railroad 
may  be  which  justifies  this  marked  departure  from  ordinary  prin- 
ciples. Possibly  it  may  be  said  that  there  has  been  a  development 
of  opinion  on  the  subject.  In  Fosdick  v.  Schall,  supra^  the  Supreme 
Court  relied  upon  the  largeness  of  the  amounts  involved,  the  com- 
plicated nature  of  the  various  rights  to  be  adjusted,  and,  above  all, 
on  the  fact  that  the  business  of  railroad  companies  is  done  to  a 
greater  or  less  extent  on  credit,  and  that  debts  for  labor,  etc.,  are 
often  allowed  to  accumulate  in  order  to  procure  funds  for  the 
payment  of  interest.  It  is  obvious,  however,  that  none  of  these 
features  are  peculiar  to  railroads.  The  same  remarks  would  be 
equally  applicable  to  any  great  industrial  enterprise.  It  seems 
altogether  impossible  to  maintain  with  any  show  of  plausibility 
that  the  rights  of  persons  who  help  to  keep  up  a  railroad  should, 
on  such  grounds  alone,  be  regarded  as  essentially  different  from 
the  rights  of  persons  who  keep  up  a  mill,  a  foundry,  or  a  ship- 
building establishment.  The  mere  magnitude  and  complication 
of  the  interests  involved,  and  the  practice  of  carrying  on  the  busi- 
ness on  credit,  seem  to  furnish  an  especially  unsatisfactory  basis 
for  singling  out  the  former  class  of  creditors,  when  it  is  remem- 
bered that  the  equity,  if  it  exists  at  all,  must  avail  not  merely  in 
favor  of  the  creditors  of  the  very  largest  system  of  railroad  lines, 
but  also  in  favor  of  the  creditors  of  a  line  a  few  miles  long,  the 
business  of  which  is  insignificant  compared  with  that  of  hundreds 
of  the  great  factories  throughout  tlie  country. 

The  objections  to  resting  the  preference  of  debts  for  labor,  etc., 
solely  upon  the  grounds  assigned  in  Fosdick  v.  Schall  seem  to  be 
recognized  in  later  decisions  of  the  Supreme  Court  of  the  United 
States,  and  we  think  it  may  now  be  taken  as  the  established  doc- 
trine that  the  differentiating  feature  in  the  cases  considered  in 
the  present  chapter  is  the  interest  which  the  public  have  in  the 

them  an  implied  consent  to  holding  their  ings.    As,  therefore,  they  have,  while  out  of 

bonds  on  this  condition ;    as   where   tiie  possession,  no  right  to  earnings  superior 

mortgagors,    as   long    as   they  remain   in  to  the  mortgagor's,  it  is  proper  that  the 

possession,    are   placed   by   the    mortgage  net  income  accruing  after  the  appointment 

itself  under  the  obligation  of  applying  the  of  a  receiver  should  be  first  applied  to  the 

income   "to  the   payment  of  the  current  discharge  of  debts  that  were  incurred  to 

expenses  of  the  road,   ...  or  of  disposing  defray  current  expenses.      Poland  v.   La- 

of  the  same  for  the  lawful   uses"  of  the  moille  Valley  R.  Co.   (1879),  .'52  Vt.  144. 

mortgagors.      Under   these  circumstances  Our  observation   in   the  text  is  intended 

the  mortgagees  may  well  be  regarded  as  to  ajiply  to  cases  where  there  are  no  un- 

having    taken    their    security,    burdened  usual   conditions   in    the   mortgage    from 

with   an  express    trust,    that  current  ex-  which   a   modification   of   rights   may  be 

penKes  are  to  Ix:  paid  out  of  curient  earn-  inferred. 


i 


§  509.]  PREFERRED  DEBTS.  591 

continued  operation  of  the  railroad  "  as  a  jroing  concern."  In 
other  words,  the  preference  of  such  debts  can  apparently  be  justi- 
fied only  on  the  hypothesis  that,  for  some  special  reason  of  pub- 
lic policy,  the  business  must  be  kept  on  foot  at  all  costs ;  and  this 
reason  can  only  be  found  in  the  fact  that  the  State  has  certain 
rights  in  regard  to  railroads  which  are  paramount  to  those  of  the 
com])any  and  its  creditors.  Thus  in  ^[iltcnbergcr  v.  Logansport 
Ry.  Co.^  Mr.  Justice  Blatchford  made  the  following  remarks  in 
the  course  of  his  opinion  :  — 

"  Many  circumstances  may  render  it  necessary  and  indispen- 
sable to  the  business  of  the  road  and  the  preservation  of  the 
property  for  the  receiver  to  pay  pre-existing  debts  of  certain 
classes  out  of  the  earnings  of  the  receivership,  or  even  out  of 
the  corpus  of  the  property.  Yet  the  discretion  to  do  so  should  be 
exercised  with  great  care.  The  payment  of  such  claims  stands, 
prima  facie,  on  a  different  basis  from  the  payment  of  claims  aris- 
ing under  the  receivership,  while  it  may  be  brought  within  the 
principle  of  the  latter  by  special  circumstances.  It  is  easy  to  see 
that  payment  of  unpaid  debts  for  operating  expenses,  accrued 
within  ninety  days,  due  by  a  railroad  suddenly  deprived  of  the 
control  of  its  property,  due  to  operatives  in  its  employ,  whose 

1  106  U.  S.  286  (18S2).  This  aspect  and  regular  operation,  as  the  interests  of 
of  the  subject  has  been  strongly  erapha-  the  community,  not  those  of  the  share- 
sized  in  one  ease  decided  not  long  before  holders,  demand.  No  matter  that  a  divi- 
Fosdick  V.  Schall,  in  these  words:  "A  dend  is  never  paid,  that  the  })rivate 
railway  is  matter  of  public  concern.  It  investment  is  sunk  and  worthless,  that 
is  one  of  the  great  instruments  of  modern  the  interest  upon  its  bonds  is  never  met, 
commerce  between  States  and  nations,  and  that  all  its  creditors  go  unpaid,  every 
The  ])ublic  as  well  as  private  intei-ests  dollar  of  its  earnings  must  nevertheless  be 
require  its  continual  operation.  To  refuse  applied  to  keep  up  its  maximum  efficiency, 
to  pay  anything  whatever  for  past  services  as  required  by  the  political  power  which 
or  supplies  or  materials  has  never,  it  is  created  it."  "  The  road  once  constructed 
believed,  been  attempted  by  any  court  or  is,  instanter,  and  by  mere  force  of  the 
even  demanded  by  any  mortgagee."  Tur-  grant,  and  law,  embodied  in  the  govern- 
ner  v.  Indianapolis,  B.  &  W.  R.  Co.  mental  agencies  of  the  State,  and  dedi- 
(1878),  8  Biss.  315.  The  paramount  rights  cated  to  public  use.  All  and  singular  its 
of  the  public  have  never  been  stated  more  cars,  engines,  rights  of  way,  and  property 
strongly  than  in  Talcott  v.  Township  of  of  every  description,  real,  personal,  and 
Pine  Grove  (1872),  1  Flip.  145,  23  Fed.  mixed,  are  but  a  trust  fund  for  the  politi- 
Cas.  No.  13,735,  which,  however,  was  not  cal  power,  like  the  functions  of  a  public 
».  case  dealing  with  preferential  debts,  office.  The  judicial  personage,  the  cor- 
In  the  relation  of  the  railroad  to  the  poration  created  by  the  sovereign  power 
public  or  sovereign,  "the  incidental  inter-  expressly  for  this  sole  purpose  and  no 
est  and  profits  of  individuals  are  accidents  other,  is  in  the  most  strict,  technical,  and 
both  in  theory  and  practice.  Every  far-  unqualified  sense  but  its  trustee.  This  is 
thing  of  its  tolls  is  first  to  be  diverted  to  the  primary  and  sole,  legal,  political 
paying  the  public  tax,  and  to  the  contin-  motive  for  its  creation.." 
uance  of  the  road,   its   ample  equipment 


r;92  RAILWAY    BONDS    AND    MORTGAGES.        [CHAP.  XXVIII. 

cessation  from  work  simultaneously  is  to  be  deprecated,  in  the 
interests  both  of  the  property  and  the  public,  and  the  payment  of 
limited  amounts  due  to  other  and  connecting  lines  of  road  for 
materials  and  repairs,  and  for  unpaid  ticket  and  freight  balances, 
and  the  outcome  of  indispensable  business  relations,  where  a  stop- 
page of  the  continuance  of  such  business  relations  would  be  a 
probable  result,  in  case  of  non-payment, —  the  general  consequence 
involving  largely  also  the  interests  and  accommodation  of  travel  and 
traffic,  may  well  place  such  payments  in  the  category  of  those 
made  to  preserve  the  mortgage  property  in  a  large  sense,  by 
maintaining  the  good-will  and  integrity  of  the  enterprise,  and 
entitle  them  to  be  made   a  first  lien." 

So  also  in  Wood  v.  Guarantee  Trust  &  Safe  Deposit  Qo.}  where 
it  was  attempted  to  apply  the  doctrine  of  preferential  debts  in 
favor  of  the  supply  creditor  of  a  water-works  company,  Mr.  Jus- 
tice Lamar  took  occasion  to  point  out  that  this  doctrine  had  never 
been  countenanced  in  any  case  except  that  of  a  railroad  company  ; 
but  an  express  ruling  on  the  point  was  deemed  to  be  unnecessary, 
in  view  of  other  considerations  which  were  conclusive  against  the 
enforceability  of  the  plaintiff's  claim. 

A  distinguished  circuit  judge  announced  the- same  principle  still 
more  distinctly  in  the  following  language  :  "  Underlying  the  rule 
which  the  Supreme  Court  has  laid  down  in  respect  to  the  pay= 
ment  of  prior  unsecured  debts  recently  accrued,  runs  the  thought 
that  a  railroad  corporation  owes  a  duty  to  the  public  which  has 
given  it  its  franchise  and  enabled  it  to  construct  its  road,  —  the 
duty  of  operating  that  road  for  the  benefit  of  the  public."  "^ 

That  the  doctrine  as  to  the  preferential  debts  of  railroad  com- 
panies can  be  justified  only  by  the  quasi  public  character  of  such 
corporations  has  been  directly  ruled  by  the  New  York  Court  of 
Appeals,  which  has  decided  that  the  "  back  claims  "  of  the  em- 
ployees of  an  insolvent  hotel  company  have  no  such  superior 
equity  as  against  the  claims  of  the  secured  creditors  ;  that  a 
receiver,  appointed  at  the  instance  of  the  latter,  should  be  au- 
thorized to  pay  them  in  preference  to  the  mortgage  bonds  of 
the  corporation.^ 

1  128  U.  S.  41G  (1888).  »  Raht    v.   Attrill    (1887),   106  N.   Y. 

2  Central  Trust  Co.  v.  Wabash,  St.  I..  423.  Referring  to  the  cases  in  the  Su- 
&  Pac.  Ky.  Co.  (1885),  23  Fed.  Rei).  863,  preme  Court  of  the  United  States,  Judge 
per  Brewer,  J.  Andrews,  on  p.  436,  said  :  "  We  liave  not 

To  tlie  same  effect  see  Bound  v.  Soutli  lost  sight  of    the  recent  very  important 

Carolina  R.  Co.  (1891),  47  Fed.  Hep.  30,  cases  decided  in  the  Supreme  Court  of  the 

and   tlie  castas  cited  iu  the  following  sec-  United  States,   involving  the  question  of 

tioii.  the  power  which  may  be  vested  by  the 


§  GOO.] 


PREFERRED    DEBTS, 


593 


§  600.  What  Corporations  are  Subject  to  the  Rule.  —  What  cor- 
porations, if  any,  besides  railroad  comi)anies  are  within  the  scope 
ol"  the  rule  has  not  as  yet  been  settled  precisely  by  the  courts.  It 
has  been  held  that  the  test  is  whether  the  corporation  has  exer- 
cised, or  can  legitimately  exercise,  the  right  of  eminent  domain 
for  the  purpose  of  facilitating  the  conduct  of  its  business,  and  the 
rule  is  therefore  not  applicable  to  carriers  by  water.^ 

Applying  this  ultimate  test,  it  is  clear  that  such  corporations  as 
hotel,  mining,  manufacturing  companies,  and  the  like,  would  have 
to  be  excluded  from  the  application  of  the  rule  ^  and  denied  in 
another.^ 

Possibly  a  definite  conception  may  be  arrived  at  by  consider- 
ing that  the  doctrine  of  preferential  claims  is  applied,  in  the 
case  of  railroad  companies,  not  solely  on  account  of  that  public 
character  which  demands  that  they  shall  be  kept  up  as  a  going, 
concern,  but  also  because,  owing  to  the  peculiar  character  of  the 
business,  there  is  a  more  than  ordinary  danger  that  their  operation 
will  be  interrupted  if  certain  back  claims  are  not  paid.  The  plant 
and  equipment  of  a  railroad,  it  is  obvious,  are  essentially  different 
from  the  plant  and  equipment  of  a  gas  company  or  a  water  com- 


covirt  in  receivers  of  insolvent  railroad 
corporations,  and  the  rights  of  the  court 
to  provide  for  the  payment  of  certain 
debts  contracted  before  or  after  the  ap- 
pointment of  a  receiver  out  of  income, 
and  if  that  is  inadequate,  out  of  the 
corpus  of  the  property.  These  cases  and 
decisions  are  the  outcome  of  the  growth 
of  railroad  enterprises  and  business  within 
a  comparatively  recent  period.  It  has 
been  held  that  under  special  circumstances 
the  court  may  direct  the  payment  of  ante- 
receivership  debts  for  labor  or  supplies 
contracted  within  a  limited  period  before 
the  insolvency,  the  adjustment  and  pay- 
ment of  traffic  balances  in  favor  of  con- 
necting roads,  and  may  direct  the  receiver 
to  operate  the  road  pending  foreclosure, 
and  to  that  end  purchase  necessary  rolling- 
stock  for  the  use  of  the  road  and  make 
repairs  and  improvements  thereon,  the 
expense  of  which  shall  be  a  charge  on  the 
property  in  priority  to  legal  liens.  (Wal- 
lace V.  Loomis  (1877),  97  U.  S,  146  ; 
Fosdick  V.  Schall  (1879),  99  U.  S.  235  ; 
Barton  v.  Barbour  (1881),  104  U.  S.  126; 
Miltenberger  v.  Logansport  Railway  Co. 
(1882),  106  U.S.  286;  Union  Trust  Co. 
V.  Soutter  (1882),  107  U.  S.  591 ;   Burn- 


ham  V.  Bowen  (1884),  111  U.  S.  776; 
Union  Trust  Co.  v.  Illinois  Midland  R. 
Co.  (1886),  117  U.  S.  434.)  It  cannot  be 
successfully  denied  that  the  decisions  in 
these  cases  vest  in  the  courts  a  very 
broad  and  comprehensive  jurisdiction  over 
insolvent  railroad  corporations  and  their 
property.  It  will  be  found  on  examining 
these  cases  that  the  jurisdiction  asserted 
by  the  court  therein  is  largely  based  upon 
the  public  character  of  railroad  corpora- 
tions, the  public  interest  in  their  con- 
tinued and  successful  operation,  the 
I)eculiar  character  and  terms  of  railroad 
mortgages,  and  upon  other  special  grounds 
not  applicable  to  ordinary  private  cor- 
porations." 

1  Bound  V.  South  Carolina  11.  Co. 
(1892),  50  Fed.  Rep.   312. 

2  Merchants'  Bank  of  Atlanta  v.  Moore 
(1895),  106  Ala.  646  ;  s.  c.  17  So.  Rep. 
705  ;  Laughlin  v.  United  States  Rolling 
Stock  Co.  (1894),  64  Fed.  Rep.  25; 
Hooper  v.  Central  Trust  Co.  (1895),  81 
Md.  559  ;  s.  c.  32  Atl.  Rep.  505,  and  the 
cases  cited  in  the  preceding  .section. 

8  Hunty.  Memphis  Gaslight  Co.  (1895), 
95  Tenn.  136  ;  s.  c.  31  S.  W.  1006. 


38 


594 


RAILWAY   BONDS   AND   MORTGAGES.        [CHAP.  XXVIII. 


pany.  The  former  is  only  valuable  in  so  far  as  it  is  kept  in  readi- 
ness to  meet  the  demands  of  a  business  which  is  one  of  constant 
change  and  flux,  dependent  to  a  large  extent  upon  a  variable  body 
of  customers.  The  latter  is  designed  to  serve  the  requirements  of 
a  business  which  would  suffer  comparatively  little  from  a  tem- 
porary stoppage,  and  this  is  all  that  is  to  be  apprehended  in  the 
case  of  either  class  of  business.  The  central  consideration,  there- 
fore, which  has  influenced  the  courts  to  exercise  this  extraordinary 
jurisdiction  in  the  case  of  railroads  is  wanting,  or,  at  all  events,  is 
very  much  less  prominent  in  the  case  of  other  corporations  which 
are  unquestionably  of  a  quasi  public  nature.  This  difference  con- 
stitutes a  perfectly  adequate  reason  for  denying  the  allowance  of 
any  preferences  except  to  the  creditors  of  railroad  companies. 

It  has  also  been  decided  that  the  doctrine  of  preferential  debts 
is  not  applicable  to  a  manufacturing  company  ;i  even  if  there  has 
been  a  diversion  of  earnings  in  favor  of  the  mortgage  creditors.^ 

It  is  not  irrelevant  to  notice  in  the  present  connection  that  the 
analogous  powers  conferred  upon  receivers  in  regard  to  borrowing 
money  on  the  security  of  the  corpus  of  the  estate  for  the  purpose 
of  keeping  the  road  in  operation  have  been  still  more  distinctly 
placed  upon  the  ground  of  the  public  interest  in  the  duties  which 
a  railroad  company  undertakes  when  it  is  organized.  (See  Chap. 
XXIX.) 

In  a  very  late  federal  case  it  was  held  that  the  doctrine  of  the 
case  of  Fosdick  v.  Schall,  99  U.  S.  235,  will  not  be  applied  in  fore- 
closure suits  against  any  other  corporations  than  railroad  com- 
panies.^ 

But  there  are  other  corporations,  the  position  of  which  with 
respect  to  the  doctrine  is,  in  the  present  state  of  the  authorities, 
somewhat  difficult  to  fix.  That  no  preference  will  be  granted  to 
back  claims  against  a  waterworks  company  is  settled,  —  a  doc- 
trine which  seems  to  involve  the  conclusion  that  the  power  to 
exercise  the  right  of  eminent  domain  is  not  a  decisive  test.^ 


1  Seventh  National  Bank  v.  Shenan- 
doah Iron  Co.  (1887J,  35  Fed.  Rep.  436. 

2  Snively  v.  Looniis  Coal  Co.  (Phajnix 
Powder  Mfg.  Co.,  Intervener),  (1895),  69 
Fed.  Hep.  204. 

In  the  last  cited  case  the  court  dis- 
tinctly took  the  ground  that  there  was  no 
public  interest  requiring  such  a  corporation 
to  he  continued  as  a  going  concern. 

8  Ford  V.  Central  Trust  Co.  (1895),  70 
Fed.  Rep.  144  ;  8.  c.  17  C.  C.  A.  31.  See 
Haima  ct  al.    v.   State  Trust   Co.   et  al. 


(1895),  70  Fed.  Rep.  2  ;  s.  c.  16  C.  C.  A. 
586. 

*  Wood  V.  Guarantee  Trust  &  Safe 
Deposit  Co.  (1888),  128  U.  S.  416.  The 
Supreme  Court  of  the  United  States  in 
this  case  is  evidently  inclined  to  hold  that 
the  doctrine  of  preferential  debts  is  appli- 
cable only  to  railroads,  though  it  was  not 
so  decided  in  explicit  terms,  and  the  case 
went  off  on  another  point.  In  Ellis  v. 
Vernon  Ice,  etc.  Co.  (1893),  86  Tex.  109, 
however,   it  was  held  that  a  waterworks 


§  601.]  PREFERRED  DEBTS.  595 

That  a  gas  company  is  on  the  same  footing  as  a  railroad  has 
been  asserted  in  one  case.^ 

§  601.  Anomalies  of  the  Doctrine  as  now  administered.  —  But 
even  if  it  is  conceded  that  the  protection  of  the  public  interests 
furnishes  a  sutKicient  ground  for  the  exercise  of  this  novel  juris- 
diction ;  that  "  the  ends  of  justice  have  been  promoted  "  by  the 
action  of  the  courts  in  paying  preferential  debts  ;  ^  that  "  there 
is  justice  in  paying  out  of  the  income  the  working-men  and  ma- 
terial-men, who  have  kept  the  road  in  use  ; "  and  that  "  their  pref- 
erence places  the  bondholders  in  no  worse  condition  than  they 
would  have  been  if  payment  had  been  made  when  the  debts  were 
contracted,"  ^  —  it  seems  fairly  open  to  question  whether  the  whole 
matter  would  not  have  been  settled  upon  a  more  satisfactory  basis 
if  its  adjustment  had  been  left  to  the  legislature.  Two  inconsist- 
encies inherent  in  the  judge-made  law  which  is  now  administered 
might  in  that  way  have  been  obviated.  In  the  first  place,  there 
seems  to  be  no  adequate  reason  why  the  courts  should  draw  the 
line  defining  preferred  debts  at  those  which  are  incurred  for 
operating  expenses,  and  refuse  to  interfere  in  those  equally  meri- 
torious cases  where  the  company  has  failed  to  pay  the  expenses  of 
construction.^  It  is  evident  that  even  where  the  company,  as  is 
commonly  the  case,  is  not  the  direct  paymaster  of  the  persons  who 
furnish  labor  and  supplies  for  building  the  road,  the  inability  of 
the  company  to  discharge  a  debt  due  to  the  contractors  who  actu- 
ally do  the  construction  work,  must  necessarily,  as  such  operations 
are  usually  conducted,  involve  the  non-payment  of  the  employees 
of  these  contractors. 

The  bondholders  get  the  advantage  of  this  labor  and  these  sup- 
plies just  as  clearly  as  they  get  the  advantage  of  the  labor  and 
supplies  furnished  while  the  road  is  in  operation.  Why  should 
the  fact  that  the  security  is  benefited  be,  in  one  case,  a  reason  for 
favoring  those  who  have  contributed  to  the  result,  and  not  in  the 
other  ?  The  actual  creation  of  the  security  ought  to  be  regarded 
as  a  work  entitling  those  who  have  participated  therein  to  as  much 
favor  as  those  who  have  contributed  to  preserve  the  security  after 
its  creation.^ 

company  was  so  far  public  as  to  justify  ^  Clark    v.    Williamsport   R.    Co.,    an 

keeping  it  up  by  the  issue  of  receivers'  unreported  case  decided   by   Mr.    Justice 

certificates,    a    ruling    which    cannot    be  Strong  while  on  the    Supreme   Bench  of 

reconciled  with  the  case  just  cited.  Pennsylvania. 

1  Reyburn     v.    Consumers'     Gas     Co.  *  See  below,  §  634. 

(1887),  29  Fed.  Rep.  561.  *  This  view  has  been  taken  in  a  recent 

2  Farmers'  Loan  &  Trust  Co.  v.  Kansas  case  by  Judge  Caldwell,  though  the  allow- 
City,  W.  &  N.  W.  R.  Co.  (1892),  53  Fed.  ance  of  debts  for  construction  was  as  a 
Rep.  182,  per  Caldwell,  J.  matter  of  fact  assented  to  by  the  trustees. 


596 


RAILWAY   BONDS   AND   MORTGAGES.       [CHAP.  XXVIII. 


In  the  second  place,  legislation  might  have  been  so  framed  as 
not  to  make  the  payment  of  these  debts  dependent  upon  the  cir- 
cumstance of  the  appointment  of  a  receiver.  If  the  claims  pre- 
ferred are  really  meritorious,  there  surely  cannot  be  instanced  a 
more  deplorable  result  of  the  separation  of  law  and  equity  than 
that  they  should  go  unpaid  simply  because  the  mortgagee  elects 
to  assert  his  rights.  Yet  such  seems  to  be  the  unquestioned  rule 
according  to  the  highest  authority.-' 

S  602.  Theory  that  Company  becomes  Agent  sub  Modo  of  Bond- 
holders, if  allowed  to  remain  in  Possession.  —  The  theory  that  the 
company,  if  allowed  to  remain  in  possession  after  default,  becomes 
the  agent  of  the  bondholders  for  the  purpose  of  contracting  debts 


Farmers'  Loan  &  Trust  Co.  v.  Kansas  City, 
W.  &  N.  W.  Ry.  Co.  (1892),  53  Fed. 
Rep.  182.  The  learned  judge  thought 
it  a  matter  for  congratulation  that  this 
anomaly  is  gradually  disappearing  through 
the  enactment  of  appropriate  legislation. 
See  the  note  appended  to  the  report  of 
this  case  for  a  list  of  the  statutes  recog- 
nizing the  meritorious  character  of  con- 
struction debts. 

In  Vermont  the  right  of  a  railroad 
company  to  mortgage  all  its  personal 
property  without  the  necessity  for  a 
change  of  possession  is  only  s*  jject  to 
the  right  of  a  creditor  to  attach  that 
property  to  secure  payment  of  a  claim 
"for  services  rendered  or  materials  fur- 
nished for  the  purpose  of  keeping  the 
road  in  repair  or  in  running  the  same." 
Poland  V.  Lamoille  Valley  Ry.  Co.  (1879), 
52  Vt.  144. 

1  Fosdick  V.  Sehall  (1879),  99  U.  S. 
235  ;  s.  c.  8  Fed.  Rei..  449.  In  Central 
Trust  Co.  V.  East  Tennessee,  Va.  &  Ga.  R. 
Co.  (1886),  30  Fed.  Rep.  895,  it  is  stated 
obUer  that  the  doctrine  of  preferential 
debts  is  applicable  to  cases  where  the 
trustee  takes  possession,  and  the  above 
decision  of  the  Su])reme  Court  of  the 
United  States,  and  Burnham  v.  Boweu 
(1884),  111  U.  S.  776;  s.  c.  17  Am.  & 
Eiig.  R.  R.  Cas.  308,  are  cited  as  authori- 
ties. This  is  certainly  an  error,  as  no 
such  doctrine  is  laid  down  in  these  cases. 
In  fact  Fosdick  v.  Sehall  is  a  distinct 
authority  against  it.  In  Burnham  v. 
Bowen  Chief  Justice  Waite  said  :  "If 
the  trustees  had  taken  possession  under 
the  mortgage,  they  would  have  been  sub- 


ject to  similar  expenses  to  do  what  the 
company,  with  their  consent  and  approba- 
tion, was  doing  for  them."  But  this  re- 
mark has  certainly  no  such  meaning  as 
that  ascribed  to  it.  The  point  does  not 
seem  to  have  been  directly  raised  in  any 
case,  but  in  Duncan  v.  Mobile  &  Ohio  R. 
Co.  (1876),  2  Woods,  542,  Judge  "Woods 
refused  to  direct  trustees  in  possession  to 
apply  the  income  to  the  payment  of  cer- 
tain floating  indebtedness,  even  though  a 
part  of  it  had  been  contracted  by  the 
company  to  pay  oiT  bonded  interest  and 
to  make  permanent  improvements,  and 
though  it  was  represented  that  a  scheme 
of  reorganization  would  be  greatly  facili- 
tated by  such  an  application  of  the  fund. 
The  latter  of  these  reasons  would  of  course 
have  had  no  weight  even  if  the  court  had 
been  considering  the  petition  of  a  receiver ; 
but  under  the  doctrine  of  Fosdick  v. 
Sehall  it  is  clear  that,  if  the  property 
had  been  in  the  hands  of  a  receiver,  the 
bondholders  would  have  been  bound  to 
submit  to  the  replacement  of  any  part  of 
the  floating  debt  which  had  been  .applied 
to  interest  or  betterments.  The  case  is 
therefore  a  distinct  authority  for  the  rule 
stated  in  the  text,  though,  as  it  was 
decided  before  the  principle  of  the  restora- 
tion of  diverted  earnings  was  clearly  for- 
mulated, its  pertinence  is  of  a  somewhat 
negative  character. 

In  Canada  the  trustees  who  go  into 
possession  cannot  be  held  liable  for  mate- 
rials furnished  or  work  done  previous  to 
their  possession  :  Wallbridge  v.  Farwell 
(1890),   18  Can.  S.  C.  1. 


§  602.] 


PREFERRED   DEBTS. 


597 


for  operating  expenses,  has  been  put  forward  in  some  cases  as  a 
reason  why  such  debts  should  be  paid  in  preference  to  the  bonds. 
It  seems  clear,  however,  that  there  must  be  something  more  than 
a  mere  failure  to  take  possession  in  order  to  raise  an  estoppel  on 
this  ground.^ 

To  produce  that  result,  the  period  during  which  the  company 
were  allowed  to  operate  the  road  must  have  been  so  considerable 
as  to  justify  the  inference  that  the  bondholders  impliedly  con- 
sented that  the  earnings  of  the  road  should  be  used  to  discharge 
such  expenses  as  are  incurred  in  a  greater  or  less  degree  for  their 
benefit.^ 


1  Blair  v.  St.  Louis,  H.  &  K.  R.  Co. 
(1884),  2-2  Fed.  Rep.  471 ;  Hiles  v.  Case 
(1880),  9  Biss.  549  ;  s.  c.  14  Fed.  Rep. 
141  ;  reported  also  suh  nom.  In  re  Dex- 
terviUe  Mfg.  &  Boom  Co.  (1880),  4  Fed. 
Kep.  87i3  ;  Skiddy  v.  Atlantic,  Miss.  & 
Ohio  R.  Co.   (1878),   3  Hughes,   320,  340. 

In  Blair  v.  St.  Louis  1!.  Co.,  supra,  the 
master  had  reported  in  favor  of  all  claims 
accruing  since  the  first  default  in  the 
payment  of  interest,  a  period  of  over  two 
years.  Judge  Brewer  thus  commented  on 
this  action  :  "  This  seems  to  jiroceed  on 
the  assumption  that  the  mortgagees,  by 
failing  to  take  action,  have  made  the 
mortgagor  company  their  agent  to  incur 
debts  ;  have  impliedly  consented  that  all 
such  debts  should  take  preference  of  their 
secured  claims.  I  do  not  think  that  this 
principle  is  sound.  There  is  no  implied 
agency  to  that  extent,  and  I  do  not  think 
that  the  rulings  of  the  Supreme  Court  are 
based  upon  any  such  doctrine.  The  idea 
which  underlies  them  I  take  to  be  this  : 
that  the  management  of  a  large  business, 
like  that  of  a  railroad  company,  cannot 
be  conducted  on  a  cash  basis.  Temporary 
credit,  in  the  nature  of  things,  is  indis- 
pensable. Its  employees  cannot  be  paid 
every  month.  It  cannot  settle  with  other 
roads  its  trafiic  balances  at  the  close  of 
eveiy  day.  Time  to  adjust  and  settle 
these  various  matters  is  indispensable. 
Because  in  the  nature  of  things  this  is 
so,  .such  temporary  credits  must  be  taken 
as  assented  to  by  the  mortgagees,  because 
both  the  mortgagees  and  the  public  are 
interested  in  keeping  up  the  road,  and  hav- 
ing it  preserved  as  a  going  concern,  and 
whatever  is  necessary  to  accomplish  this 


result  must  be  taken  as  assented  to  by  the 
mortgagees.  In  this  view,  such  temporary 
credits  accruing  prior  to  the  appointment 
of  the  receiver  must  be  recognized  by  the 
mortgagees  and  such  claims  preferred." 

2  Dow  V.  Memphis  &  Little  Rock  R. 
Co.  (1884),  20  Fed.  Rep.  260,  267,  where 
Judge  Caldwell  said,  among  other  things : 
"It  is  no  answer  to  say  the  company 
used  its  earnings  for  other  purposes.  The 
bondholders  knew  such  liabilities  must  be 
incurred  in  running  the  road.  They  had 
it  in  their  power  to  take  possession  of  the 
road  and  secure  its  earnings  to  pay  such 
liabilities.  The  class  of  persons  protected 
by  this  order  could  not  do  anything  to 
protect  themselves,  or  compel  a  different 
application  of  the  earnings.  The  misap- 
plication of  the  earnings,  if  there  was 
any,  is  not,  therefore,  to  prejudice  the 
class  of  creditors  named.  The  right  to 
require  the  payment  of  such  debts  does 
not  depend  on  whether  current  earnings 
have  been  used  to  pay  the  mortgage  debt. " 
So  also  in  Duncan  v.  Trustees  (1876),  9 
Am.  Ry.  Rep.  386  ;  3  Centr.  L.  J.  579, 
the  court  expressed  a  similar  opinion  in 
the  following  words  :  "  The  Chesapeake  & 
Ohio  R.  Co.  had  been  so  long  in  default 
that  the  right  of  the  bondholders  to  claim 
possession  was  fully  consummate,  and  this 
was  a  matter  of  common  notoriety.  It 
could  not  be  expected  that  the  employees 
all  along  the  track  of  this  road  would 
pause  amid  their  increasing  round  of  daily 
duty  to  inquire  whether  the  bondholders 
had  or  had  not  asserted  their  rights  and 
assumed  control.  It  was  enough  for  them 
to  know  that  the  service  they  were  render- 
ing was  such   service   as   any   proprietor 


598 


RAILWAY   BONDS   AND   MORTGAGES.        [CHAP.  XXVIII, 


The  whole  theory  of  an  implied  assent,  even  with  this  qualifica- 
tion, has  been  vigorously  combated  by  Judge  Jenkins  in  a  recent 
case,  as  follows  :  "  If  failure  to  take  possession  works  an  implied 
assent  that  the  earnings  should  be  applied  in  compensation  of 
casualties  in  priority  to  the  mortgage,  why  not  as  to  all  floating 
indebtedness,  to  all  improvements  upon  the  road,  and  irrespective 
of  time  ?  Why  not  say  that,  through  failure  to  take  possession, 
the  bondholders  assent  that  earnings  should  be  devoted  to  the 
payment  of  all  debts  incurred  after  default  in  the  payment  of 
interest,  and  in  priority  thereto  ?  Why  limit  such  priority  to  the 
period  of  six  months  prior  to  the  receivership  ?  If  priority  is  to 
be  predicated  upon  implied  assent  instead  of  upon  benefit  to  the 
res,  it  should  be  allowed  to  all  claims  arising  during  failure  to 
take  possession  from  which  assent  is  implied.  The  priority 
should  be  coextensive  in  point  of  time  with  the  implied  assent. 
That  logically  results  from  the  principle  bottomed  upon  implied 
assent.  Such  doctrine  is,  to  my  thinking,  a  broad  departure  from 
the  equitable  doctrine  declared  by  the  Supreme  Court,  and  would 
be  ruinous  in  its  consequences.  If  conceded,  the  entire  floating 
debt  of  a  railway  company,  occurring  after  default  in  payment  of 


would  necessarily  require,  and  they  had  a 
right  to  believe  that  all  the  ofRcers  left  in 
notorious  occupancy  of  the  property,  and 
charged  before  the  public  with  the  respon- 
sibility of  its  care  and  custodj',  were 
abundantly  authorized  to  act  for  all  whom 
it  might  concern  in  contracting  for  their 
services.  .  .  .  These  employees  had  every 
right  to  believe  that,  so  long  as  the 
bondholders  stood  aloof  without  asserting 
their  rights  to  possession,  they  were  will- 
ing to  accept  and  regard  pro  tanto  as  their 
agents  for  the  preservation  and  protection 
of  the  property  the  persons  who,  placed  in 
charge  thereof  by  their  defaulting  debtor, 
could  not,  in  good  faith  to  the  creditor  or 
the  debtor,  abandon  their  posts  or  be 
derelict,  while  they  had  them,  to  the 
trusts  which  they  imposed."  So  also  in 
Williamson's  Admin,  v.  Washington  City, 
Va.  Midi.  &Grt.  Southern  R.  Co.  (1880), 
33  Gratt.  624  ;  s.  c.  1  Am.  &  Eng.  R.  R. 
CiLS.  498,  tlie  court  considend  that  the 
fact  of  the  mortgagees  having  left  the 
company  in  possession  for  several  years, 
and  allowed  it  to  obtain  credit  upon  the 
faith  of  its  control  of  the  earnings,  fur- 
nished a  good  and  sufficient  reason  for 
requiring  the  debts  contracted  for  operat- 


ing expenses  to  be  paid  before  the  court 
would  exercise  its  discretion  in  appointing 
a  receiver.  In  Union  Trust  Co.  v.  Souther 
(1882),  107  U.  S.  591  ;  s.  c.  11  Am.  & 
Eng.  R.  R.  Gas.  707,  the  failure  of  the 
trustees  to  take  possession  for  three 
months  after  the  period  of  continued 
default  which  gave  them  that  right  was 
mentioned  among  the  circumstances  which 
may  make  an  order  to  pay  the  back  claims 
of  a  material-man  not  an  unreasonable 
exercise  of  the  discretion  of  a  court  which 
is  asked  to  appoint  a  receiver  ;  but  the 
court  does  not  take  the  position  that  the 
company  thereby  becomes  the  agent  of  the 
bondholders.  The  diversion  of  the  earn- 
ings had,  in  fact,  taken  place  with  the 
consent  of  the  bondliolders. 

In  Douglass  v.  Cline  (1877),  12  Bush 
(Ky.),  603;  18  Am.  Ry.  Rep.  273,  the 
court  lays  some  stress  upon  the  fact  that 
the  debts  for  which  a  preference  was 
claimed  were  incurred  during  a  period 
when  the  bondholders  "either  could  or 
could  not  interfere  to  protect  their  secur- 
ity." But  the  decision  was  rendered  on 
the  broader  ground  of  the  superior  equity 
of  the  claims. 


§  COS.] 


PREFERRED    DEBTS. 


599 


interest,  and  during  failure  to  take  possession,  would  necessarily 
and  logically  be  given  priority.  Vested  rights  of  property  would 
be  subjected  to  great  detriment  under  such  holding.  The  bonds 
of  American  railways  are  scattered  throughout  Europe,  and  are 
held  in  many  hands.  It  requires  much  time  to  institute  con- 
certed action  by  the  holders  after  default  in  payment  of  interest. 
Meantime  unprincipled  directors,  anxious  to  retain  possession  of 
the  road,  could  contract  indebtedness,  —  given  priority  by  such 
ruling,  —  working  ruin  to  the  mortgage  interest.  The  bondholder 
would  be  '  improved  out  of  his  estate,'  and  his  vested  rights  placed 
at  the  mercy  of  hostile  directors.  I  am  unwilling  to  assent  to 
such  doctrine.     I  do  not  understand  it  to  be  the  law."  ^ 


Article  II.  —  Priority  op  Back  Claims. 

§  603.  Povrer  of  Court  on  Appointment  of  Receiver  to  impose 
Conditions  as  to  Payment  of  Back  Claims.  —  The  pOWer  of  the 
court  to  require  the  payment  of  certain  back  claims  as  a  condi- 
tion of  granting  a  receivership  is  made  to  rest  upon  the  fact  that 
it  is  within  the  discretion  of  the  court  to  give  or  refuse  this  kind 
of  relief.  The  assumption  being  that,  for  the  reasons  already 
enlarged  upon,  the  bondholders  are  bound  in  equity  to  see  these 
claims  paid  before  they  themselves  have  any  right  to  the  income, 
it  follows  that  the  court  may  require  them  to  do  equity  in  order 
that  they  may  receive  equity .^ 


^  Farmers'  Loan  &  Trust  Co.  v.  Green 
Bay,  W.  &  S.  W.  R.  Co.  (1891),  45  Fed. 
Rep.  664 ;  s.  c.  46  Am.  &  Eng.  R.  R.  Gas. 
296.  So  also  in  Farmers'  Loan  &  Trust 
Co.  V.  Chicago  &  A.  Ry.  Co.  (1889),  42 
Fed.  Rep.  6  ;  s.  c.  8  Ry.  &  Corp.  L.  J. 
184,  Judge  Gresham  said  that  "it  does 
not  follow  that,  because  the  bondholders 
failed  to  exercise  at  an  earlier  day  their 
right  to  foreclose  for  the  principal  indebt- 
edness, and  in  that  connection  ask  for  a 
receiver,  they  thereby  constitute  the  cor- 
poration their  agent  for  all  purposes  in  the 
operation  of  the  road." 

2  Fosdick  V.  Schall  (1879),  99  U.  S.  235; 
s.  c.  7  Fed.  Rep.  449  ;  Douglass  v.  Cline 
(1877),  12  Bush  (Ky.),  808  ;  s.  c.  18  Am. 
Ry.  Rep.  273  ;  Poland  v.  Lamoille  Valley 
R.  Co.,  52  Vt.  144  ;  Williamson  v.  Wash- 
ington City,  Va.  Midi.  &  Great  Southern 
R.  Co.  (1880),  33  Gratt.  624  ;  s.  c.  1  Am. 
&  Eng.  R.  R.  Gas.  498 ;  Ellis  v.  Boston, 
Hartford,  &  Erie  R.  Co,  (1871),  107  Mass.  1. 


In  Douglass  v.  Cline,  siqjra,  Judge  Cofer 
delivered  an  elaborate  dissenting  opinion 
in  which  he  combated  vigorously,  and 
with  much  justice,  this  novel  application 
of  a  familiar  maxim  of  equity.  The 
ordinary  meaning  of  the  maxim,  it  was 
pointed  out,  was  not  that  the  plaintiff 
should  do  equity  to  some  third  party, 
but  that  he  sliould  do  equity  to  the 
defendant  in  regard  to  the  subject-matter 
of  the  litigation.  In  cases  of  any  other 
kind,  it  has  never  been  contended  that 
a  cliancellor  should  refuse  to  grant  a 
relief  against  B.,  because  the  complainant 
has  an  unfair  advantage  against  C.  The 
position  of  the  bondholders  is,  however, 
really  much  stronger  than  this,  for  accord- 
ing to  the  principles  of  equity,  as  usually 
administered,  it  cannot  be  maintained  that 
in  seeking  to  secure  all  the  earnings  from 
the  time  the  default  of  the  company  gives 
them  the  right  to  foreclose,  they  are  taking 
an  unfair  advantage  of  any  one. 


600  RAILWAY   BONDS   AND   MORTGAGES.        [CHAP.  XXVIII. 

This  power  of  the  court  does  not  depend  on  whether  current 
earnings  have  or  have  not  been  used  to  pay  interest,  or  to  increase 
the  value  of  the  property.^ 

§  604.  Limits  of  Discretionary  Power  of  the  Court  to  impose 
Conditions  as  to  Payment  of  Back  Claims.  —  It  is  not  to  be  ex- 
pected that  a  standard  so  vague  as  the  discretion  of  the  court 
will  be  applied  with  entire  uniformity  of  results  to  the  determi- 
nation of  the  question,  what  back  claims  may  properly  be  pro- 
vided for  in  an  order  of  appointment  of  a  receiver.  Some  courts 
have  gone  so  far  as  to  extort  the  assent  of  the  bondholders  to 
schemes  of  liquidating  antecedent  debts,  which  amount  to  giving 
all  the  general  creditors  a  prior  claim  upon  the  income  of  the 
receivership.  This  seems  an  unwarrantable  exercise  of  judicial 
discretion,  and  the  Supreme  Court  of  the  United  States  has,  in  a 
recent  case,  animadverted  in  severe  terms  upon  such  abuse  of 
power  :  "  The  appointment  of  a  receiver  vests  in  the  court  no 
absolute  control  over  the  property,  and  no  general  authority  to 
displace  vested  contract  liens.  Because  in  a  few  specified  and 
limited  cases  this  court  has  declared  that  unsecured  claims  were 
entitled  to  priority  over  mortgage  debts,  an  idea  seems  to  have 
obtained  that  a  court  appointing  a  receiver  acquires  power  to 
give  such  preference  to  any  general  and  unsecured  claims.  It 
has  been  assumed  that  a  court  appointing  a  receiver  could  right- 
fully burden  the  mortgaged  property  for  the  payment  of  any  un- 
secured indebtedness.  Indeed,  we  are  advised  that  some  courts 
have  made  the  appointment  of  a  receiver  conditional  upon  the 
payment  of  all  unsecured  indebtedness  in  preference  to  the  mort- 
gage liens  sought  to  be  enforced.  Can  anything  be  conceived 
which  more  thoroughly  destroys  the  sacredness  of  contract  obli- 
gations ?  One  holding  a  mortgage  debt  upon  a  railroad  has  the 
same  right  to  demand  and  expect  of  the  court  respect  for  his 
vested  and  contracted  priority  as  the  holder  of  a  mortgage  on  a 
farm  or  lot.  So,  when  a  court  appoints  a  receiver  of  railroad 
property,  it  has  no  right  to  make  that  receivership  conditional  on 
the  payment  of  other  than  those  few  unsecured  claims  which,  by 
the  rulings  of  this  court,  have  been  declared  to  have  an  equitable 
priority.  No  one  is  bound  to  sell  to  a  railroad  company,  or  to 
work  for  it ;  and  whoever  has  dealings  with  a  company  whose 
property  is  mortgaged  must  be  assumed  to  liave  dealt  with  it  on 
the  faith  of  its  j)crsonal  responsibility,  and  not  in  expectation  of 
subsequently  displacing  the  priority  of  the  mortgage  liens.  It  is 
the  exception  and  not  the  rule  that  such  priority  of  liens  can  be 

1  Dow  V.  Meiiii.liis  &  Little  Kock  K.  Co.  (1884),  20  Fed.  llep.  260. 


§§  605,  606.]  PREFERRED  DEBTS.  601 

displaced.  We  emphasize  this  fact  of  the  sacredness  of  contract 
liens,  for  the  reason  that  there  seems  to  be  growing  an  idea  that 
tliQ  Chancellor,  in  the  exercise  of  his  equitable  powers,  has  un- 
limited discretion  in  this  matter  of  the  displacement  of  vested 
liens."  1 

§  605.  Claimants  in  Order  of  Appointment  not  invested  -with 
Absolute  Right  as  against  Bondholders.  —  An  order  appointing  a 
receiver  does  not  vest  in  the  claimants  coming  within  its  terms 
an  absolute  right  as  against  the  security  holders.  Its  terms  are 
a  protection  to  the  receiver  himself ;  and  what  he  does  and  pays 
within  those  terms  is  thereafter  beyond  the  challenge  of  any- 
party  interested  in  the  property.  But  when  he  has  not  paid  a 
claim  which  it  is  alleged  comes  within  the  terms  of  the  order, 
and  the  question  is  presented  to  the  court  as  to  the  liability  of 
the  property  for  the  claim,  the  court  is  not  foreclosed  by  the 
order,  but  may  determine  the  extent  of  liability  of  the  property 
to  such  claim,  and  what  its  rights  of  priority  may  be.^ 

§  606.  Upon  whom  Conditions  of  Order  are  binding.  —  Condi- 
tions imposed  as  to  the  discharge  of  back  claims  are  binding  not 
only  on  the  party  who  asks  for  the  appointment  of  the  receiver, 
and  accepts  it  on  the  terms  laid  down,  but  also  on  any  one  who 
may  afterwards  come  into  the  litigation.^ 

As  to  any  particular  claim,  the  order  is  conclusive  where  all 


1  Kneeland    v.    American     Loan    Co.  Midland  Ry.  Co.  (1886),  117  U.  S.   434  ; 

(1890),  136  U.  S.  89 ;  43  Am.  &  Eng.  R.  R.  s.  c.  25  Am.  &  Eng.  R.  R.  Cas.  560. 
Cas.  519.     So  far  as  regards  the  subject-  ^  Louisville,  Evansville,  &  St.  Louis  R. 

matter,  the  proper  limits  of  a  chancellor's  Co.  v.  Wilson  (1891),  138  U.  S.  501. 
discretion    in    requiring   the   payment   of  ^  Calhoun  v.  St.  Louis  &  S.  W.  Ry.  Co. 

back  claims  are  probably  indicated  with  (1880),  14  Fed.  Rep.   9,   10.     The   court 

sufficient  accuracy  in  the  following  brief  said  :  "  Parties  in  court  at   the  time  are 

but  comprehensive  order,  issued  in  one  of  certainly  bound  by  an  order  made  when 

the  cases:    "It   is    further    ordered,   ad-  the  court  took  jurisdiction  of  the  case,  and 

judged,  and  decreed  that  the  said  receiver,  all  coming  into  the  litigation  afterwards 

out  of  the  income  that  shall  come  into  his  must  be  considered  as  coming  subject  to 

hands  from  the  operation  of  the  said  rail-  the  policy  which  had  been  prescribed  by 

road  or  otherwise,  do  proceed  to  pay  all  the  court  in  relation   to  the  payment  of 

just  claims  and  accounts  for  labor,  mate-  the  labor  and  supply  claims,  and  certainly 

rial,  supplies,  salaries  of  officers  and  wages  subject  to  the  order  as  modified  by  the 

of  employees,  that  may  have  been  earned  court  at  the  instance  of   the  first  mort- 

or  furnished  within  six  months  prior  to"  gagees.     Then  it  follows  that,  under  the 

a   specific    date.     See    the    statement    of  rule  in   Fosdick  v.   Schall,  the   condition 

facts  in  Louisville,  Evansville,  &  St.  Louis  imposed  upon  the  property  should  adhero 

R.  Co.  V.  Wilson  (1891),  138  U.  S.   501.  to  it  during  the  progress  of  the  litigation, 

A  more  lengthy  example  of  an  order  of  and  all  claims  coming  within  the  terms  of 

appointment  providing  for  the  payment  of  the  order  of  the  court  should  be  paid  ia 

back  claims  will  be  found  in  the  re])ort  of  the  manner  there  pointed  out." 
the  case  of  Union  Trust  Co.  v.  Illinois 


602  RAILWAY   BONDS   AND   MORTGAGES.         [CHAP.  XXVIII. 

the  parties  accept  it,  whether  or  not  the  court  had  the  power  to 
require  its  payment  in  the  first  instance.^ 

§  607.  Back  Claims  to  be  preferred  need  not  be  particularized 
in  the  Order.  —  It  is  not  always  possible  to  determine  before  the 
receiver  is  appointed  what  claims  are  in  equity  paramount  to  the 
mortgage,  and  they  need  not  be  precisely  specified  in  the  order  of 
appointment.  The  receiver  may  be  directed  to  pay  such  claims 
as  the  master  shall  report  to  be  equitably  entitled  to  priority .^ 

§  608.  Limits  of  the  Power  to  prefer  Unsecured  Debts  when  no 
Provision  is  made  for  the  Payment  in  Order  appointing  a  Receiver.  — 
The  decision  in  Fosdick  v.  Schall  left  one  important  point  in  an 
unsettled  condition,  as  the  court  did  not  express  any  opinion  as 
to  whether  back  claims  could  be  enforced  in  those  cases  in  which 
no  order  had  been  made  for  their  payment,  when  the  receiver  was 
appointed,  and  there  was  no  proof  of  diversion.  This  question 
was  partially  resolved  in  Miltenberger  v.  Logansport  Ry.  Co.,^  in 
which  it  was  held  that  arrears  of  wages  and  sums  due  to  connect- 
ing lines  for  which  no  provision  had  been  made  in  the  order  of 
appointment,  might  be  paid,wliere  the  case  was  brought  by  special 
circumstances  within  the  principle  which  regulates  the  payment  of 
claims  arising  during  a  receivership.  Circumstances  justifying 
such  a  payment  were  held  to  exist  if  it  was  apparently  necessary 
for  the  purpose  of  keeping  the  road  in  operation,  or,  in  other 
words,  if  the  protedio.i  and  preservation  of  the  property  as  a 
"  going  concern  "  required  it. 

In  Burnham  v.  Bowen  ^  this  circumscribed  doctrine  was  ex- 


1  Union  Trust  Co.  v.  Atchison,  T.  &  ployees  no  longer  in  the  service  of  the  com- 
S.  F.  R.  Co.  (Madden,  Intervener),  (1895),  pany  the  priority  of  the  mortgage  was 
42  Pac.  89.  strictly    upheld,    the    great    hardship    of 

2  Blair  v.  St.  Louis  H.  &  K.  R.  Co.  many  of  the  cases  being  at  the  same  time 
(1884),  22  Fed.  Rep.  471,  474.  conceded. 

8  186    U.    S.    286    (1882).     A   similar  *  111  U.  S.  776;  s.  c.  17  Am.  &  Eng. 

conclusion  had  previously  been  arrived  at  R.  R.  Cas.  (1884).     In  this  case  the  Cir- 

in  Skiddy  v.   Athmtic,   Miss.  &   Oliio  R.  cuit  Court  had   used   the   income  of  the 

Co.  (1878),  3   Huglies,   320,  where,   upon  receivership  to  pay  the  fixed  prior  charges 

the  receiver's  representing  that    the  pay-  on    the    mortgaged    property,    and    thus 

ment  of  certain  back  claims  for  the  wages  increase  the  security  of  the  bondholders, 

of  persons  still  in  the  employment  of  the  A  decree  of   strict  foreclosure   was   then 

company  was  necessary  for  the  safe  and  rendered,  the  rights  of  all  intei'veners,  of 

successful  operation  of  the  road,  and  that  whom  Bowen  was  one,  being  saved,  and 

he  could  not  be  responsible  for  the  conse-  the  case  continued  for  the  final  determina- 

quencfts  of  a  refusal  of  it  by  the  court,  an  tion  of  all  such  {jucstions  as  the  one  under 

order  was  made  for  the  payment  of  arrears  discussion.     The  court  held  that,  "  as  the 

for  eight  months,  although  no  conditions  diversion  of  the  fund  by  the  receiver  cre- 

were  inifiosed  at  the  aiipointincnt  of  the  ated  in  equity  a  charge  on  the  property  as 

receiver,  but  as  to  the  back  claims  of  em-  security   for   the    restoration,    the    mort- 


§  608.]  PREFERRED  DEBTS.  603 

panded,  and  the  general  rule  laid  down  tliat,  even  if  no  special 
provision  has  been  made  for  the  payment  of  operating  expenses 
in  the  order  appointing  the  receiver,  a  court  of  chancery  when  it 
takes  jjossession  of  mortgaged  railroad,  and  thus  deprives  the 
company  of  the  power  of  receiving  any  further  earnings,  ought  to 
do  what  the  company  would  have  been  bound  to  do,  if  it  had  re- 
mained in  possession  ;  that  is  to  say,  "  pay  out  of  what  it  receives 
from  the  earnings  all  the  debts  which,  in  equity  and  good  con- 
science, considering  the  character  of  the  business,  arc  chargeable 
upon  such  earnings."  The  result  of  this  decision,  therefore,  is 
that  debts  of  this  class  are  an  absolute  charge  in  equity  on  the 
continuing  income,  as  well  that  which  comes  in  the  hands  of 
the  court  after  the  receiver  is  appointed  as  that  which  is  collected 
by  the  comj^any  itself  prior  to  such  appointment,  and  that  their 
payment  may  be  enforced  at  any  stage  of  the  litigation,  provided 
the  court  has  control  of  the  subject-matter. 

In  one  recent  case  it  has  been  ruled  that  preference  cannot  be 
accorded  to  a  claim  as  to  the  corpus  of  the  property,  w^here  no 
order  has  been  made  for  its  payment  at  the  time  of  the  receiver's 
appointment.^ 

In  another  it  has  been  held  that,  under  such  circumstances,  a 
claim  cannot  be  made  a  charge  either  on  the  corpus  or  earnings.^ 

gagees,  having  elected  to  take  the  property  tended  doctrine  of  this  case  is,  however, 

under  a  decree  of  strict  foreclosure,  took  clearly  within  the  principle  of  Burnham 

it  subject  to  the  charge  in  favor  of  the  v.  Bowen,  supra.     To  the  same  effect  see 

current  debt  creditor  whose  money  they  Central  Trust  Co.  v.  St.  Louis,  A.  &  T.  R. 

had  got."     The  point  was  also  raised  in  Co.  (1890),    41    Fed.   Rep.  551  ;  Farmers' 

another  case  decided  in  a  Circuit  Court  Loan   &  Trust    Co.   v.   Kansas   City,    W. 

about  the  same  time  as  Burnham  u.  Bowen,  &    N.    W.    R.    Co.    (1892),  53   Fed.  Eep. 

and  Judge  Brewer  expressly  rejected  the  182. 

contention  of  counsel,  that  no  unsecured  ^  Cutting  v.  Tavares,  0.  &  A.  R.  Co. 
claims  can  be  preferred  to  the  mortgage,  (Florida  Cent.  &  P.  R.  Co.  et  al.,  Liter- 
unless  there  has  been  either  a  diversion  of  veners),  (1894;,  61  Fed.  Rep.  150 ;  s.  c.  9 
earnings,  or  the  court  has  required  their  C.  C.  A.  40  ;  61  Fed.  Rep.  15. 
payment  as  a  condition  of  appointing  a  ^  Central  Trust  Co.  v.  Chattanooga  & 
receiver.  Blair  v.  St.  Louis,  H.  &  K.  R.  Southern  R.  Co.  (1895),  69  Fed.  Rep.  295, 
Co.  (1884),  22  Fed.  Rep.  471.  There  it  following  the  ruling  of  the  Court  of  Ap- 
was  held,  on  the  authority  of  Miltenberger  peals  in  the  case  last  cited. 
V.  Logansjiort  Ry.  Co.,  supra,  that  certain  Holders  of  debentures  charging  all  the 
labor  and  supply  claims  might  be  pre-  property  of  the  company  as  a  floating  se- 
ferred.  But  the  grounds  on  which  that  curity  held  preferred  to  subsequent  credit- 
case  was  decided  were,  as  we  have  seen,  ors  in  a  winding  up.  /?«•  re  Opei'a  (Lim.), 
quite  special,  and  it  can  scarcely  be  said  (1891),  3  Ch.  Div.  260;  In  re  Standard 
to  be  an  authority  for  allowing  back  Mfg.  Co.  (1891),  1  Ch.  627,  640,  641  ;  Ee 
claims,  not  provided  for  in  the  order  of  Pyle  Works,  44  Ch.  Div.  534  ;  Ee  General 
appointment,  where  there  is  no  averment  South  American  Co.,  2  Ch.  Div.  337  ;  Be 
that  their  discharge  is  necessary  for  the  Bell  (1886),  34  W.  R.  363.  They  also 
preservation  of  the  estate.     The  more  ex-  have  priority  over  general  creditors.     lie 


604  RAILWAY   BONDS    AND    MORTGAGES.        [CHAP.  XXVIII. 

The  only  precedent  cited  by  the  court  in  the  former  case  was 
Fosdick  V.  Schall,  which  does  not  sustain  any  such  doctrine  as 
that  attributed  to  it,  the  fact  being,  as  already  remarked,  that  the 
Supreme  Court  of  the  United  States  did  not  express  any  opinion 
whatever  as  to  the  rights  of  the  parties,  where  no  order  embrac- 
ing a  claim  has  been  made,  except  in  the  special  case  where  a 
diversion  of  earnings  is  shown.  These  cases,  so  far  as  they  are 
intended  to  lay  down  a  general  doctrine,  are,  it  is  evident,  directly 
opposed  to  Miltenberger  v.  Logansport  Ry.  Co.  and  Burnham  v. 
Bowen,  supra,  which,  without  in  any  way  contradicting  Fosdick  v. 
Schall,  have  greatly  expanded  the  scope  of  that  decision.  The 
Supreme  Court  is  clearly  committed  to  the  doctrine  that,  within 
certain  fixed  limits,  back  claims  not  provided  for  in  the  order  of 
appointment  may  be  made  a  charge  either  on  the  income  or  (in 
extreme  cases)  on  the  corpus.  In  fact  it  is  easy  to  see  that  any 
other  position  would  be  wholly  illogical,  and  supported  by  no 
more  valid  ground  than  a  sort  of  technical  estoppel.  Obviously, 
if  a  court  has  the  right  to  refuse  to  appoint  a  receiver  unless  cer- 
tain back  claims  are  paid,  it  must  also  have  a  right  to  refuse  to 
continue  the  receivership  for  the  same  reason.  The  narrow  theory 
that,  whatever  is  settled  in  the  order  of  appointment  is  res  judi- 
cata would  be  singularly  out  of  keeping  with  the  central  principles 
underlying  this  extraordinary  jurisdiction.  If  the  court  is  to  dis- 
charge effectually  its  function  of  seeing  that  the  public  interests 
do  not  suffer  through  the  stoppage  of  the  road,  it  must  retain  the 
capacity  for  postponing  the  claims  of  the  bondholders  at  any  stage 
of  the  proceedings,  where  the  exigency  requires  it.  To  what 
extent  those  claims  shall  be  postponed,  whether  as  regards  the 
income  only  or  the  corpus,  is  a  question  which,  as  was  said  in 
Miltenberger  v.  Logansport  Ry.,  supra,  must  be  decided  according 
to  the  circumstances  of  the  case.  If  it  is  simply  a  matter  of  equity 
and  good  conscience,  the  debt  will  be  charged  on  the  income  only. 
If  non-payment  of  the  debt  endanger  the  public  interests,  the  court 
will  not  hesitate  to  make  the  corpus  of  the  estate  responsible  for 
the  satisfaction  of  the  creditors'  demand. 

§  609.  Assignee  of  Preferred  Debt  entitled  to  Preference.  —  The 
assignee  of  a  claim  covered  by  an  order  appointing  a  receiver  is 
as  much  entitled  to  its  benefit  as  the  original  holder.^ 

Anglo-American  Leather  Clotli  Co.  (1879),  ^  Union  Trust  Co.   v.   Walker  (1884), 

42  L.  T.  R.  507.  107  U.  S.  596.     '^  Tiieso  creditors,"  said 

As  to  priority  of  a  mortgagee  under  a  the   court,    "are  -paid  not   because  they 

renewal  of  his  mortgage  to  unsecured  crcd-  have  in  law  a  lien  on  tlie  mortgaged  prop- 

itors,  see  Jlf  IJndi-rhanks  Mills  Cotton  Co.  erty  or  the  income,  but  because  in  equity 

(1868),  31  Ch.  Div.  226.  the  earnings  of  the  company  constitute  a 


§§  610-612.]  PREFERRED    DEBTS.  605 

§010.  Debts  ■wrill  not  be  preferred  merely  because  Bondholder 
has  promised  Priority,  —  The  promise  oi'  a  bondholder  to  see  that 
a  claim  lor  personal  services  in  making  negotiations  for  a  railroad, 
which  is  not  shown  to  be  of  a  character  that  gives  it  a  preference 
over  the  mortgage,  shall  be  paid  before  the  bonds,  is  without  con- 
sideration, and  not  enforceable.^ 

§  Gil,  Judgment  of  another  Court,  •wrhen  not  conclusive  as  to 
whether   a  Claim   is   to   be   preferred.  —  Since  the  priority  of   other 

claims  can  only  be  conceded  at  the  expense  of  the  bondholders,  a 
judgment  for  a  debt  rendered  in  an  action  to  which  neither  they 
themselves  nor  the  receiver  in  their  behalf  are  made  parties  is 
not  admissible  in  another  court,  to  establish  that  the  debt  is  an 
equitable  charge  on  the  mortgaged  property  superior  in  dignity  to 
the  mortgage.2 

§  612.  Back  Claims  not  ordinarily  Lien  on  Corpus.  —  That  back 
claims  will  not  ordinarily  be  made  a  charge  upon  the  corpus  of  the 
estate  follows  as  a  necessary  deduction  from  the  principle  that 
"  the  mere  fact  of  the  appointment  of  a  receiver  to  preserve  the 
pro])erty  pendente  lite  does  not  change  the  character  of  a  debt." 
Such  an  appointment  does  not  confer  the  rank  of  a  secured  claim 
upon  an  unsecured  claim  for  supplies,^  or  upon  an  unsecured  claim 
for  rent,*  or  upon  an  unsecured  claim  for  arrears  of  salary.^ 

fund    for   the    payment   of    the   expenses  inter  alios  acta,  and  that  the  most  that 

which  their  claims  represent,  before  an}'  the    claimant    was    entitled    to,    on    the 

income  arises  which  ought  to  be  applied  strength  of  the  judgment,  was  a  general 

to  the  discharge  of  the  mortgage  debt,  unsecured  allowance  against  the  com])any. 
Under  such  circumstances  it  is  a  matter  ^  United  States  Trust  Co.  f.  New  York, 

of  no  importance  that  the  original  cred-  W.  S.  &  B.  R.   Co.  (1885),   25  Fed.  Rep. 

itor  has  parted  with  the  claim.     The  right  800 ;  Blair  v.   St.  Louis,  H.  &  K.  R.  Co, 

is  one  that  attaches  to  the  debt,  and  not  to  (1884),  22  Fed.  Rep.  471.     In  the  first  of 

the  person  of  the  original  creditor.     Con-  these  cases  the  income  of  the  receivership 

sequently  the  right  passes  with  an  assign-  had  not  been  sufficient  to  pay  the  expenses 

ment  of  the  debt."     .s.  p.  Northern  Pacific  of  operation,  and  the  court  said  that,  under 

R.  Co.  V.  Lamont  (1894),  69  Fed.  Rep.  23.  these  circumstances,  the  application  of  the 

1  Farmers'  Loan  &  Trust  Co.  v.  Pine  creditor  to  enforce  the  payment  of  a  claim 
Bluff,  M.  &  N.  0.  Ry.  Co.  (Ark.,  1893),  not  provided  for  in  the  order  appointing 
21  S.  W.  Rep.  652.  tlie  receiver  was  substantially  a  reipiest  to 

2  Wabash,  St.  Louis,  &  Pac.  Ry.  Co.  v.  charge  the  corpits  of  the  estate. 

Central  T.  Co.  (1887),   33  Fed.  Rep.  238.  *  Central    Trust   Co.    v.    Wabash,    St. 

There  a  creditor  intervened  in  a  federal  Louis,  &  Pac.  R.  Co.  (1888),  34  Fed.  Rep. 

court  with  a  claim  alleged  to  be  prior  to  259,   the  court  saying  that  receivers,   al- 

the  mortgage  lien,  but,   before  any  action  though   they  are  liable   for  rent,  if  they 

was  taken,  he  was  allowed  to  dismiss  his  elect  to  adopt  a  lease  (see  Chap.  XXXL) 

petition  without  prejudice.     Thereafter  he  due  thereunder,  are  not  bound  to  such  an 

obtained   in    the    State    court   a   consent  extent  that  the  lien  of  the  mortgage  upon 

judgment  against   the   company  only  on  the  corpics  of  the  property  is  to  be  post- 

the  same  claim.     It  was   held   that  this  poned  to  the  claim  for  that  rent, 

proceeding  was,   as  regards  the  receiver,  ^  National  Bank  of  Augusta  v.  Caro- 

then    representing    the    bondholders,    res  Una,   K.  &  W,  R.   Co.   (1895),   63  Fed. 


606  RAILWAY   BONDS    AND   MORTGAGES^        [CHAP.  XXVIII. 

To  justify  making  a  past-due  claim  a  charge  on  the  corpus,  the 
existence  of  some  special  equity  must  be  affirmatively  shown.^ 

§  613.  Back  Claims  Lien  on  Corpus  Twhere  Diversion  of  Earnings 
is  established.  — That  the  earnings  have  been  diverted  by  the  com- 
pany to  the  payment  of  interest  or  to  permanent  improvements  of 
the  estate  is  a  well-recognized  ground  for  declaring  preferential 
debts  to  be  a  lien  on  the  corpus,  if  the  current  income  of  the 
receivership  is  insufficient  to  discharge  them.^ 

This  rule  rests,  as  we  have  seen  in  a  former  section,  upon  the 
principle  that  the  earnings  constitute  a  current  debt  fund,  which 
cannot  be  legitimately  applied  to  any  claims  until  the  operating 
expenses  are  fully  paid.^ 

In  other  words,  the  income  must  be  first  devoted  to  the  expenses 
of  producing  the  income.* 

If  there  has  been  a  diversion  of  the  earnings  to  the  payment  of 
interest,  the  right  of  the  preferential  creditors  to  demand  restitu- 
tion is  not  defeated  by  the  fact  that  another  portion  of  the  earnings 
has  been  misapplied  to  the  payment  of  a  floating  debt  of  previous 
years,  which  was  entitled  to  no  priority.^ 

The  bondholders  are  not  absolved  from  the  obligation  of  restor- 
ing diverted  earnings,  for  the  reason  that  the  mortgage  gives,  in 
terms,  a  lien  on  the  profits  and  income  ;  for,  as  we  have  seen  in  a 
preceding  chapter,  until  possession  of  the  mortgaged  premises  is 
actually  taken,  or  something  equivalent  done,  the  whole  earnings 
belong  to  the  company,  and  are  subject  to  its  control.^  (As  to 
the  restoration  of  earnings  diverted  during  the  receivership,  see 
Chapter  XXXI.) 

§  614.  Payments  of  Interest,  when  not  Diversion  of  Earnings.  — 
Payments  of  interest  are  not  a  diversion  of  earnings  as  regards 
a  creditor  to  whom  there  is  nothing  due  at  the  time  those  pay- 
Rep.  25.  Ill  this  case  the  earnings  of  the  St.  Louis,  A.  &  T.  H.  R.  Co.  v.  Cleveland, 
road  were  insufficient  to  pay  even  the  re-  C.  C.  &  1.  R.  Co.  (1888),  125  U.  S.  658  ; 
ceiver's  compensation,  so  that  the  reasons  s.  c.  33  Am.  &  Eng.  R.  R.  Cas.  16. 
against  granting  the  petition  were  stronger  ^  Fosdick  v.  Schall,  supra,  §  597. 

than  usual.  *  Wood    v.    Guarantee    Trust    &   Safe 

1  National  Bank  of  Augusta  v.  Caro-  Deporsit  Co.  (1888),  128  U.S.  416  ;  s.  c.  9 
lina,   K.   &  W.    R.  Co.   (1895),    63  Fed.     Sup.  Ct.  Rep.  131. 

Rep.   25.  ^  Williamson  v.  Wa.'^hington  City,  Va. 

2  Fosdick  V.  Schall  (1879),  99  U.  S.  JIdl.  &  Grt.  Southern  R.  Co.  (1880),  33 
235;  Union  Trust  Co.  i-.  Souther  (1882),  Gratt.  (Va.)  624;  s.  c.  1  Am.  &  Eng. 
107  U.  S.  59  ;  s.  c.   11  Am.  &  Eng.  R.  K.  K.  R.   Cas.  498. 

Cas.  707  ;   Farmers'  Loan  &  Trust  Co.  v.  ^  See  the  remarks  of  Justice  Harlan  in 

Vicksl.nrg  &  Meridian  R.  Co.  (1888),  33  Thomas  v.   Peoria  &  R.  I.  R.  Co.  (1888), 

Fed.   Rep.    778  ;  Calhoun   v.  St.  Louis  &  36  Fed.    Rep.   808  ;  s.  c.   36  Am.  &  Eng. 

S.  W.  Ry.  Co.  (1881),  14  Fed.  Rej).  9,  10  ;  R.  R.  Caa.  381. 
Buriiham  v.  Bowcii  (188-1),  111  U.  S.  776; 


§  615.]  PREFERRED  DEBTS.  607 

ments  are  made.  A  lessor  of  an  insolvent  road,  for  example, 
cannot  claim  the  restoration  of  earnings  thus  used,  where  the 
evidence  shows  that  the  rent  was  not  in  arrear  when  the  bond- 
holders were  paid  their  interest.  A  solvent  road  is  not  bound  to 
accumulate  income  with  a  view  to  possible  future  inability  to  [tuy 
rent  or  other  operating  expenses.^ 

Nor  can  the  payment  of  interest  be  treated  as  a  diversion  where 
the  mortgagees  have  themselves  advanced,  for  the  purpose  of 
keeping  up  the  road,  more  than  the  amount  thus  paid.^ 

Nor  is  there  any  diversion  where  the  money  applied  to  the  pay- 
ment of  interest  constitutes  a  portion  of  the  funds  of  the  cor- 
poration which  has  not  yet  become  a  "  going  concern,"  and  which, 
tiierefore,  has  no  income  to  use  for  any  purpose.^ 

§  615.  Back  Claims  may  be  made  Lien  on  Corpus  if  Preserva- 
tion of  Property  requires.  —  The  impossibility  or  extreme  difficulty 
of  preserving  the  proj)erty  in  any  other  way  will,  in  some  special 
cases,  constitute  a  sufficient  reason  for  making  back  claims  a  lien 
on  the  corpus,  even  if  no  diversion  of  earnings  is  shown.^  But 
this  should  not  be  done  without  giving  the  adverse  parties  an 
opportunity  to  be  heard.^ 

It  is  only  in  the  case  of  railroads  that  payment  of  back  claims 
can  be  ordered  on  this  ground.  A  debt  created  by  the  receiver 
of  the  property  of  an  insolvent  hotel  company  to  pay  off  arrears 
of  wages,  on  the  ground  that,  unless  they  are  so  paid,  there  is  a 
serious  risk  that  the  property  will  be  destroyed  or  seriously  dam- 
aged by   riotous  employees,  is  not  an  expense  incuri'ed  for  the 

1  St.  Louis,  Alton,  &  Teire  Haute  R.  as  to  the  wages  of  employees  during  the 

Co.  V.  Cleveland,  C.  C.  &  I.  R.  Co.  (1888),  six  months  immediately  preceding  the  re- 

125   U.   S.   658  ;    s.    c.   8   Sup.    Ct.  Rep.  ceiver's  appointment,  in  Union  Trust  Co. 

1011.  V.   Illinois  Midland   Ry.    Co.    (1886),  117 

^  Ibid.  U.  S.  434  ;  and  as  to  freight  balances,  in 

3  Wood    V.    Guarantee    Trust   &   Safe  Finance  Co.  of  Pennsylvania  v.  Charleston, 

Deposit  Co.  (1888),  128  U.  S.  416  ;  s.  c.  9  C.  &  C.   R.  Co.   (1895),   10  C.  C.  A.  323  ; 

Sup.  Ct.  Rep.  131.  62  Fed.  Rep.  205  ;  61  Am.  &  Eng.  R.  R. 

*  Miltenberger  v.  Logansport  Ry.  Co.  Cas.  710.  In  this  last  case  the  issue  of 
(1883),  106  U.  S.  286  ;  s.  c.  12  Am.  &  first-lien  certificates  to  meet  these,  as  well 
Eng.  R.  R.  Cas.  464.  (For  an  extract  as  some  other  obligations,  had  been  au- 
from  this  case  showing  the  considerations  thorized,  and  the  trustee  had  raised  no 
which  influenced  the  court  in  upholding  objection.  The  circumstances,  therefore, 
these  allowances,  see  ante. )  There  arrears  raised  a  sort  of  estoppel  against  the  bond- 
of  wages  due  to  operatives  within  ninety  holders,  but  the  general  principle  is  ap- 
days,  and  amounts  due  to  connecting  lines  proved  unreservedly  by  the  court, 
for  materials  and  repairs,  and  for  ticket  ^  Union  Trust  Co.  v.  Illinois  Midland 
and  freight  balances,  were  held  to  have  Ry.  Co.  (1886),  117  U.  S.  434.  See  fur- 
been  properly  discharged  out  of  the  pro-  ther  as  to  notice  to  parties  in  interest, 
ceeds  of  the  sale  of  the  corpus.  Chap.   XXXI. 

This  case  was  approved  and  followed, 


608  RAILWAY    BONDS    AND    MORTGAGES.        [CHAP.  XXVIII. 

preservation  of  the  property,  and  cannot  be  made  a  prior  lien 
thereon  without  the  consent  of  the  mortgage  creditors.  "  It 
clearly  onght  not  to  have  been  assumed,"  said  the  court,  "  that 
the  ordinary  agencies  of  the  law  were  inadequate  to  the  situation, 
or  that  the  law,  operating  through  its  regularly  appointed  chan- 
nels, was  impotent  to  control  it."  ^ 

§  616.  Assumption  of  Floating  Indebtedness  by  Purchasers  does 
not  create  Lien,  etc.  —  The  assumption  by  a  purchasing  company 
of  the  floating  indebtedness  of  two  other  companies  does  not 
create  a  lien  upon  the  property  transferred  in  favor  of  the  cred- 
itors to  whom  that  indebtedness  is  owing.  By  such  a  transaction 
those  creditors  merely  acquire  the  right  of  looking  for  payment 
to  the  purchasing  as  well  as  to  the  vendor  companies.^ 

§  617.  Back  Claims  not  Lien  on  Corpus,  because  Income  of 
Receivership  insufficient  to  pay  them.  —  The  fact  that  the  income 
of  the  receivership  is  insufficient  to  discharge  the  back  claims 
specified  in  the  order  of  appointment  will  not  justify  the  court  in 
providing  for  their  payment  by  declaring  them  to  be  a  lien  on  the 
corpus.  As  was  said  in  Burnham  v.  Bowen,  "We  do  not  now 
hold,  any  more  than  we  did  in  Fosdick  v.  Schall,  that  the  income 
of  a  railroad  in  the  hands  of  a  receiver  can  be  taken  away  from 
the  mortgage  creditors  and  used  to  pay  the  general  creditors  of 
the  road.  All  we  then  decided,  and  all  we  now  decide,  is,  that  if 
current  earnings  are  used  for  tlie  benefit  of  mortgage  creditors 
before  current  expenses  are  paid,  the  mortgage  security  is  charge- 
able in  equity  with  the  restoration  of  the  fund  which  has  thus 
been  improperly  api)lied  to  tlieir  use."  ^ 

§  618.  Preferential  Debts  of  any  Part  of  Composite  System  a 
Charge  on  whole  Property.  —  Where  the  receiver  is  appointed  in 
a  suit  to  foreclose  a  general  mortgage  on  a  composite  system  of 
roads  operated  by  a  single  corj)oration,  the  preferential  debts  of 
the  corporation  will  be  charged  on  the   earnings  of   the  entire 

1  Kaht  V.  Attrill  (1887),  106  N.  Y.  United  States  Supreme  Court,  had  no 
423,  4:J4  ;  s.  c.  13  N.  E.  Rep.  282.  Much  reference  to  it.s  preservation  from  phj'sical 
stre.ss  was  laid  b}'  the  court  on  the  fact  violence,  but  only  to  its  preservation  from 
that  such  a  company  is  not  a  quasi  public  the  damage  to  the  business  an<l  to  the 
character  like  a  railroad  company,  and  public  interest  which  would  have  resulted 
Miltenberger  v.  Logansport  Ry.  Co.,  supra,  from  the  receiver's  suddenly  being  de- 
was  distinguisiied  on  this  ground.  But  it  prived  of  the  whole  or  a  large  part  of 
is  submitted  that  the  doctrine  of  that  case  the  persons  engaged  in  02)erating  the 
would   not  have  warranted   any  different  road. 

decision  if  the  company  had  been  operat-  ^  Hervey  v.  Illinois  Midland  Ry.   Co. 

ing  a  railroad  instead  of  a  hotel.      The  (1884),  28  Fed.  Rep.  169. 
necessity   of    "preserving"   the   railroad,  ^  111  U.  S.  776;  -s.  o.  17  Am.  &  Eng. 

which  was  the  basis  of  tlic  ruling  of  the  R,  R.  Cas.  308  (1884). 


§  619.]  PREFERRED  DEBTS.  609 

system.  These  debts  being  the  obligations  of  a  single  debtor,  it 
makes  no  difference  whether  they  were  incurred  in  the  operation 
of  one  line  or  of  the  other.  The  fact  that  some  of  those  lines 
are  yielding  a  surplus  income,  and  others  are  not  paying  their 
expenses,  does  not  constitute  a  reason  for  saddling  the  whole  bur- 
den of  such  debts  on  the  non-paying  lines.  Hence  the  bond- 
holders secured  by  prior  underlying  mortgages  on  the  paying 
lines  have  no  equity  to  demand  that  the  payment  of  the  preferen- 
tial debts  and  operating  expenses  of  the  non-paying  lines  out  of 
the  earnings  of  the  receivership  shall  be  treated  as  a  diversion  of 
such  earnings,  entitling  them  to  have  interest  on  their  bonds  de- 
clared a  first  charge  on  the  corpus  of  the  whole  property,  if  the 
earnings  themselves  are  insufficient  to  satisfy  their  claim.^ 

§  619.  Doctrine  of  Diversion  not  applicable  to  Ordinary  Creditor's 
Suit.  —  The  doctrine  which  permits  a  lien  to  be  fastened  on  the 
proceeds  in  favor  of  certain  classes  of  creditors,  where  the  cur- 
rent earnings  have  been  diverted  for  the  benefit  of  the  bond- 
holders, has  no  application  to  a  case  where  a  receiver  is  appointed 
in  an  ordinary  creditor's  suit  in  aid  of  a  judgment  obtained  for 
an  unsecured  debt,  especially  where  the  claim  of  the  complainant 
is  as  meritorious  as  that  of  the  other  creditors  who  ask  to  be 
allowed  to  share  ratably  with  him  in  the  proceeds.  To  such  a 
case  the  ordinary  rule  is  applicable,  that,  where  the  aid  of  a  court 
of  equity  is  sought  by  judgment  creditors  to  reach  property  that 
cannot  be  reached  by  legal  proceedings,  the  court  follows  the  law, 
and  recognizes  the  priority  which  those  judgment  creditors  who 
have  moved  in  the  cause  would  have  obtained  by  the  levy  of  an 
execution  at  the  time  of  filing  the  bill,  if  no  obstacles  had  stood 
in  the  way  of  the  levy.^ 

1  Central   Trust   Co.    v.    Wabash,    St.  the   administration   is    merely    ancillary. 

Louis,  &  Pac.   Ry.    Co.   (1887),    30  Fed.  Yet  the  rights  of  all  the  parties  go  back 

Rep.    332.  to  the   statutes   of   the   two   States,    and 

Where  the  receiver  appointed  by  a  dis-  although  the  corporation  is  a  single  con- 

trict  judge  in  one  State  of  a  raih'oad  run-  solidated   corporation,    yet   its   rights    in 

ning  through  two  States  is  also  appointed  each  of  the  States  must  largely  be  affected 

receiver  of  its  property  in  the  other  State,  by  the  statutes,   and   the   course  of   the 

and  there  is  some  variance  in  the  orders  decision    and    procedure    therein.      This 

of  these  courts  as  to  the  procedure  and  difference    in    the   origin    and   source   of 

administration  of  the  receiver  made  by  the  rights  may  naturally  affect  many  matters 

two  judges,  each  making  such  orders  in  the  of  procedure  in  the  administration  of  the 

matter  as  are  made  in  his  ordinary  practice,  property,  and  it  cannot  be  held  that  such 

the  difference  not  affecting  any  substantial  procedure    must    in    all    cases    be   made 

rights  of  the  parties,  the  circuit  judge  will  uniform    in    the   two    States."      Central 

not  interfere  or  modify  such  orders.  Trust  Co.   v.   Texas  &  St.  Louis  R.   Co. 

"The  court  where  the  bill  is  filed  and  (1884),  22  Fed.  Rep.  135. 
the  receiver  first  appointed  is  the  court  of         ^  George  v.  St.  Louis  Cable  &  W.  Ry. 

primary  administration,  and  in  the  other  Co.  (1890),  44  Fed.  Rep.  117. 

39 


610 


RAILWAY   BONDS   AND   MORTGAGES.        [CHAP.  XXVIII. 


Article  III.  —  Within  what  Period  Back  Claims  must  have 

ACCRUED     TO     BE     ALLOWED     PREFERENCE.        ThE     SiX      MoNTHS' 

Rule. 

§620.  Generally. — 111  the  absence  of  special  considerations, 
the  courts  are  disinclined  to  allow  any  back  claims  to  rank  as 
preferred  debts,  unless  they  have  accrued  within  six  months 
prior  to  the  appointment  of  a  receiver.  This  period  was  fixed 
originally,  as  it  seems,  with  reference  to  statutes  in  pari 
materia} 

In  a  foreclosure  action  by  the  trustee  representing  bondholders 
of  a  corporation  mortgage,  the  preference  given  under  the  Iowa 
statute  (Acts  23d  Gen.  Ass.,  ch.  48)  to  laborers  or  servants,  for 
wages  due  for  three  months  previous  to  a  receivership,  was  recog- 
nized as  against  the  claims  of  the  trustees  of  the  mortgage  and 
their  attorneys,  as  well  as  the  holders  of  the  bonds  secured  by 


1  Thus  in  Scott  v.  Clinton  &  Spring- 
field R.  Co.  (1876),  6  Biss.  529,  535  ;  s.  c. 
21  Fed.  Gas.  820,  Case  No.  12,527,  de- 
cided in  the  Circuit  Court  of  the  South- 
em  District  of  Illinois,  Judge  Drunimond 
said :  "  We  have,  as  a  sort  of  necessity 
of  the  case,  and  yielding  to  some  ex- 
tent to  the  statute  of  this  State,  where 
supplies  and  materials  have  been  furnished 
to  a  railroad,  and  the  diligence  required 
by  the  statute  has  been  used  by  the  cred- 
itors to  enforce  their  claims  within  six 
months,  allowed  the  payment  of  those 
claims."  The  statute  here  referred  to  was 
enacted  in  1872,  and  gave  a  lien  upon 
railroad  property  of  all  kinds  for  "fuel, 
ties,  materials,  sup])lies,  or  any  other 
article  or  thing  necessary  for  the  construc- 
tion, maintenance,  operation,  or  repair  of 
such  roads  by  contracts  with  such  cor- 
poration," and  for  "work  and  labor  for 
such  construction,  maintenance,  operation, 
or  repair,  by  the  like  contract,"  as  )>art 
of  the  current  expenses  of  the  road,  "as 
against  such  railroads,  and  iis  against  all 
mortgages  or  other  liens  which  shall 
accrue  after  the  conmiencement  of  the 
delivery  of  said  articles  or  the  conimence- 
meiit  of  said  work  or  labor,"  and  also  pro- 
vided that  "suit  should  be  commenced 
witJiin  six  moiillis  after  the  con)j)letion  of 
the  contract,  the  performance  of  the  labor, 


or   furnishing   the   materials."      Starr   & 
Curtis  Annotated  Stat,  of  111.,  p.  1533. 

In  a  later  case,  Turner  v.  Indianapolis, 
B.  &  W.  R.  Co.  (1878),  8  Biss.  315,  the 
same  judge  explained  at  greater  length 
the  reasons  which  led  him  to  refer  to  this 
statute  for  guidance  in  determining  what 
would  be  a  suitable  time  limit  under  such 
circumstances.  "  It  being  conceded  that 
some  claims  for  past  services  should  be 
paid,  the  next  point  to  be  determined  was, 
what  limitation,  if  any,  as  to  time,  should 
be  placed  upon  such  payment.  It  was 
found  in  many  cases  that  those  who  had 
control  of  the  railways,  instead  of  paying 
the  current  operating  expenses  of  the  com- 
panies, would  postpone  the  payment  of  the 
same  sometimes  for  many  months  in  favor 
of  the  interest  due  on  the  mortgages, 
which  they  would  discharge,  in  the  hope, 
apparently,  that  a  more  favorable  time 
ill  the  business  of  the  roads  would  enable 
them  to  make  up  the  deticiency.  It  was 
in  view  of  this  and  similar  considerations, 
growing  out  of  the  actual  condition  of 
affairs,  and  of  the  absolute  necessity  of 
fixing  some  reasonable  time  within  which 
such  claims  should  be  allowed,  that  the 
court  adopted,  as  l)y  analogy,  the  rule  of 
the  statute  of  Illinois  in  relation  to  liens 
on  railroads  for  work  done  and  supplies 
and  materials  furnished. 


§  G21.]  PREFERRED  DEBTS.  611 

the  mortgage ;  but  the  court  held  that  the  fees  of  the  receivers 
and  their  attorneys  were  a  part  of  the  costs  of  the  case,  and  were 
properly  allowed  a  preference,  as  also  a  balance  due  on  a  loan 
authorized  by  the  court  and  made  by  a  receiver  for  carrying 
on  the  business  of  the  corporation  and  payment  of  wages  due 
prior  to  the  receivership.^  But  the  true  test  is  that  the  debt 
should  have  been  contracted  in  the  ordinary  course  of  a  con- 
tinuing business,  to  be  paid  out  of  current  earnings,  and 
within  such  a  period  that  it  would,  presumably,  have  been  paid 
at  the  time  agreed  upon  if  the  company  had  remained  in 
possession.^ 

When  debts  of  this  character  remain  unsettled,  or  are  not  put 
in  suit  for  such  a  time  as  would  be  deemed  unreasonable,  it  may 
fairly  be  presumed  that  the  creditors  have  ceased  to  look  to  cur- 
rent receipts  for  payment,  and  have  accepted  the  position  of 
general  creditors,  who,  as  such,  would  have  no  claim  for  indemnity 
upon  any  special  part  of  the  income.^ 

§  621.  The  Six  Months'  Rule.  —  The  choice  of  the  limit  of  six 
months  in  the  class  of  cases  referred  to  has  been  sufficiently 
regular  to  have  given  rise  to  the  familiar  expression,  "  The  Six 
Months'  Rule  ; "  but,  as  a  matter  of  fact,  no  absolute  rule  has  ever 
been  established.*     See  §  598,  ante. 

Thus  preference  has  been  given  to  claims  antedating  the  ap- 

1  St.  Paul  Title  Ins.  &  Trust  Co.  et  al.  more  than  six  months  before  the  appoint- 
V.  Diagonal  Cove  Co.  et  al.  (Gunson  et  ment  of  the  receiver.  In  Manchester 
al.,  Interveners)  (1895),  64  N.  W.  Kep.  Locomotive  Works  v.  Truesdell  (1890),  44 
606.  Minn.  115,  the  court  sustained  the  disal- 

In  Mellon  et  al.  v.  Morristown  &  Cum-  lowance  of  a  claim  for  the  price  of  a  loco- 

berland  Gap  R.  Co.  e<  a^.  (Tenn.,  1895),  35  motive,   principally  on    the   ground   that 

S.  W.  Rep.  404,  persons  loaning  monej'  to  the   sale    was    completed   more   than   six 

contractors,    with   which   they   may  have  months   before   the    appointment   of    the 

])aid  for  rails,  etc.,  to  be  used  in  the  con-  receiver,  —  holding  that   the    designation 

struction  of  the  road,   without  a  special  of  a  time  limit  was  a  matter  within  the 

contract  to  that  effect,  could  have  no  lieu  discretion  of  the  court, 
for  their  money   loaned,  nor   could    they  *  In  Blair  v.  St.  Louis,  H.  &  K.  R.  Co. 

be  subrogated  to  the  liens  which  the  fur-  (1884),  22  Fed.  Rep.  471,  Judge  Brewer, 

nishers  of  such  supplies  could  have.  while  conceding  that,    in  his  opinion,   a 

2  Burnham  u.  Bowen  (1884),  111  U.  S.  period  of  six  months  was  ordinarily 
776;  s.  c.  17  Am.  &  Eng.  R.  R.  Cas.  ample,  added:  "There  is  no  arbitrary 
308.  time   prescribed,    and  it  should   be   only 

3  Thomas  v.  Peoria  &  R.  I.  R.  Co.  such  reasonable  time  as,  in  the  nature  of 
(1888),  36  Fed.  Rep.  808  ;  s.  c.  36  Am.  &  things,  and  in  the  ordinary  course  of 
Eng.  R.  R.  Cas.  381.  In  this  case  Mr.  business,  would  be  sufficient  to  have  such 
Justice  Harlan  ruled  that,  in  the  absence  of  claims  settled  and  paid."  So  also  in 
special  circumsta.nces,  the  income  accru-  Fidelity  Co.  v.  Shenandoah  R.  Co.,  Va.,  9 
ing  during  the  receivership  would  not  be  S.  E.  Rep.  759. 

chargeable  for  rents  of  cars,  etc.,  accruing 


612  EAILWAY   BONDS   AND    MORTGAGES.         [CHAP.  XXVIII. 

pointment  of  a  receiver  by  eight  months  ;  ^  by  eleven  months  ;  ^  by 
two  years ;  ^  by  three  years.^ 

The  date  at  which  supplies  were  actually  furnished  is  the  ma- 
terial point  in  determining  whether  the  debt  therefor  is  to  be 
preferred.  Hence  a  clause  in  the  order  appointing  a  receiver, 
whereby  he  is  authorized  "  to  pay  the  amounts  due  and  maturing 
for  materials  and  supplies  about  the  operation  and  use  of  said 
road,"  does  not  warrant  the  payment  of  a  renewed  promissory 
note,  originally  made  by  the  company  in  payment  of  a  claim  for 
re-rolling  iron  for  the  use  of  the  road  some  years  before.^ 

The  claim  of  a  steel  company  for  coupling  links  and  pins  and 
tank  steel  necessary  to  the  operation  of  a  railroad  from  day  to 
day,  furnished  within  four  months  before  the  appointment  of  a 
receiver  in  a  foreclosure  suit  of  the  first  mortgage  and  within  a 
year  before  the  receivership  was  extended  to  a  suit  to  foreclose 
the  second  mortgage,  was  given  a  prior  lien  to  the  mortgages  in 
the  United  States  Circuit  Court  for  the  District  of  Massachusetts.^ 

§  622.  Rule  -wrhere  there  is  a  Running  Account.  —  If,  at  the  be- 
ginning of  the  six  months,  there  is  an  open  and  running  account 
for  supplies,  all  the  items  will  be  given  preference  if  the  account  is 
under  a  subsisting  contract ;  otherwise  all  the  items  previous  to 
that  time  will  be  disallowed.''' 

§  623.  Unsecured  Claims  antedating  Period  fixed  in  Order,  Pay- 
ment of.  —  Unsecured  claims  antedating  the  period  fixed  in  the 
order  may  be  paid  out  of  any  surplus  earnings  that  may  remain 
in  the  hands  of  a  receiver  after  paying  the  claims  specially  pro- 
vided for,  but  not  out  of  the  corpus.^ 

1  Skidd  J'  V.  Atlantic,  Miss.  &  Ohio  R.  appointment,  but  it  does  not  appear  that 
Co.  (1879),  3  Hughes,  320;    Douglass  v.     any  stress  was  laid  on  this  fact. 

CHne  (1877),  12  Bush  (Ky.),  608.  ^  Brown  v.  New  York  &  Erie  R.  Co. 

2  Burnham  v.  Bowen  (1884),  111  U.  S.     (1860),  19  How.  Pr.  (N.  Y.)  84. 

776.  6  Wood  V.  New  York  &  New  England 

8  Williaiuson  v.  Washington  City,  Va.  R.  Co.  et  al.  (Carnegie   Steel   Co.,  Liin., 

Midi.  &  Grt.  Southern  R.  Co.  (1880),  33  Intervener),    (1895),    70    Fed.   Rep.   741. 

Gratt.  624  ;  Farmers'  Loan  &  Trust  Co.  v.  After  discussing  the  cases  pertinent  to  the 

Kansas  City,  W.  &  N.  W.  Ry.  Co.  (1892),  question,  Colt,  C.   J.,  said:   "As  to  the 

53  Fed.  Rej).   182  ;  Central  Trust   Co.  v.  olijection  that  these  supplies  were  not  fur- 

St.  Louis,  A.  &  T.  Ry.  Co.  (1890),  41  Fed.  nished  during  the  period  of  time  within 

Kep.   551.     In    this   last   case   the   court  which   alone   a   priority  can  be  given,  it 

refused  to  be  governed  by  the  lien  law  of  may  be  said  that  there  is  no  fixed  rule  as 

the  State,  which  required  a  supply  creditor  to  time  further  than  is  expressed  by  the 

to  take  steps  to  enforce  his  claim  under  words  "  reasonable  time." 
the  law  within  one  year  after  it  accrued.  "^  Central   Trust   Co.   v.    Texas    &   St. 

*  Hale  V.  Frost  (1878),  99   U.  S.  389.  Louis  Ry.  Co.  (1885),  23  Fed.  Rep.  673. 
In  this  case  a  note  had  been  given  for  the  8  fiiig   doctrine   was   announced   with 

debt  sixteen  months  prior  to  the  receiver's  some  hesitancy  in  Bayliss  t.  Lafayette  M. 


624.]  PREFEERED  DEBTS.  613 


Article  IV.  —  Classes  of  Back  Claims  entitled  to  Priority. 

§  624.  Generally.  —  The  underlying  principle  in  the  cases  where 
debts  arising  before  the  receivership  have  been  allowed  as  prior  in 
equity  to  the  claim  of  the  bondholder  on  the  earnings  during  the 
receivership,  has,  in  one  case,  said  to  be  that  "  the  debt,  when 
incurred,  operated  in  a  direct  way  to  the  advantage  of  the  bond- 
holder." 1 

In  another  case,  the  proper  test  has  been  declared  to  be  whether 
or  not  the  claim  falls  into  the  category  of  "  payments  made  to  pre- 
serve the  estate."  ^ 

These  dicta  appear  to  be  merely  two  ways  of  stating  the  same 
doctrine,  though,  if  strictly  construed,  the  latter  statement  would 
obviously  circumscribe  preferred  debts  within  somewhat  narrower 
limits  than  the  former.  In  another  case.  Judge  Brewer  thought 
that  "  whatever  is  necessary  in  the  ordinary  administration  of  the 
affairs  of  the  corporation  comes  within  the  spirit  of  the  decisions  " 
of  the  Supreme  Court  of  the  United  States.  If  by  "  necessary  "  is 
meant  necessary  for  the  preservation  of  the  road  as  a  going  con- 
cern, this  theory  of  the  proper  limits  of  preferred  debts  does  not 
differ  materially  from  the  other  two.^ 

The  effect  of  the  three  dicta  just  cited  may  perhaps  be  stated 
thus  :  To  give  a  claim  the  status  of  a  preferred  debt,  it  must  repre- 
sent not  merely  a  liability  contracted  in  carrying  on  the  business, 
but  a  liability  which  in  a  reasonable  sense  it  was  necessary  to  in- 
cur in  order  to  keep  the  road  in  operation.  The  following  sections 
will  show  in  detail  what  precise  claims  are  and  are  not  included 
in  the  favored  class. 

The  receiver  of  a  company,  no  more  than  the  company  itself, 
can  raise  the  question  of  the  constitutionality  of  an  act  of  a  State 

&  B.  R.   Co.   (1879),  9  Biss.  90;  s.   c.   2  of  appointment  upon  the  payment  of  claims 

Fed.  Cas.   1080,  Case  No.   1141 ;  8  Rep.  for  supplies,  has  no  effect  in  barring  nier- 

579,  by  Judge  Drummond.     But  in  United  itorious   preferential   claims."      Xorthern 

States  Trust  Co.  v.  New  York,  W.  S.  &  E.  Pacific  R.  Co.  v.  Lamout  (C.  C.  A.,  1895), 

R.  Co.    (1885),  25  Fed.  Rep.   800,  Judge  69  Fed.  Rep.  23. 

Nixon,  of  the  New  Jersey  Circuit,  declared  ^  Easton  v.  Houston  &  Texas  Central 

that,  if  there  had  been  any  surplus  avail-  Ry.  Co.    (1889),    38    Fed.    Rep.    12,    per 

able,  he  would  not  have  hesitated  to  order  Pardee,  J. 

the   payment   of  the   claim   of   a   supjily  ^  frazier  v.  East  Tennessee,  Va.  &  Ga. 

creditor  which  accrued   before   the   com-  R.   Co.    (1889),    88  Tenn.    138  ;    s.  c.   12 

mencement  of  the  privileged  period  ;  while  S.  W.  Rep.  419;  40  Am.  &  Eng.   Pi.  R. 

in  a  recent  case  the  broad  rule  was  laid  Cas.   358. 

down  by   the  Circuit   Court   of    Appeals  ^  Blair  v.  St.   Louis,  H.  &  K.  R.  Co. 

"that  a  six  months'  limitation,  in  an  order  (1885),  23  Fed.  Rep.  521. 


614 


RAILWAY    BONDS    AND    MORTGAGES.        [CHAP.  XXVIII. 


affecting  the  right  of  a  claimant  to  have  his  debt  preferred  as  a 
lien  under  such  act,  upon  the  ground  that  the  statute  discriminates 
against  citizens  of  other  States.^ 

Where  net  earnings  of  a  railroad  have  been  irrevocably  assigned 
to  bondholders,  claimants  of  prior  liens  upon  the  gross  earnings  of 
the  company,  who  have  let  payment  be  made  to  tlie  bondholders 
first,  will  not  be  entitled  to  have  payment  made  to  them  as 
against  the  bondholders  out  of  income  accruing  after  a  receiver 
has  been  appointed.^ 


1  Brown  v.  Ohio  Valley  Ry.  Co.  (1897), 
79  Fed.  Rep.  176,  in  which  case  the  stat- 
ute of  Indiana,  2  Burns'  Rev.  St.  Ind. 
1894,  §  5179,  giving  citizens  of  the  State 
a  lien  on  the  personal  property  of  railroad 
companies  to  the  amount  of  $100  for  all 
debts  originally  contracted  in  the  State 
superior  to  all  other  liens  and  mortgages, 
has  been  held  in  the  federal  courts  valid 
as  against  a  railroad  company  and  other 
holders  of  liens. 

Judgment  creditors  of  a  company  in 
the  possession  of  receivers  derive  no  vested 
right  to  have  their  claims  settled  in 
full  from  an  order  of  the  court  autlior- 
izing  the  receivers  "  to  compromise,  ad- 
just, and  settle  in  their  best  discretion  " 
claims  against  the  company.  Mercantile 
Trust  Co.  V.  Baltimore  &  0.  R.  Co.  (1897), 
79  Fed.  Kep.  389. 

A  judgment  against  a  company  grow- 
ing out  of  a  negligence  of  its  servants  was 
denied  a  preference  in  Farmers'  Loan  & 
Trust  Co.  V.  Northern  Pac.  R.  Co.  (1897), 
79  Fed.  Rep.  227. 

A  claim  for  rental  of  terminal  facilities, 
especially  for  the  time  they  were  used  by 
the  receiver,  has  been  accorded  a  prefer- 
ence over  the  mortgage  in  Savannah,  F.  & 
W.  Ry.  Co.  V.  Jacksonville,  T.  &  K.  W. 
Ry.  Co.  (1897),  79  Fed.  Rep.  35. 

Claims  for  amounts  of  money  expended 
in  repairs  of  a  leased  road  which  was  a 
part  of  the  system,  and  the  payments  of 
interest  on  tlie  bonds  of  the  lessor,  which 
had  been  guarantied,  have  also  been  giv(m 
prefereui.'C  to  the  mortgage  bondholders' 
claims.  S<jutliern  Ry.  Co.  v.  Fillett  (1S9G), 
76  Fed.  Rep.  507. 

A  ca.so  where  the  receiver  used  portions 
of  the  income,  under  the  oi'ders  of  the 
court  for  the  betterment  of  the  property 


and  the  claims  of  creditors,  were  given 
preference  over  the  trustee  of  the  mort- 
gage. Manhattan  Trust  Co.  of  New  York 
V.  Seattle  Coal  &  Iron  Co.  (Wash.,  1897), 
48  Pac.  Rep.  333. 

The  rule  as  to  the  lien  of  a  vendor  of 
chattels  which  have  become  a  part  of  the 
realty  is  stateii  in  New  York  Security  & 
Trust  Co.  V.  Capital  Ry.  Co.  (1896),  77 
Fed.  Rep.  529. 

2  Grand  Trunk  Ry.  v.  Central  Vermont 
R.  Co.  (1897),  78  Fed.  Rep.  690. 

A  mortgagor  corporation  sold  land  lots, 
which  it  had  previousl}'  mortgaged  to  B.,  to 
a  street-railway  company,  wliich  erected  a 
power-house  on  them  and  used  them  for 
railroad  purposes.  A  receiver  was  subse- 
quently appointed  for  the  company  in  a  suit 
against  it,  and,  to  pay  operating  expenses, 
receiver's  certificates  were  issued.  A  sale 
of  the  company's  property,  including  the 
land  lots,  was  made  at  the  request  of  the 
holders  of  these  certificates,  and  the  pro- 
ceeds applied  to  their  payment.  B., 
though  cognizant  of  these  })roceedings, 
was  not  a  party  to  the  suit.  Interest  on 
his  mortgage  and  taxes  on  the  lots  had 
been  paid  by  the  receiver  during  his  pos- 
session of  the  property.  B.'s  right  to 
foreclose  his  mortgage  after  these  proceed- 
ings was  sustained  in  Third  Street  Sub- 
urban Ry.  Co.  V.  Lewis  (1897),  79  Fed. 
Rep.  196. 

Tlie  holders  of  certain  "debentures"  or 
bonds,  secured  by  a  mortgage  upon  cer- 
tain lands  of  the  company,  were  held  to 
have  a  priority  over  the  original  vendor's 
liens  on  those  lands  to  which  an  inter- 
vener attempted  to  have  himself  suliro- 
gated,  in  lilake  v.  Pine  Mountain  Iron  Co. 
(189G),  76  Fed.  Rep.  624. 


§§  625-627.] 


PREFERRED    DEBTS. 


615 


§  625. 


Freight    and    Ticket    Balances.  —  Debts    for 
balances    in  favor  of   other   companies   are 


Debt3     for 

freight    and    ticket 
always  allowed.^ 

§  626.  Debts  incurred  in  the  Transportation  of  Passengers  and 
Freight. —  In  l)o\v  V.  Memphis  &  Little  Rock  II.  Co.,  Judge  Cald- 
well required  the  payment  of  this  class  of  obligations  as  a  con- 
dition of  appointing  a  receiver,  but  it  is  not  api)arent  from  the 
report  what  ])recise  items  were  included  amongst  them.  They 
are  mentioned  separately  from  ticket  and  freight  balances.^ 

§  627.  Debts  for  "Wages  due  Employees.  —  The  general  propriety 
of  allowing  a  preference  to  these  is  not  disputed.^ 

But  some  discussion  has  taken  place  as  to  whether  all  persons 
who  have  rendered  services  of  any  description  are  entitled  to  a 
preference.  Perhaps  the  better  opinion  is  that  the  rule  avails  in 
favor  of  all  classes  of  employees,  whether  their  work  is  mainly 
mental  or  mainly  physical.  In  Farmers'  Loan  &  Trust  Co.  v. 
Vicksburg  &  Meridian  R.  Co.,*  the  effect  of  the  authorities  was 
said  to  be  that  the  wages  and  salaries  of  employees  of  every  grade 
should  be  placed  among  the  preferred  debts. 

In  one  of  the  earlier  cases  priority  was  allowed  to  a  claim  for 
services  rendered  as  counsel,^  and  a  similar  ruling  has  been  made 
by  Judge  Brewer.^ 


1  Miltenberger  v.  Logansport  Ry.  Co. 
(1882),  106  U.  S.  286,  311  ;  s.  c.  12  Am. 
&  Eng.  R.  R.  Cas.  464  ;  Union  Trust  Co. 
V.  Illinois  Midland  Ry.  Co.  (1886),  117 
U.  S.  434  ;  Farmers'  Loan  &  Trust  Co.  v. 
Kansas  City,  W.  &  N.  W.  Ry.  Co.  (1892), 
53  Fed.  Rep.  182  ;  Farmers' Loan  &  Trust 
Co.  V.  Vicksburg  &  Meridian  R.  Co.  (1888), 
33  Fed.  Rep.  778  ;  Dow  v.  Memphis  & 
Little  Rock  R.  Co.  (1S84),  20  Fed.  Rep. 
260  ;  s.  c.  17  Am.  &  Eng.  R.  R.  Cas. 
324. 

2  20  Fed.  Rep.  260  ;  s.  c.  17  Am.  & 
Eng.  R.  R.  Cas.  324  (1884).  This  case, 
however,  is  .supposed  to  be  one  of  those 
whicli  the  Supreme  Court  of  the  United 
States  had  in  mind  when  it  reprimanded 
the  judges  who  had  gone  to  the  length 
of  requiring  the  ]iayment  of  all  unsecured 
debts  (Kneeland  v.  American  Loan  & 
Trust  Co.,  §  60.5,  antc^  ;  and  any  ruling 
for  which  it  is  the  sole  authority  .should 
perhaps  be  regarded  as  at  least  open  to 
controversy. 

3  Duncan  v.  Trustees  (1876),  9  Am. 
Ry.  Rep.  386  ;  Douglass  v.  Cline  (1877), 


12  Bush  (Ky. ),  608 ;  s.  c.  18  Am.  Ry. 
Rep.  273  ;  Fosdick  v.  Schall  (1879),  99 
U.  S.  235 ;  Miltenberger  v.  Logansport 
Ry.  Co.  (1882),  106  U.  S.  286  ;  s.  c.  12 
Am.  &  Eng.  K.  R.  Cas.  464  ;  Union  Trust 
Co.  V.  Illinois  Midland  Ry.  Co.  (1885), 
117  U.  S.  434;  Dow  v.  Memphis  &  C.  R. 
Co.  (1884),  20  Fed.  Rep.  260  ;  s.  c.  17 
Am.  &  Eng.  R.  R.  Cas.  324. 
*  33  Fed.  Rep.  778  (1888). 

5  Bayliss  v.  La  Fayette,  M.  &  B.  Ry. 
Co.  (1879),  9  Biss.  90  ;  s.  c.  2  Fed.  Cas. 
1080,  Case  No.  1141  ;  8  Fed.  Rep.  579. 

6  Blair  v.  St.  Louis,  H.  &  K.  R.  Co. 
(1885),  23  Fed.  Rep.  521.  In  this  case 
the  allowance  was  limited  to  the  instal- 
ment of  the  .salary  which  became  due  just 
before  the  appointment  of  the  receiver. 
The  learned  judge  declined  to  recognize 
the  priority  of  a  claim  for  services  which 
accrued  a  year  and  a  half  previously,  re- 
marking :  "  "While,  of  course,  as  we  in  the 
profession  all  agree,  lawyers  are  benefac- 
tors to  the  human  race,  and  entitled  to 
special  consideration  at  the  hands  of  any 
intelligent  tribunal,  yet  I  think   that  a 


616  RAILWAY   BONDS   AND   MORTGAGES.        [CHAP.  XXVIII. 

So,  also,  it  has  been  held  in  New  York,  though  by  a  divided 
court,  that  such  services  were  included  in  an  order  directing  the 
payment  of  debts  "  owing  to  the  laborers  and  employees  of  the 
company  for  labor  and  services  actually  done  in  connection  with 
the  company's  railways."  ^ 

If  the  general  term  "  employees  "  is  alone  used  in  the  order, 
there  seems  to  be  no  reason  why  the  regular  counsel  of  the  com- 
pany should  not  have  the  benefit  of  its  provisions.^ 

This  is  assumed  to  be  the  rule  in  one  case,  the  court,  however, 
holding  that  the  special  lien  of  such  a  counsel  would  be  allowed  a 
priority  only  as  to  the  income  of  the  receivership,  and  as  to  the 
company's  papers  and  muniments  of  title  which  he  had  in  his 
possession,  and  would  not  be  recognized  as  extending  to  the 
general  corpus  of  the  estate.^ 

On  the  other  hand,  in  Addison  v.  Lewis,^  the  court  was  strongly 
of  opinion  that  the  salary  of  the  president  of  the  company  was 
not  a  preferential  claim ;  but  the  actual  ground  on  which  his 
claim  was  disallowed  was  that  he  had  waived  his  rights  by  stat- 
ing in  the  annual  reports  of  the  company's  business  that  his  salary 
was  one  of  the  items  paid. 

A  secretary  of  a  railroad  company  has  no  priority  of  lien  to 
the  bondholders  for  services  rendered  the  company  within  six 
months  prior  to  the  receivership.^ 

It  has  also  been  ruled  that  the  term  "  wages  of  employees,"  in 
an  order  instructing  the  receiver  as  to  the  claims  to  be  paid  in 
preference  to  the  mortgage  debt,  did  not  include  the  money  due 
for  the  services  of  a  counsel  employed  for  special  purposes.^ 

lawyer  who  waits  a  year  and  a  half  before  tinguished  Fosdick  v.   Schall   (1879),   99 

collecting  his  fees  is  guilty  of  great  negli-  U.  S.  235,  and  Cutting  v.  Tavares,  0.  &  A. 

gence.    He  certainly  presents  no  equitable  R.  Co.,  61  Fed.  Eep.  150  ;  s.  c.  9  C.  C.  A. 

claims  for  preference."  401  (1894). 

1  Gurney  v.  Atlantic  &  Great  Western  This  last  case  held  that,  in  order 
R.  Co.  (1874),  58  N.  Y.  358.  to    make    such    a    claim    preferential,    it 

2  In  Louisville,  Evansville,  &  St.  Louis  must  appear  that  there  was  an  order  of 
R.  Co.  V.  Wilson  (1891),  138  U.  S.  501,  court  at  the  time  the  receivers  were  ap- 
505,  this  question  was  incidentally  touched  pointed  providing  for  its  pa3-ment,  and 
upon.  The  court  declined  to  express  any  evidence  that  the  current  earnings  before 
decided  o[)inion,  as  the  point  was  not  di-  or  after  the  appointment  of  the  receiv- 
rectly  involv(?d,  and  the  case  went  off  on  a  crs  were  diverted  to  paying  interest  on 
special  ground.  the  bonded  debt.     Neither  of  these  facts 

^  Bound    V.     South   Carolina    R.    Co.  were  shown  in  the  petition  of  Harris. 
(1892),  52  Fed.  Rep.  52fl.  6  Louisville,   Evansville,   &    St.    Louis 

*  75  Va.  701  ;  .s.  c.  9  Am.  &  Eng.  R.  Co.  v.  Wilson  (1891),  138  U.  S.  501. 
R.  R.  Cas.  702  (1881).  Gurney  v.   Atlantic  &  Great  Western  Ry. 

*  Central  Trust  Co.  of  New  York  v.  Co.,  supra,  was  cited,  but  held  not  to  be 
Chattanooga  S.  R.  Co.  (Harris,  Intervener),  strictly  in  point.  The  court  declined  to 
(1895),  69  Fed.  Rep.  295.     The  court  dis-  pass  any  criticism  on  that  decision,  being 


J 


§  628.]  PREFERRED  DEBTS.  617 

The  construction  placed  upon  the  statutes  which  have  created 
legal  priorities  similar  in  character  to  those  recognized  by  courts 
of  equity  is  rather  in  favor  of  this  stricter  interpretation.  Thus 
the  Vermont  statute  makes  a  mortgage  of  railroad  chattels  inop- 
erative against  claims  "for  injuries  sustained  on  the  road  by 
reason  of  the  neglect  of  the  corporation,  or  for  services  rendered 
or  materials  furnished  for  the  purpose  of  keeping  the  road  in  re- 
pair, or  in  running  the  same."  Its  protection  has  been  declared 
to  extend  to  creditors  who  are  engaged  in  manual  labor  in  mak- 
ing repairs  or  in  operating  the  roads,  or  who  have  furnished 
materials  to  be  used  therein,  as  iron,  ties,  etc.,  but  not  to  claims 
for  services  of  directors,  superintendents,  civil  engineers,  cashiers, 
paymasters,  or  heads  of  departments,  nor  to  claims  for  rents  of 
offices  occupied  by  them,  nor  to  claims  for  telegraphing  ordered 
by  them,  nor  to  claims  for  the  printing  of  tickets,  bill-heads, 
posters,  time-tables,  etc.,  and  the  materials  used  therein.^ 

Since  the  rationale  of  the  rule  allowing  debts  for  wages  of  em- 
ployees to  be  preferred  to  the  mortgage  debt  is  that  it  would  be 
unreasonable  as  well  as  detrimental  to  the  operation  of  the  road 
to  expect  them  to  make  careful  examination  into  the  financial 
condition  of  the  company,  and  that  they  should  therefore  be  en- 
couraged to  continue  working  by  the  assurance  that  the  court 
will  provide  for  any  claims  of  this  description  accruing  a  reason- 
ble  time  before  the  receiver's  appointment,  it  has  been  held  that, 
as  the  president  of  the  company  has  full  knowledge  of  the  state 
of  its  affairs,  and  is  not  bound  to  furnish  his  services  a  day  after 
his  remuneration  seems  uncertain,  he  is  not  entitled  to  priority 
of  payment,  as  to  the  arrears  of  his  salary,  out  of  the  proceeds 
of  the  sale,  where  the  earnings  are  insufficient  to  pay  even  the 
receiver's  compensation.^ 

§  628.  Claims  for  Legal  Services  not  preferred  unless  they  have 
inured  to  Benefit  of  Bondholders.  ■ —  A  claim  for  legal  services  in 
advising  parties  who  have  lent  money  to  keep  the  road  in  opera- 
tion to  secure  themselves  by  taking  assignments  of  preferential 
claims,  which  upon  foreclosure  are  recognized,  and  obtain  for  the 
lenders  an  equality  of  right  with  the  security  holders  in  a  reor- 
ganization scheme,  is  not  entitled  to  a  priority  over  the  mortgage 
debt.     Funds  belonging  to  the  mortgagee  cannot  be  taken  from 

apparently  of  opinion  that  the  special  cir-  ^  Poland   v.    Lamoille    Valley   R.    Co. 

cumstances  of  the  ease  had  largely  influ-  (1879),  52  Vt.  144. 

enced  the  inclusion  of  professional  services  ^  National  Bank  of  Augusta  v.  Caro- 

within  the  descriptive  words  of  the  ap-  lina,  K.  &W.  R.  Co.  (1895),  63  Fed.  Rep. 

poiutment.  25. 


618  RAILWAY   BONDS   AND   MORTGAGES.       [CHAP,  XXVIII. 

him  to  pay  counsel  to  devise  a  scheme  by  which  a  subsequent 
lender  of  money  is  preferred  before  liim.i 

Nor  are  security  holders  liable  for  the  expenses  incurred  by 
their  debtor  in  carrying  into  effect  a  scheme  which  the  latter 
believes  will  enable  it  to  pay  its  interest  to  them,  but  which  in 
fact  does  not  accomplish  that  result.  Hence  services  rendered 
by  counsel  at  the  instance  of  a  railroad  company  to  preserve  con- 
trol of  the  portion  of  its  road  which  is  not  covered  by  the  mort- 
gage under  foreclosure  cannot  be  considered  as  services  to  the 
holders  of  bonds  secured  by  that  mortgage.^ 

On  the  other  hand,  services  of  counsel  in  recovering  some  of 
the  mortgagor's  property  from  a  company  which  has  the  same, 
and  thereafter  passed  into  a  receiver's  hands,  inure  to  the  benefit 
of  the  secured  creditors  of  the  lessor  company,  and  are  properly 
charged  against  the  assets  of  the  latter  as  a  preferential  claim.^ 

The  funds  in  the  hands  of  a  receiver  appointed  in  a  suit  to  fore- 
close a  mortgage  executed  by  one  who  purchased  the  railroad  at 
a  sale  in  earlier  proceedings  are  not  chargeable  with  a  claim  for 
legal  services  to  another  receiver  who  administered  the  property 
prior  to  that  sale,  even  though  the  services  resulted  in  reducing 
the  demand  of  a  lienholder,  and  to  this  extent  inured  to  the  ben- 
efit of  the  bondholders  secured  by  the  second  mortgage.* 

§  629.  Debts  for  Supplies  and  Materials.  —  Debts  for  Supplies 
and  materials  furnished  for  equipping,  operating,  repairing,  or 
improving  the  road  are  indisputably  in  the  preferred  class.^ 

1  Louisville,  Evansvillo,  &  St.  Louis  R.  burg  &  Meridian  R.  Co.  (1888),   33  Fed. 

Co.  V.  Wilson  (1891),  138  U.  S.  501.  Rep.  778  ;  Dow  i;.  Memphis  &  Little  Rock 

■    2  Ibid.  R.  Co.   (1884),  20  Fed.   Rep.  260;  s.  c. 

8  Louisville,  Evansville,  &  St.  Louis  R.  17  Am.  &  Eng.  R.  R.  Cas.  324  ;  William- 
Co.  V.  Wilson  (1891),  138  U.  S.  501,  cit-  son  v.  Washington  Cit)',  Va.  Midi.  &  Grt. 
ing  Ready.  Dupper,  6  T.  R.  361.  "The  Southern  R.  Co.  (1881),  33  Gratt.  624; 
principle  has  long  been  settled  that  a  s.  c.  1  Am.  &  Eng.  R.  R.  Cas.  498.  In 
party  should  not  run  away  with  the  fruits  Skiddy  v.  Atlantic,  Miss.  &  Ohio  R.  Co. 
of  a  cause  without  satisfying  the  legal  lie-  (1878),  3  Hughes,  320,  where  no  condi- 
mands  of  his  attorney  by  whose  industry  tions  had  been  imposed  at  the  appointment 
and  expense  these  fruits  were  obtained."  of  the  receiver,  the  court  refused  to  accord 

*   Bound    V.    South    Carolina    Ry.  Co.  priority  to  the  claims  of  material-men,  and 

(1892),   51  Fed.   Rep.  58,  citing  Hand  v.  declined  to  attach  any  importance  to  the 

Savannah  &  Charleston  R.  Co.  (1883),  21  fact    that    these  claims  were  made  under 

S.  C.   162,  to  the    effect    that  "  before  a  contracts  just  before  the    commenceuient 

legal  charge  can  be  sustained  there  must  of  the  proceedings,  and  that  the  material 

be  a  contract  of  emi)loyment,  either  e.x-  had  been  used  by  the  receivers.    "Whether 

pressly  made  or  sup(^rinduced  by  the  law  a  debt  bo    an    hour  or  a  year  old,"  said 

on  the  facts."  Judge  Bond,  "can  make  no  difference.     It 

6  Fosdick  V.  Schall    (1879),  99  U.  S.  stands    in    the  same  relation,  no    matter 

252  ;  i'lurnham  v.  l5owen  (1884),  111  U.  S.  what  its  age,  to  the  secured  debt  of  the 

776  ;  Farmers'  Loan  &  Trust  Co.  v.  Vicks-  road.     To  allow  one  of  these  debts  to  be 


§  630.] 


PREFERRED    DEBTS. 


619 


The  rule  is  the  same  whether  the  supplies  were  upon  a  contract 
with  the  company  owning  the  road,  or  another  company  having 
possession  of  it  and  operating  it  under  the  obligation  of  paying 
the  current  expenses.^ 

In  the  category  of  necessary  supplies  may  be  placed  waiting- 
rooms  and  ticket-offices  at  any  point  where  the  business  requires 
such  accommodation.^ 

§  630.  Debts  for  Materials  or  Equipments  furnished  on  Credit 
not  preferred.  —  The  general  principle  applicable  to  indebted- 
ness incurred  under  a  specific  contract  for  supplies,  which  con- 
templates payment  at  some  definite  period  or  periods  in  the 
future,  is  that  the  seller  thereby  surrenders  the  favored  position 
of  a  preferred  creditor,  and  is  only  entitled  to  come  in  as  an  un- 
secured claimant,  except  in  so  far  as  he  may  have  reserved  a  lien 
on  the  articles  sold.^ 

The  case  of  such  a  claimant  is  declared  to  be  very  different  from 
that  of  workmen  and  employees,  or  of  those  who  furnished  from 
day  to  day  supplies  necessary  for  the  maintenance  of  the  road.^ 


paid  is  to  allow  all.  That  is  to  say,  the 
unsecured  debt  would  be  paid  pari  passu 
with  the  secured  debt,  and  in  a  court  of 
equity  it  would  come  to  pass  that  the 
only  persons  who  had  no  security  would 
be  those  who  had  taken  it."  But  this 
decision  is,  in  view  of  its  date,  chiefly 
interesting  as  a  clear  statement  of  what 
the  rule  was  considered  to  be  before  Fos- 
dick  V.  Schall. 

1  Clark  V.  Central  Railroad  &  Bkg.  Co. 
(C.  C.  A.,  1895),  66  Fed.  Rep.  803. 

2  Northern  Pacific  R.  Co.  v.  Laniont 
(0.  C.   A.,  1895),  69  Fed.  Rep.   23. 

All  claims  for  supjdies  contracted  within 
a  reasonable  time  before  a  receiver  conies 
into  possession  of  earnings  of  a  company 
must  be  paid  before  any  of  the  earnings 
is  applied  to  betterments  or  interest  on 
bonds.  Southern  Ry.  Co.  v.  Carnegie  Steel 
Co.  (1896),  76  Fed".  Rep.  492  ;  Southern 
Ry.  Co.  V.  American  Brake  Co.  (1896), 
76  Fed.  Rep.  502.  If  earnings  have  been 
diverted,  then  they  must  be  paid  out  of 
the  proceeds  of  sale  of  the  property.  Ibid. 
A  claim  for  current  supplies,  when  ap- 
proved by  the  acceptance  of  a  draft  for 
the  amount  by  a  receiver,  should  also  be 
paid  from  such  proceeds  under  similar  cir- 
cumstances. Southern  Ry.  Co.  v.  Adams 
(1896),  76  Fed.  Rep.  504.     But  after  ac- 


cepting from  the  receivers  the  princijial  of 
such  a  claim,  the  owner  cannot  re-petition 
for  interest.  Southern  Ry.  Co.  v.  Dunlop 
Mills  (1896),  76  Fed.  Rep.  505.  As  to 
what  is  a  reasonable  time  within  which 
supplies  may  have  been  acquired  before 
the  receivership  to  give  them  an  equi- 
table priority,  a  claim  for  steel  rails  sup- 
plied from  nine  to  eleven  months  prior  to 
receivership  was  held,  in  Southern  Ry.  Co. 
V.  Carnegie  Steel  Co.  (1896),  76  Fed.  Rep. 
492,  not  lost  by  laches,  as  notes  were 
made  in  renewal  of  the  claim,  and  the 
amount  was  demanded  promptly  at  their 
maturity.  Bound  i-.  South  Carolina  Ry. 
Co.,  58  Fed.  Rep.  473,  was  distinguished 
by  the  court. 

3  Bound  V.  South  Carolina  Ry.  Co. 
(C.  C.  A.,  1893),  58  Fed.  Rep.  473; 
American  Loan  &  Trust  Co.  v.  East  & 
West  R.  Co.  (1891),  46  Fed.  Rep.  101. 

*  Thomas  v.  Western  Car  Co.  (1893), 
149  U.  S.  95. 

Where  a  company  bargained  for  steel 
rails  in  large  quantities,  for  the  purpose 
of  replacing  old  worn-out  rails,  upon  a 
contract  that  notes  were  to  be  given  for 
the  amount  at  six  mouths,  with  privilege 
of  renewal  foi  another  six  months,  such  a 
debt  was  held  not  entitled  to  preference 
over  the  mortgage.     Lackawanna   Iron  & 


620 


RAILWAY  BONDS   AND   MORTGAGES.        [CHAP.  XXVIII. 


The  most  common  illustration  of  this  principle  is  furnished  by 
the  cases  in  which  there  has  been  a  conditional  sale  of  rolling- 
stock  for  a  price  to  be  paid  in  instalments,  the  title  remaining  in 
the  vendor  till  payment  of  the  last  instalment.  The  amounts 
due  under  such  a  contract  are  not  preferential  debts.  The  vendor 
has  a  priority  to  the  extent  of  his  lien,  and  may  enforce  it  by  tak- 
ing back  the  rolling-stock,  if  the  instalments  of  the  purchase- 
money  are  not  duly  paid ;  but  as  to  the  balance  of  what  is  due  to 
him  after  enforcing  his  lien,  he  is  a  general  creditor,  with  no  spe- 
cial equities  in  his  favor,^ 

It  is  immaterial  for  the  purposes  of  this  rule  whether  the  sums 
of  money  stipulated  to  be  paid  at  the  specified  intervals  are  styled 
in  the  contract  instalments  of  the  price,  or  rent.^ 

The  same  principle  is  also  held  to  govern  cases  where  the  con- 
tract is  in  fact,  as  well  as  in  name,  a  lease,  and  the  remedy 


Coal  Co,  V.  Farmers'  Loan  &  Trust  Co. 
(1897),  79  Fed.  Rep.  202,  followed  in 
Morgan's  La.  &  Tex.  R.  &  St.  Ship  Co.  •;;. 
Farmers'  Loan  &  Trust  Co.  (1897),  79 
Fed.  Rep.  210,  where  a  claim  was  made 
for  money  loaned,  etc.  ;  also  in  Southern 
Development  Co.  v.  Farmers'  Loan  &  Trust 
Co.  (1897),  79  Fed.  Rep.  212,  relating  to 
a  claim  for  money  advanced  for  certain 
purposes. 

1  Fosdick  V.  Schall  (1879),  99  U.  S. 
235  ;  s.  c.  7  Rep.  449 ;  Huidekoper  v. 
Hinckley  Locomotive  Co.  (1879),  99  U.  S. 
258 ;  Fidelity  Insurance,  Trust,  &  Safe 
Deposit  Co.  V.  Shenandoah  Valley  R.  Co. 
(1889),  86  Va.  1  ;  s.  c.  9  S.  E.  Rep.  751  ; 
38  Am,  &  Eng.  R.  R.  Cas.  559  ;  Frank  v. 
Denver  &  Rio  Grande  Ry.  Co.  (1885),  23 
Fed.  Rep.  123,  127.  See  also  Eastern  and 
Midlands  Ry.,  65  Law  Times,  670. 

2  Kneeland  v.  American  Loan  &  Trust 
Co.  (1890),  136  U.  S.  89,  97  ;  s,  c.  43  Am. 
&  Eng.  R.  R.  Cas,  519.  In  this  case  the 
question  was  presented  nakedly,  without 
being  complicated  by  any  special  circum- 
stances, the  appointment  of  the  receiver 
being  at  the  instance  of  a  judgment  cred- 
itor, and  solely  with  a  view  of  reaching 
the  surplus  eai'iiings.  The  mortgagees  had 
not  asked  for  a  foreclosure,  nor  tliat  tlie 
court  sliould  take  charge  of  the  property, 
and  tlie  owners  of  the  rolling-stock  had 
reclaimed  it,  as  in  Fosdick  v.  Sciiall.  Cnly 
the  projierty  was  sold  which  was  covered 
by  mortgages  executed  prior  to  any  con- 


tract with  respect  to  the  rolling-stock,  so 
that  the  owners  of  it  were  precluded  from 
averring  that  their  property  was  sold,  and 
that  this  gave  them  an  interest  in  the  sale. 

It  was  emphatically  declared  that,  un- 
der these  circumstances,  there  was  no 
foundation  whatever  upon  which  to  rest 
a  claim  for  priority  of  payment  out  of  the 
proceeds  of  the  sale  of  the  property  in 
foreclosure  proceedings  'afterwards  insti- 
tuted by  the  mortgagees,  Mr.  Justice 
Brewer  taking  occasion  to  deliver  a  strong 
protest  against  the  extreme  instances  of 
the  assumption  of  discretionary  power  by 
some  courts  in  respect  to  the  preference  of 
unsecured  debts. 

As  to  preference  to  mortgage  of  car 
rentals  where  the  receiver  has  retained 
and  used  cars  leased  by  the  company,  see 
Mercantile  Trust  &  Deposit  Co.  v.  South- 
ern Iron  Car  Line  Co.  (Ala.,  1897),  21  So, 
Rep.  373. 

As  to  preference  over  mortgage  of 
claims  for  receiver's  certificates,  see  Bos- 
ton Safe  Deposit  &  T.  Co.  v.  Holders  of 
.$130,500  of  Receiver's  Certificates  (1896), 
75  Fed.  Rep.  193  ;  Boston  Safe  Deposit  & 
T.  Co.  V.  Groome  (1896),  75  Fed.  Rep. 
209. 

When  a  debt  for  rental  of  a  leased 
line,  ])art  of  a  system,  shall  be  treated  aa 
an  obligation  of  the  receivership,  author- 
ized by  the  court,  see  Centi-al  R.  &  F>kg, 
Co.  of  Georgia  v.  Farmers'  Loan  &  Trust 
Co.  (1897),  79  Fed.  Rep.  158, 


I 
i 


§  630.]  PREFERRED   DEBTS.  621 

reserved  by  the  lessor  is  a  right  to  terminate  the  contract  and  de- 
mand possession  of  the  cars  forthwith  upon  any  failure  of  the 
railroad  company  to  pay  promptly  the  interest  or  principal  of  any 
of  its  bonds  or  other  liabilities.  Such  a  provision  shows  that  the 
lessor  intended  to  protect  himself  by  other  methods  than  relying 
on  the  possible  order  of  a  court  which  might  appoint  a  receiver. 
The  reasons  for  adopting  this  conclusion  are  of  course  much 
stronger  where  the  lessor  is  a  car  company,  the  principal  officers 
of  which  control  the  railroad  company  also.  Having  full  knowl- 
edge of  the  financial  condition  of  the  railroad  company,  they  must 
be  treated  as  having  leased  the  cars  to  it  in  reliance  on  its  general 
credit,  rather  than  in  expectation  of  displacing  the  priority  of  the 
mortgage  lien.^ 

This  general  principle  avails  in  favor  of  the  mortgagee  even  as 
to  the  period  during  which  the  property  is  controlled  by  a  receiver, 
provided  the  receiver  is  not  appointed  at  his  own  instance.  The 
relative  priorities  of  the  liens  of  the  mortgagees  and  of  the  vendor 
of  rolling-stock  under  a  conditional  sale  are  not  affected  by  the 
appointment  of  a  receiver  to  enforce  the  claims  of  a  third  party. 
Since  neither  lienholder  has,  in  such  a  case,  asked  the  aid  of  the 
court,  no  obligation  is  assumed  by  either  in  respect  to  the  manage- 
ment of  the  property.  The  use  of  the  rolling-stock  by  the  receiver 
for  several  months,  therefore,  can  give  its  owners  no  right  to 
charge  upon  the  mortgage  estate  the  deficiency  that  may  remain 
after  the  application  of  the  current  income  to  the  payment  of  the 
rental.^ 

Claims  for  rental  of  cars  during  receivership,  which  cars  the 
receiver  has  retained,  and  the  trustee  of  bondholders  has  resisted 
being  delivered  to  a  lessor,  reserving  title,  are  properly  chargeable 
to  the  proceeds  of  sale  of  the  property,  as  expenses  of  administra- 
tion to  be  preferred  to  the  claims  of  bondholders.^ 

These  rules  as  to  equities  in  the  matter  of  a  receiver's  using 
cars  held  by  the  railroad  company  under  a  lease  have  been  de- 
clared by  the  Supreme  Court  of  Georgia :  — 

(a)  The  time  for  which  the  rental  of  the  cars  is  chargeable  to 
the  assets  of  the  railway  company  is  obviously  that  during  which 
the  company  and  its  receiver  had  possession  of  and  used  them. 

1  Thomas  v.  Western  Car  Co.  (1892),  Co.  (1890),  136  U.  S.  89;  s.  c.  43  Am.  & 
149  U.  S.  95,  110,  reversing  on  this  point     Eng.  R.  R.  Cas.  519. 

Thomas  v.  Peoria  &  R.  I.  R.  Co.  (1888),  -36  «  Lane,  Receiver,  v.  Macon  &  Atlantic 

Fed.  Rep.  808  ;  s.  c.  36  Am.  &  Eug.  R.  R.  Ry.  Co.  et  al.  (1895),  96  Ga.  630;  s.  c.  24 

Cas.  381.  S.  E.  Rep.  157. 

2  Kneeland  v.  American  Loan  &  Trust 


622  RAILWAY   BONDS    AND    MORTGAGES.       [CHAP.  XXVIII. 

(6)  As  a  general  rule,  compensation  for  the  ordinary  wear  and 
tear  of  a  thing  rented  is  included  in  and  covered  by  the  rental 
charge.  .  .  .  But  depreciation  arising  from  careless  use,  or  from 
abuse,  and  which  is  greater  than  that  caused  by  ordinary  and 
proper  use,  is  a  different  matter,  and  ought  to  be  paid  for,  or 
else  the  owner  will  get  nothing  for  the  injury  to  the  property  thus 
occasioned. 

(c)  The  expenses  incurred  in  returning  the  cars  as  the  court 
ordered  ought  not  to  fall  upon  the  owner,  for  it  seems  clear  that 
the  latter  cannot  be  fairly  charged  with  the  cost  of  a  delivery 
which  it  was  manifestly  the  court's  duty  to  effectuate. 

(c?)  Interest  should  be  allowed  on  all  claims  for  the  date  on 
which  the  cars  are  returned  to  the  lessor.^ 

§  631.  Rentals  due  by  the  Mortgagor  Company  as  Lessee  of 
another  Line.  Rule.  —  It  will  be  shown  in  the  succeeding  chapter 
that  a  receiver  is  not  bound  to  adopt  a  lease  of  a  road  entered  into 
by  the  mortgagor.  If  he  elects  not  to  adopt  such  a  lease,  the  claim 
of  the  lessor  for  rent  which  accrued  prior  to  the  receivership  will 
not  be  accorded  any  preference  as  against  the  mortgage  debt.  A 
claim  of  this  kind  falls  into  the  same  category  as  those  referred 
to  in  the  last  section.^ 

The  same  principle  prevails  with  regard  to  the  interest  on  the 
bonds  of  a  lessor  company  which  the  lessee  has  agreed  to  pay 
as  rent  for  the  leased  line,  under  a  contract  made  prior  to  the 
mortgage  under  foreclosure,  but  not  creating  any  lien  on  the 
property.^ 

§  632.  Diversion  of  Earnings  immaterial  where  Credit  is  given  for 
Materials  furnished.  —  A  supply  creditor  who  has  allowed  the  com- 
pany a  specified  period  of  credit  is  precluded  from  obtaining  a 
preference  for  his  claim,  even  though  the  purcliase-money  was  by 
the  contract  to  be  paid  out  of  the  earnings,  and  it  is  shown  that 
some  of  the  bonded  interest  was  discharged  out  of  the  income 
accruing  while  the  period  of  credit  was  running.^ 

§  633.    Debts  contracted  for  Original  Construction  not  preferred. — 

The  cases  holding  that  the  priority  of  a  mortgage  debt  may  some- 
times be  displaced  in  favor  of  unsecured  creditors,  when  those 
debts  were  contracted  for  keeping  up  a  railroad,  already  built,  as 

1  Lane,  Receiver,  v.  Macon  &  Atl.  Ry.  Rep.  268,  citing  several  cases  as  to  rental 
Co.  et  al.  (181)5),  96  Ga.  630,  651  ;  s.  c.  24     of  cars. 

S.  E.  Rep.  1.07.  8  Central  Trust  Co.  v.  Charlotte,  C.  & 

2  New  York,  V.  &  0.  R.  Co.  v.   New     A.  R.  Co.  (1895),  65  Fed.  Rep.  264. 
York,  L.  K.  &,  W.  R.  Co.  (1893),  58  Fed.  *  Bound   v.    South    Carolina   Ry.    Co. 

(C.  C.  A.,  1893),  58  Fed.  Rep.  473. 


§  633.]  PREFERRED  DEBTS.  623 

a  going  concern,  have  no  application  to  a  debt  contracted  for 
original  construction.^ 

Hence  a  duly  registered  mortgage  of  a  road  "  built  and  to  be 
built,"  takes  precedence,  as  regards  the  unbuilt  portion,  over  the 
subsequent  claim  of  a  contractor  who  had  himself  finished  it 
under  an  agreement  with  the  company  that  he  should  retain  its 
possession  and  apply  its  earnings  to  the  liquidation  of  the  debt 
due  to  him,  and  who  had,  in  accordance  with  such  agreement, 
taken  possession  of  the  road  and  i^etained  it.  "  Registry  of  the 
mortgage,"  said  the  court,  "  was  notice  to  all  the  world  of  the  lien, 
and  in  that  point  of  view  the  case  does  not  even  show  a  hardship 
on  the  contractor,  as  he  must  have  known  when  he  accepted  the 
agreement  that  he  took  the  road  subject  to  the  mortgage."  ^ 

Such  a  claim  cannot  be  accorded  priority  on  the  ground  that  the 
contractor  is  the  last  creditor,  and  has  aided  in  preserving  the 
property.  This  doctrine  has  never  been  applied  except  in  mari- 
time cases,  which  stand  on  a  particular  reason.^ 

For  the  purposes  of  the  rule  it  is  immaterial  that  the  work  is 
done  at  the  request  of  the  lessee  in  possession  of  the  property,  and 
that  there  is  a  special  contract  that  the  person  doing  the  work 
shall  have  a  lien  on  the  earnings.^ 

Of  course  the  consent  of  the  bondholders  themselves  may  some- 
times raise  these  debts  to  the  preferred  class,  and  the  court  will 
sometimes  order  a  hearing  to  be  had  for  the  purpose  of  ascertain- 
ing their  views.^ 

The  principle  that  there  is  no  equity  in  favor  of  the  back  claims 
of  those  who  aid  in  constructing  a  road  has  been  also  assigned  as 
a  ground  for  denying  priority  to  that  part  of  a  claim  of  counsel 
for  fees  which  was  based  on  services  rendered  before  the  road 
became  a  "going  concern."^ 

1  Toledo,  D.  &  B.  R.  Co.  v.  Hamilton  Eng.  R.  R.  Cas.  373 ;  Meyer  v.  Johnston 
(1890),   134   U.  S.    296  ;  s.  c.    43  Am.  &     (1875),  53  Ala.  237. 

Eng.  R.  R.  Cas.  396  ;  Foggy.  Blair  (1890),  ^  This  was  done  in  Farmers'  Loan  & 

133U.  S.  534;  Farmers' Loan  &  Trust  Co.  Trust  Co.  i;.   Kansas  City,  W.  &  N.   W. 

V.  Pine  Bluff,  M.  &  N.  0.   R.  Co.  (Ark.,  Ry.  Co.  (1892),  53  Fed.  Rep.  182,  and  the 

1893),  21  S.  W.  Rep.  652  ;  Porter  v.  Pitts-  necessary  consent  secured,  it  being  appar- 

burg  Bessemer  Steel  Co.  (1887),  120  U.  S.  ent  that  the  payment  of  the  construction 

649  ;  s.  c.  30  Am.  &  Eng.  R.  R.  Cas.  472  ;  debts  was  for  the  interests  of  the  secured 

Wood  V.  Guarantee  Trust  &  Safe  Deposit  creditors.      Judge   Caldwell   at   the   same 

Co.  (1888),  128  U.  S.  416.  time  took   occasion  to  express  his  regret 

2  Dunham  v.  Cincinnati,  Peru,  etc.  R.  that  any  distinction  was  ever  made  as  to 
Co.  (1863),  1  Wall.  254.  these  debts  (see  above). 

8  Gnlveston  Railroad  v.  Cowdrey  (1870),  ^  Finance     Co.     of     Pennsylvania     v. 

11  Wall.  459,  481.  Charleston,    C.   &  C.   R.    Co.   (1892),   52 

*  Thompson  v.  White  Water  Valley  R.  Fed.  Rep.   526. 
Co.  (1889),  132  U.  S.  68  ;  s.  c.  40  Am.  & 


624  RAILWAY    BONDS    AND    MORTGAGES,        [CHAP.  XXVIII. 

8  634:.  Damages  for  Breach  of  Contract  not  preferred.  —  A  claim 
for  damages  for  breach  of  a  contract  to  allow  a  mill-owner  to  haul 
lumber  over  a  side  track  will  not  be  accorded  a  preference  either 
in  regard  to  the  income  or  the  corpus.^ 

Nor  has  a  claim  for  unpaid  moneys  due  on  a  speculative  con- 
tract any  of  the  equitable  features  of  a  supply  claim,  and  it  does 
not  acquire  any  higher  priority  merely  from  the  fact  that,  in  the 
order  appointing  the  receiver,  he  was  directed  to  carry  out  the 
contracts  of  the  insolvent  company.  The  same  rule  applies  to 
a  claim  of  damages  by  reason  of  the  failure  of  the  receiver  fully 
to  complete  the  contract.^ 

Where  a  railroad  company  enters  into  an  agreement  with  a 
mining  company,  for  instance,  that  if  the  latter  will  build  a 
branch  road  leading  to  its  mines  and  convey  it  to  the  railroad 
company,  the  latter  will  pay  a  fixed  sum  per  ton  for  all  coal 
shipped  over  the  branch  road  to  the  mining  company.  Such  a 
contract  will  create  an  equitable  charge  upon  the  earnings  of  the 
branch,  and  the  receiver  of  the  railroad  in  after-foreclosure  pro- 
ceedings will  be  required  to  give  a  preference  over  the  mortgage 
bondholders  to  the  mining  company.^ 

§  635.  Debts  for  Damages  caused  by  Operation  of  Road.  — 
Debts  for  damages  to  property  or  persons  caused  by  the  operation 
are  not,  according  to  the  great  weight  of  authority,  within  the 
preferential  class ;  at  all  events,  their  payment  has  been  specially 
imposed  as  a  condition  of  granting  the  appointment  of  a  receiver. 
Thus  it  has  been  held  improper,  in  the  absence  of  such  a  pro- 
vision, to  allow  a  past-due  claim  for  damages  for  the  destruction 
of  property  by  fire  from  a  locomotive ;  *  or  for  loss  of  goods  in 
transit,  whether  by  fire  or  otherwise ;  ^  or  for  personal  injuries.® 

1  Central  Trust  Co.  v.  Wabash,  St.  L.  s.  c.  30  Am.  &  Eng.  R.  R.  Gas.  450  ; 
&  Pac.  Ry.  Co.  (1887),  32  Fed.  Rep.  566.  Farmers'  Loan  &  Trust  Co.  v.  Green  Bay, 

2  Olyphant  v.  St.  Louis  Ore  &  Steel  Co.  W.  &  N.  W.  R.  Co.  (1891),  45  Fed.  Rep. 
(1866),  28  Fed.  Rep.  729.  664  ;  s.  c.  46  Am.  &  Eng.  R.  R.  Cas.  296, 

3  Fidelity  Ins.,  Trust,  &  Safe  Deposit  denying  the  authority  of  Dow  v.  Memphis 
Co.  et  al.  V.  Norfolk  &  Western  R.  Co.  &  Little  Rock  R.  Co.  (1884),  20  Fed.  Rep. 
(Virginia  &  T.  Coal  &  Iron  Co.,  Inter-  260  ;  s.  c.  17  Am.  &  Eng.  R.  R.  Cas.  324, 
vener),  (1896),   72  Fed.   Rep.  704.  which  countenances  a  different  doctrine. 

^  Hiles  V.   Case  (1880),   9  Biss.  549;  See  ante,  for  a  caution  as  to  the  doubtful 

s.  c.   14  Fed.  Rep.  141.     See  also  §  108,  authority  of  this. 
ante.  It  is,  however,  worthy  of  notice  that 

*  Easton  v.  Houston  &  Texas  Central  in  the  earlier  case  the  question  was  as  to 

Ry.  Co.  (1889),  38  Fed.  Rep.  12.  the  propriety  of  making  the  payment  of 

8  Central  Trust  Co.  v.  Wabash,  St.  L.  the  claim  a  condition  of  granting  a  re- 
ft I'ac.  Ry.  Co.  (1886),  28  Fed.  Kep.  871  ;  ceivership,  while  in  the  later  case  no  such 
Central  Trust  Co.  v.  Kast  Tenn.,  Va.  &  order  had  been  made.  The  general  rea- 
Ga.   R.  Co.   (1886),   30  Fed.   Rep.   895  ;  soiling  of  the  later  case,  that  the  category 


1 


§  635.] 


PREFERRED   DEBTS. 


625 


Where  a  railroad  has  been,  in  proceedings  quo  warranto,  placed 
in  the  hands  of  a  receiver  by  a  State  court,  and  tlie  order  after- 
wards vacated,  with  a  restoration  of  the  property  to  the  company 
charged  with  a  lien  for  damage  suits  during  that  receivership,  and 
pending  a  suit  for  such  a  claim  a  mortgage  given  by  the  company 
is  foreclosed  in  a  federal  court  and  a  receiver  appointed,  notwith- 
standing the  latter,  being  appointed  a  party,  may  appear  in  the  suit 
in  the  State  court  and  answer  that  without  leave  of  the  federal 
court  such  a  claim,  reduced  to  judgment  in  the  State  court,  will 
not  be  recognized  as  having  a  priority  of  lien  over  the  bond- 
holders.^ 

Such  claims  are  based  upon  the  fact  that  they  inure  to  the 
benefit  of  the  security,  or  have  been  the  means  of  keeping  the 
road  a  going  concern.  A  claim  for  damages  for  personal  injuries 
against  a  company,  within  the  six  months  prior  to  receivership, 
not  being  such  a  claim,  will  not  be  ordered  paid  from  the  income 
of  the  receivership.2 

of  claims  which  may  be  accorded  priority 
over  the  mortgage,  even  against  the  con- 
sent of  the  mortgagee,  and  after  the  court 
has  assumed  control  of  the  property,  does 
not  extend  beyond  those  which  are  based 
upon  things  done  for  the  benefit  of  the 
res,  and  consequently  of  the  mortgagees, 
is  undoubtedlj'  sound.  But  it  is,  we 
think,  fairly  open  to  argument,  whether  a 
chancellor,  when  invited  to  exercise  his 
discretion  in  appointing  a  receiver,  may 
not,  in  view  of  all  the  circumstances  of 
the  case,  require  the  payment  of  some 
other  claims  besides  these.  Claims  for 
personal  injuries,  accruing  while  the  road 
is  in  the  hands  of  a  receiver,  are  admitted 
to  be  entitled  to  payment  as  a  part  of  the 
operating  expenses.  Ma)'  there  not  be 
cases  where  it  would  be  inequitable  for 
the  mortgagees  to  decline  to  pay  such 
claims,  merely  for  the  reason  that  they 
accrued  before  the  receivership  was  asked 
for,  and  may  not  the  court  mould  its  relief 
accordingly  ?  The  controversy  really  raises 
the  broad  question  whether  the  limits  of 
the  class  of  debts  known  as  preferential 
are  identical,  whether  provisions  for  their 
payment  is  being  made  at  the  time  the 
receiver  is  appointed,  or  after  the  receiver- 
ship has  begun.  The  cases  show  very 
clearly  that  as  to  most  of  these  so-called 
"equitable  liens"  there  is  a  complete 
identit}-.     But  no  court  of  final  resort,  so 


far  as  we  know,  has  pronounced  for  or 
against  the  doctrine  that  the  domain  of 
rights  in  each  case  is  coextensive.  The 
Supreme  Court  of  the  United  States  has 
expressly  declared  that  the  court  wliich 
appoints  the  receiver  has  no  right  to 
demand  that  the  mortgagees  shall  assent 
to  the  payment  of  all  the  claims  of  the 
general  creditors  (Kneeland  v.  American 
Loan  &  Trust  Co.  (1890),  136  U.  S.  89  ; 
s.  c.  43  Am.  &  Eng.  R.  R.  Cas.  519);  but 
a  definite  rule  still  remains  to  be  formu- 
lated. 

1  Foreman  v.  Central  Trust  Co.  of  New 
York  et  al.  (1896),  71  Fed.  Rep.  776  ;  s.  c. 
18  C.  C.  A.  321.  The  order  of  the  State 
court,  purporting  to  make  this  claim  a 
lien  superior  to  the  mortgage,  was  farther 
held  not  to  be  authorized  by  the  Receivers' 
Act,  Rev.  St.  Tex.,  arts.  1466  et  seq.  See 
Giles  V.  Stanton  (1894),  86  Tex.  620  ; 
s.  c.  26  S.  W.  Rep.  615  ;  Fordyce  v. 
Dubose  (1894),  87  Tex.  78  ;  s.  c.  268.  W. 
Rep.  1050,  in  which  cases  it  was  held  that 
the  rights  of  the  bondholders,  secured  by 
a  mortgage  executed  before  the  passage  of 
the  Receivers'  Act,  could  not  be  affected 
or  prejudiced  by  any  lien  which  the 
court  was  authorized  to  impose  under  the 
provisions  of  that  act. 

2  St.  Louis  Trust  Co.  v.  Kelly  (189.'.), 
70  Fed.  Rep.  32  ;  s.  c.  16  C.  C.  A.  110, 
followed   in   Ames   et   (tl.  v.   Union    Pac. 


40 


626 


RAILWAY    BONDS    AND    MORTGAGES.        [CHAP.  XXVIII. 


The  Supreme  Court  of  Georgia  has  taken  a  position  against 
the  theoi'ies  of  all  the  decisions  of  the  other  courts  on  this  subject, 
and  held  that  a  mortgagee  having  a  right  under  his  mortgage  to 
possession  of  a  railroad  company  and  to  control  the  income,  whei'e 
he  prefers  to  foreclose  his  mortgage  and  to  have  a  sale  in  his  pro- 
ceedings to  that  end,  it  is  inequitable  to  give  priority  to  the  mort- 
gage over  a  judgment  fur  a  tort  against  the  railroad  company 
obtained  while  the  company  was  left  in  control  of  its  property 
and  income.^ 

In  Tennessee,  a  statute  expressly  forbids  the  creation  of  a  lien 
which  shall  be  superior  to  claims  for  injuries  to  person  or  prop- 
erty caused  by  the  operation  of  the  road.  A  claim  of  this  de- 
scription does  not  forfeit  the  protection  of  the  statute  by  being 
embodied  in  a  formal  contract ;  as  where  there  is  a  compi'omise, 
by  which  the  company  binds  itself  to  give  an  injured  employee 
work  for  a  specified  period.^ 

This  act  of  1877,  ch.  12,  §  3,  provides  "  that  no  railroad  company 
or  corporation  shall  have  power  under  this  act,  or  any  of  the  laws 
of  this  State,  to  create  a  mortgage  or  other  kind  of  lien  on  its  prop- 
erty in  this  State,  which  shall  be  valid  and  binding  against  judg- 
ments or  decrees,  and  execution  therefrom,  for  timbers  furnished 


Ry.  Co.  etal.  (1896),  74  Fed.  Rep.,  335; 
Farmers'  Loan  &  Trust  Co.  v.  North- 
ern Pac.  R.  Co.  et  al.  (Watts,  Inter- 
vener),   (1896),   74  Fed.  Rep.   431. 

In  this  last  case  Gilbert,  C.  J.,  said  : 
"  Such  claims  for  injuries  occurring  under 
the  receiver's  own  management  are  paid, 
it  is  true,  in  preference  to  the  mortgage 
debt,  not  for  the  reason  of  their  preferen- 
tial nature,  nor  because  of  any  superior 
equity  in  their  favor  over  claims  for  dam- 
ages which  arose  before  the  receiver  was 
appointed,  but  because  they  are  liabilities 
whicli  were  incurred  by  the  receiver  in  the 
course  of  his  own  o]}eration  of  the  road, 
and  are  payable  by  him  as  other  expenses 
of  the  management." 

The  court  also  distinguished  Farmers' 
I,oan  &  Trust  Co.  v.  Northern  Pac.  R.  Co. 
(1895),  71  Fed.  Rep.  245.  See  as  to 
judgments  for  personal  injuries  against  a 
I'oinpany  not  having  a  preference  over 
bonds  secured  by  a  mortgage  against  earn- 
ings reccdved  before  appointment  of  a 
receiver,  voluntarily  j)ai(l  over  to  him  by 
the  comiiany  or  from  other  moneys  in  liis 
hands.     Farmers'    Loan   &    Trust    Co.    v. 


Detroit,  B.  C.  &  A.  R.  Co.,  In  re  Keating 
(1895),  71  Fed.  Rep.  29. 

In  New  York  Security  &  Trust  Co.  v. 
Louisville,  E.  &  St.  L.  R.  Co.  (1897),  79 
Fed.  Rep.  386,  a  judgment  against  the 
company  for  a  death  loss  during  the  opera- 
tion of  the  road  was  held  not  to  be  an 
operating  expense  which  would  entitle  it 
to  priority  of  payment  over  the  mortgage  ; 
it  was  further  held  that  the  holder  of  the 
judgment  could  not,  on  the  ground  that  a 
supersedeas  bond  given  on  an  appeal  by 
the  company  having  caused  him  to  lose 
his  right  to  levy  and  sell  the  property, 
before  it  was  placed  in  the  hands  of  a 
receiver,  he  was  equitably  entitled  to  en- 
force the  rights  of  the  surety  on  the  bond 
in  behalf  of  his  claim.  See  also  Vlatch 
V.  American  Loan  &  Trust  Co.  (1897),  79 
Fed.  Rep.  471. 

1  Green  v.  Coast  Line  R.  Co.  et  al. 
(1895),  97  Ga.  15  ;  s.  c.  24  S.  E.  Rep.  814 
(1895),  a  well  and  thoroughly  discussed 
case  ;  opinion  by  Bleckle}',  C.  J. 

2  Frazier  v.  East  Tenn.,  Va.  &  Ga.  R. 
Co.  (1889),  88  Tenn.  138;  s.  C.  40  Am. 
&  Eng.  R.  R.  Cas.  358. 


§  635.]  PREFERRED  DEBTS.  627 

or  work  and  labor  done  on  its  road,  or  for  damage  done  to  persons 
and  property  in  the  operation  of  its  railroad  in  this  State."  In  an 
intervention  in  a  railroad  foreclosure  suit,  a  claim  of  a  consignee 
of  goods  shipped  for  loss  of  the  goods,  growing  out  of  their  loss  by 
fire  as  a  result  of  non-delivery  of  the  goods  to  intervener  from 
carelessness  or  negligence  of  the  company's  agent,  was  recognized 
as  a  claim  coming  within  the  purview  of  this  statute  w^hich  gave  it 
a  lien  upon  the  property  prior  and  superior  to  the  mortgage  secur- 
ing the  bondholders.- 

This  Tennessee  statute  will  not  affect  judgments  obtained 
against  a  Tennessee  railroad  company  whose  road  runs  into  an- 
other State  ;  in  the  latter  State,  in  actions  or  causes  of  action 
arising  in  that  State,  such  judgments  will  not  be  given  priority 
to  the  claims  of  the  mortgage  bondholders.^ 

That  all  contracts  are  made  with  reference  to  the  law  of  the 
State  in  which  the  subject-matter  of  the  contract  is,  and  in  which 
the  contract  is  made,  is  true  with  regard  to  mortgages  by  a  railroad 
corporation.  The  law  entci's  into  and  becomes  a  part  of  the  con- 
tract as  if  it  were  there  in  express  terms.^ 

It  follows  that  a  person  securing  a  judgment  for  personal  injuries 
inflicted  by  negligence  of  a  railroad  company's  employees,  bring- 
ing his  action  within  the  time  limited  under  the  act  of  South  Caro- 
lina (§  1528,  Gen.  St.  S,  C.  1882),  which  makes  this  judgment  relate 
back  to  the  date  when  the  cause  of  action  arose,  and  be  a  lien  as  of 
that  date,  of  equal  foi'ce  with  the  lien  of  employees  for  wages,  and 
superior  to  the  lien  of  any  mortgage  securing  bonds,  will  be  en- 
titled to  enforce  its  payment  against  one  purchasing  the  property 
at  foreclosure  sale,  subject  to  payment  on  his  part  of  all  liens 
superior  to  the  mortgage.* 

This  ruling  is  in  accord  with  that  of  the  Supreme  Court  of  the 
United  States  in  a  case  brought  by  writ  of  error  from  the  Supreme 
Court  of  Tennessee.^ 

A  judgment  against  a  railroad  company  for  a  tort,  though  the 
action  be  brought  after  the  record  of  a  mortgage  upon  its  prop- 
erty, will  be  preferred  in  payment  out  of  the  earnings  or  property 

1  C'Titral  Trust  Co.  v.  East  Teiin.,  *  Southern  Ry.  Co.  v.  BonKniglit 
Yn.  &  Ga.  Ky.  Co.  (1895),  70  Fed.  Sep.  (1895),  70  Fed.  Rep.  442;  s.  c.  17  C.  C. 
764.  A.   181  ;  followed  in  Ceutral  Trust  Co.  v. 

2  Central  Trust  Co.  of  New  York  v.  Madden  (1895),  70  Fed.  Rep.  451  ;  s.  c. 
East  Tenn.,  Va.  &  Ga.  Ry.  Co.    (Simmons  17  C.  C.  A.  31. 

et  cL,  Interveners),   (1895),  69  Fed.  Rep.  ^  East    Tenn.,    Va.    &   Ga.   R.  Co.  v. 

658.  Frazier  (1891),   139  U.  S.   288  ;  s.  c.  11 

3  Southern  Ry.  Co.  v.  BonKniglit  Sup.  Ct.  Rep.  517,  affirming  88  Tenn.  138; 
(1895),  70  Fed.  Rep.  442.  s.  c.  12  S.  W.  Rep.  537  (1889). 


628 


RAILWAY   BONDS   AND   MORTGAGES.       [CHAP.  XXVIII. 


in  a  foreclosure  sale,  under  §  1255,  Code  of  North  Carolina,  which 
provides  that  "  mortgages  of  incorporate  companies  upon  their 
property  or  earnings  .  .  .  shall  not  have  power  to  exempt  the 
property  or  earnings  from  executions  for  the  satisfaction  of  any 
judgment  obtained  in  courts  of  State  ...  for  torts  .  .  .,"  etc.^ 


1  Boston  Safe  Deposit  &  Trust  Co.  v. 
Hudson  (1895),  68  Fed.  Rep.  758  ;  s.  c. 
15  C.  C.  A.  651  (1895). 

Statutes  of  some  of  the  States  as  to 
priority  of  liens  to  mortgage  :  Illinois, 
Rev.  Stat.  1887,  ch.  114,  §  51,  Liens 
upon  railroads  ;  Indiana,  Rev.  Stat.  1888, 
§  3919,  Lien  for  taxes  and  debts  ;  Kansas, 
Gen.  Stat.  1889,  §  1261,  Judgment  for 
damages  prior  in  lien  to  mortgages  exe- 
cuted thereafter.     Kentucky,   Rev.   Stat. 


1894,  §  2487,  Lien  of  employees  and 
material-men  superior  to  all  other  incum- 
brances ;  Mississippi,  Code  1892,  §§  839, 
3567,  Mortgage  of  future  earnings  subor- 
dinate to  debts  contracted  in  carrying  on 
the  business  of  the  corporation  ;  Montana, 
Comp.  Laws  1887,  §  707,  Judgment  for 
injuries  prior  in  lien  to  mortgage  ;  Ohio, 
Rev.  Stat.  1890,  §  3398,  Judgment  for 
labor,  supplies,  or  damages  for  injuries 
preferred  to  mortgage. 


§  636.J 


EXPENDITURES   BY   CREDITORS,   ETC. 


629 


CHAPTER   XXIX. 

POSITION  OP  CREDITORS  WHO  MAKE  EXPENDITURES  EITHER  CONTRIB- 
UTING TO  PRESERVATION  OR  ENURING  TO  BENEFIT  OF  MORTGAGED 
PROPERTY. 


§  636.  Mortgage  Lien  usually  preferred  to 
Claim  of  Lender  to  Company  to 
pay  Interest  or  Operating  Ex- 
penses. 

637.  Lender,  how  far  entitled  to  Benefit 

of  Statutory  Lien  held  by  Cred- 
itor paid. 

638.  Rule  when  Lender  is  a  Court  Offi- 

cial. 
Lender  of  Money  to  pay  for  Rolling- 
stock,    when     not     entitled    to 
Preference  on  Ground  of  Subro- 
gation to  Vendor's  Lien. 


639. 


§  640.  Preference  for  Lender's  Claim  as- 
serted on  Ground  of  Estoppel. 

641.  What    Protection    is    accorded   or 

Preferences  given  to  Sureties  on 
Bonds  given  by  Company  dur- 
ing Litigation. 

(a)  Appeal  Bond,  Sureties  on. 

(b)  Surety  on  Injunction  Bond. 

642.  Status  of  Persons  paying  Taxes  on 

Mortgaged  Property. 


§  636.  Mortgage  Lien  usually  preferred  to  Claim  of  Lender  to 
Company  to  pay  Interest  or  Operating  Expenses.^  —  Debts  due  to 
persons  who  have  lent  money  to  pay  interest  or  operating  ex- 
penses are,  as  a  rule,  not  entitled  to  preference  as  against  the 
mortgage  lien.  Such  a  loan  merely  creates  the  relation  of  debtor 
and  creditor  between  the  mortgagor  and  the  lender,  and  in  the 
absence  of  some  special  consideration  no  equity  can  arise  in  favor 
of  the  latter  as  against  other  creditors  holding  a  security  prior  in 
point  of  time,  merely  by  reason  of  the  voluntary  application  the 
debtor  may  make  of  the  money  borrowed.^ 


1  As  to  rank  of  creditors  paying  cou- 
pons see  also  Chap.  III. 

2  Newport  &  Cincinnati  Bridge  Co.  v. 
Douglass  (1877),  12  Bush,  673,  714  ;  Mor- 
gan's La.  &  Tex.  R.  &  St.  Ship  Co.  v. 
Texas  Central  R.  Co.  (1891),  137  LT.  S. 
171  ;  s.  c.  11  Sup.  Ct.  Rep.  61  ;  45  Am. 
&  Eng.  R.  R.  Cas.  631.  In  the  latter 
case  a  railroad  company  which  was  inter- 
ested in  maintaining,  as  a  going  concern, 
a  mortgaged  connecting  line,  made  large 
advances  to  the  latter   in   consideration, 


as  was  alleged,  of  being  reimbursed  from 
the  earnings.  A  large  proportion  of  the 
loans  was  applied  to  the  payment  of  the 
bonded  interest,  and  the  rest  was  used 
to  defray  operating  expenses  and  pay  taxes. 
Under  these  circumstances  it  was  held  that 
the  lender  Avas  not  entitled  to  any  prefer- 
ence over  the  bondholders,  either  on  the 
ground  of  a  superior  equit}'  or  by  way  of 
subrogation  ;  and  that  even  if  the  advances 
could  have  been  treated  as  having  been 
specifically  applied  to  the  payment  of  in- 


630 


RAILWAY    BONDS   AND   MORTGAGES.  [CHAP.  XXIX. 


On  the  other  hand,  it  has  been  held  that  bondholders  who,  after 
receiving  a  promise  from  the  officers  of  the  road  that  they  are  to 
be  reimbursed  out  of  the  net  earnings,  advance  money  to  pay  the 
wages  of  employees,  and  thus  avert  an  impending  strike,  are  en- 
titled to  be  repaid  this  advance  in  preference  to  the  rest  of  the 
bondholders  out  of  the  earnings  coming  into  the  hands  of  a 
receiver  afterwards  appointed.^ 


terest,  which  the  evidence  did  not  show  to 
be  the  case,  such  payment  would  have 
afforded  no  basis  for  the  assertion  of  a 
preference  as  against  the  bondholdei's. 
The  fact  that  the  interest  coupons  were, 
so  far  as  disclosed,  paid,  not  purchased, 
excluded  the  possibility  of  setting  up  any 
right  based  upon  the  hypothesis  that  they 
were  still  outstanding  ;  and  the  contention 
was  wholly  inadmissible  that  the  bond- 
holders, because  they  received  what  was 
due  to  them,  should  be  held  to  have  as- 
sented to  the  running  of  the  road  at  the 
risk  of  returning  the  money  thus  paid,  if 
the  company,  by  reason  of  unrealized  ex- 
pectations on  the  part  of  those  who  made 
the  advances,  should  ultimately  turn  out 
to  be  insolvent.  To  charge  the  bondhold- 
ers with  the  responsibility  of  the  operation 
of  a  road,  as  against  the  party  who,  by 
supplying  funds  for  the  payment  of  inter- 
est, havb  prevented  them  from  taking  pos- 
session, was  declared  to  be  unreasonable. 
Nor  was  the  claim  of  the  lender  strength- 
ened by  the  fact  that  all  that  he  did  inured 
to  the  advantage  of  the  i)ublic.  "It  is  true," 
said  Chief  Justice  Fuller,  "  that  a  railroad 
company  is  a  (-orporation  operating  a  pub- 
lic highway,  but  it  does  not  follow  that 
the  discharge  of  its  public  duties  excuses 
it  from  amenability  to  its  private  obliga- 
tions. If  it  cannot  keep  up  and  maintain 
its  road  in  suitable  condition,  and  perform 
the  public  service  for  which  it  was  en- 
dowed with  its  faculties  and  franchises,  it 
must  give  way  to  tliose  who  can.  To  al- 
low anotlier  corporation,  whii:h,  for  its 
own  purposes,  has  kept  a  railroad  in  opera- 
tion in  th(!  hands  of  the  original  company, 
by  enal)ling  it  to  prevent  those  who  would 
otherwise  be  entitleil  to  take  it  from  doing 
80,  a  jireference  in  reimbursement  over  the 
latter  on  tlie  ground  of  superiority  of 
equity,  would  be  to  permit  tlie  speculative 
action  of  tliird  parties  to  defeat  contract 


obligations,  and  to  concede  a  power  over 
the  property  of  others,  which  even  govern- 
mental sovereignty  cannot  exercise  without 
limitation." 

In  Duncan  v.  Mobile  &  Ohio  R.  Co. 
(1876),  2  Woods,  542,  decided  before  the 
doctrine  as  to  "preferential  debts"  had 
been  fully  developed.  Judge  Woods  came 
to  the  conclusion  that  he  could  not,  with- 
out the  assent  of  the  bondholders,  direct 
the  application  of  the  income  of  the  road, 
after  the  trustees  had  taken  possession,  to 
the  payment  of  a  floating  debt,  part  of 
which  represented  money  spent  in  paying 
interest  and  making  improvements.  The 
mere  fact  that  the  payment  appeared, 
under  the  circumstances,  to  be  for  the 
interests  of  the  bondholders  was  declared 
not  to  furnish  sufficient  ground  for  such 
an  exercise  of  judicial  authority.  The 
court  has  no  right  to  make  a  contract  for 
them  because  it  thinks  the  contract  a 
good  one.  In  the  same  litigation  the  ques- 
tion was  subse(piently  presented,  whether 
a  firm  of  bankers,  who  were  also  the  finan- 
cial agents  of  the  company,  and  general 
managers  of  its  pecuniary  concerns,  were 
precluded  by  their  fiduciary  position  from 
repaying  themselves  from  funds  in  their 
hands  a  loan  which  they  had  made  for  the 
purpose  of  enabling  the  company  to  pay 
interest  on  its  bonds  and  other  ]ires3ing 
obligations.  Justice  Bradley  sustained  the 
tiansaction,  saying  that  it  did  not  appear 
but  that  they  had  claims  of  the  highest 
equity  to  be  paid.  See  also  Duncan  v. 
Mobile  &  Ohio  R.  Co.  (1877),  3  Woods, 
567. 

As  ]i:>rtinent  to  this  note  see  Ef.  Regent's 
Canal  Iron  Works  Co.,  Ex  parte,  Grissell, 
3  f'h.  T)iv.  411  ;  Be.  Ormerod,  Grierson,  & 
Co.  (1890),  W.  N.  217. 

1  Atkins  V.  Petersburg  R.  Co.  (1879), 
3  Hughes,  307  ;  s.  c.  2  Fed.  Cas.  90,  Case 
No.  604.     There  the  order  was  made  after 


§  G37.]  EXPENDITURES    BY    CREDITORS,    ETC.  631 

This  rule  has  been  declared  by  the  Court  of  Appeals  of  New 
York  iu  a  late  case.  The  right  of  a  creditor  of  an  insolvent  cor- 
j)oration  in  the  hands  of  a  receiver  to  have  a  preference  over 
bondholders  under  a  lirst  nioi'tgagc  is  strictissirni  juris.  ...  A 
party  loaning  money  to  an  embarrassed  corporation  subsequently 
adjudged  to  be  insolvent,  and  taking  security  therefor,  is  not  in  a 
position  which  entitles  him  in  equity  to  be  adjudged  to  have  a 
lien  on  mortgaged  property  of  the  corporation  or  its  proceeds  in 
preference  to  bondholders  under  a  mortgage  existing  when  the 
loan  was  made,  and  it  is  immaterial  for  what  purpose  the  loan 
was  made,  or  how  the  money  received  thereon  was  applied,  provided 
the  bondholdei's  were  not  parties  to  the  ti-ansaction.^ 

A  recognized  method  by  which  one  who  desires  to  assist  a  com- 
pany to  pay  debts,  which  are  entitled  to  some  special  preference 
by  way  of  lien  or  otherwise,  may  })rotect  himself,  is  to  purchase 
those  claims  himself,  and  thus  secure  all  the  rights  to  which  the 
claimants  may  be  entitled. 

Further  illustrations  of  the  principle  upon  which  the  above  cases 
turned  will  be  found  in  Chapters  II.,  III.,  on  the  questions  whether 
bonds  and  coupons  are  to  be  treated  as  bought  or  paid. 

§  037.  Lender,  ho'w  far  entitled  to  the  Benefit  of  a  Statutory- 
Lien  held  by  the  Creditor  paid.  —  The  general  rule  stated  in  the 
last  section  is  in  no  way  qualified  by  the  mere  fact  that  the  cred- 

the  appointment  of  a  receiver,  the  court  lien  by  order  of  the  court,  further  claims 
holding  that  the  case  fell  within  the  doc-  based  upon  the  equity  of  the  same.  With 
trine  of  Fosdick  v.  Schall,  that  preferred  reference  to  this  contention  Chief  Justice 
claims  may  be  thus  provided  for,  even  if  Andrews  said:  "There  is  a  sound  equity 
their  payment  has  not  been  made  a  condi-  which  supports  the  doctrine  that  when  the 
tion  of  the  appointment.  Fosdick  y.  Schall  nature  of  the  property  is  such  that  the 
is  not  an  authority  for  the  broad  doctrine  business  to  which  it  has  been  devoted 
here  attributed  to  it.  (See  Chap.  XXVII.)  cannot  be  discontinued  without  great 
But  that  doctrine  is  undoubtedly  within  probable  loss,  the  court  may  authorize 
the  spirit  of  Miltenberger  v.  Logansport  it  to  be  continued  by  its  officer  and  re- 
Ry.  Co.  {supra),  and  is  strongly  supported  ceiver,  pending  the  closing  up  of  the 
by  the  analogy  of  the  cases  in  which  the  affairs  of  the  insolvent  corporation.  Ex- 
surety  on  an  injunction  bond  has  been  penses  incurred  by  a  receiver  under  such 
granted  the  privileges  of  a  preferred  cred-  circumstances  may  be  justly  said  to  be 
iter.  (See  §  fi42,  post)  expenses  of  preservation  for  the  benefit  of 
1  Farmers' Loan  &  Trust  Co.,  Trustee,  bondliolilers  or  other  persons  entitled  to 
V.  Bankers'  &  Merchants'  Telegraph  Co.  share  in  the  final  distribution,  which 
et  nl..  In  the  matter  of  the  claim  of  the  ought  to  be  first  paid.  But  it  is  obvious 
Third  N:itional  Bank  of  the  City  of  New  that  with  the  best  intentions  attemjtts  liy 
York  (1S96),  148  N.  Y.  315  ;  s.  c.  42  N.  the  court  to  carry  on  the  business  of  a 
E.  Rep.  707.  The  bank  sought  to  have  its  railroad  or  of  a  telegraph  company  through 
claim  for  money  loaned  the  company  placed  its  receiver  are  hazai-dous,  and  we  think 
on  a  footing  with  claims  of  persons  who  courts  may  well  pause  before  extending 
had  in  the  foreclosure  proceedings  received  the  application  of  the  principle  to  which 
receiver's  certificates,   with  a  priority  of  we  have  adverted." 


632  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  XXIX. 

iters  who  are  paid  with  the  money  advanced  had  a  statutory  lien 
upon  the  property  of  the  corporation.^ 

A  construction  more  favorable  to  the  person  advancing  money 
to  pay  off  debts  of  a  preferred  class  has,  however,  been  placed 
upon  the  Mississippi  Code  (pars.  839  &  3567),  which  provides  that 
no  mortgage  of  the  income,  future  earnings,  or  rolling-stock  of  a 
railroad  corporation  shall  be  valid  against  debts  contracted  in 
carrying  on  the  business  of  the  corporation.  Under  this  pro- 
vision persons  making  advances  to  enable  the  company  to  pay  off 
taxes,  balances  due  to  other  lines,  and  arrears  of  wages  are  en- 
titled to  payment,  as  against  the  mortgagees,  out  of  the  income, 
whether  earned  before  or  since  the  appointment  of  the  receiver,  if 
that  suffices,  and,  if  there  has  been  a  diversion  of  the  income,  out 
of  the  proceeds  of  the  sale  of  the  railway .^ 

§  638.  Rule  when  the  Person  advancing  the  Money  is  a  Court 
Official.  —  It  has  been  shown  in  an  earlier  chapter  that  a  re- 
ceiver cannot  of  his  own  motion  issue  certificates  which  shall  be 
a  first  lien  on  the  trust  estate.  As  a  consequence  of  this  doctrine, 
it  has  been  held  that  a  receiver  who  has  paid  interest  on  the  bonds 
of  a  subordinate  company  will  not  be  reimbursed  by  receiver's 
certificates  constituting  a  lien  on  the  property  of  the  latter  com- 
pany prior  to  the  mortgage  securing  the  bonds,  but  that  his  claim 
will  be  admitted,  ranking  next  after  the  mortgage.^ 

In  England  a  more  severe  doctrine  has  been  laid  down  in  re- 
gard to  the  administration  of  an  insolvent  canal  company  in  wind- 
ing-up proceedings.  Advances  made  by  a  liquidator,  even  when 
made  under  the  sanction  of  an  order  of  court,  will  not  be  given 
priority  of  payment  out  of  the  corpus  of  the  estate  as  against  the 
claims  of  mortgagees,  even  though  the  transaction  was  for  the 
benefit  of  the  debenture-holders ;  and  a  sale  of  the  property  at 
the  time  the  advances  were  made  would  probably  have  produced 
a  much  smaller  amount  than  was  ultimately  received,  in  conse- 
quence of  the  fact  that  the  advances  were  so  made,  and  the 
necessity  for  a  sale  postponed.  The  debenture-holders  have  a 
right  to  express  their  opinion  whether  the  business  shall  be  car- 
ried on  at  their  risk,  and  cannot  be  bound  by  any  such  arrange- 
ment unless  they  arc  brought  before  the  court,  and  assent  thereto.^ 

1  Siuldath  V.  Gallagher  (1895),  126  :\Io.  *  In  re  Regent's  Canal  Works  (1875), 

393.  L.  R.  3  Ch.Div.   411.     The  rrasou  here 

'^  rarnK;r.s'  Loan  &  Trust  Co.  i'.  Vioks-  assij^ned  illustrates  the  distinction  taken 

burg  &  McMidian  R.  Co.  (1888),  33  Fed.  in  this  country  between  the  jjowers  of  a 

Rep.  778.  court  in  managing  the  alTairs  of  a  jirivate 

'  I'liinizy  V.  Augusta  &  K.  R.  Co.  (1894),  and    a    quasi    [lublic    corpoiation.      See 

62  Fed,  Rep.  771.  Chap.  XXIX. 


§  639.]  EXPENDITURES    BY   CREDITORS,    ETC.  633 

The  fact  that  the  lender  takes  collateral  security  for  his  loan  is 
regarded  as  almost  conclusive  evidence  that  he  relied  on  the  credit 
of  the  company  and  the  security  so  furnished.^ 

Thus  where  the  company  receives  a  loan  from  a  bank  of 
$40,000,  giving  therefor  an  indorsed  note,  and  at  the  same 
time  deposits  with  the  lender,  as  collateral,  $80,000  of  the  bonds 
secured  by  the  mortgage  under  foreclosure,  the  presumption  is 
that  the  lender  relied  for  its  ultimate  security  on  the  indorsers  of 
the  note  and  the  proceeds  of  the  bonds.^ 

But  it  seems  that,  in  such  a  case,  if  the  money  is  lent  for  the 
express  purpose  of  paying  the  bonded  interest,  and  was  so  ap- 
plied, the  loan  should  be  regarded  as  a  preferential  debt,  at  least 
if  it  is  made  with  the  knowledge  and  consent  of  the  trustees.^ 

The  same  result  would  doubtless  follow  if  the  trustees  are 
shown  to  have  been  guilty  of  any  fraud  or  deception  in  con- 
cealing the  insolvency  of  the  company,  and  thus  inducing  the 
lender  to  make  the  advance.* 

§  639.  Lender  of  Money  to  pay  for  Rolling-stock,  when  not  en- 
titled to  a  Preference  on  the  Ground  of  Subrogation  to  Vendor's 
Lien.  —  Aside  from  the  cases  in  which  subrogation  is  allowed  in 
cases  of  sureties  and  other  persons  who  satisfy  claims  against 
third  parties  to  protect  their  own  rights,  subrogation  can  only 
result  from  an  express  agreement  either  with  the  debtor  or  cred- 
itor, and  therefore  cannot  be  predicated  of  a  case  where  there  is  a 
mere  understanding  on  the  part  of  persons  advancing  money  to  pay 
the  instalments  of  the  price  of  rolling-stock,  subject  to  a  vendor's 
lien  till  fully  paid  for,  that  they  shall  be  subrogated  to  that  lien, 
and  there  is  nothing  to  show  that  they  occupy  the  position  of 
guarantors  on  the  contract,  or  are  in  any  way  bound  for  its  per- 

1  Addison  v.  Lewis  (1882),  75  Va.  701  ;  to  the  benefit  of  the  lien  of  the  prior  mort- 

s.  c.  9  Am.  &  Eijg.  R.  R.  ('as.  702  ;  Fidel-  gages  ;  but  the  court  held,  upon  a  review 

ity  Insurance,  Trust,  &  Safe  Deposit  Co.  of  the  circumstances,  that  the  transaction 

V.  Shenandoah  Valley  R.   Co.   (ISSO),  86  amounted  to  a  satisfaction  of  the  coupons 

Va.  1  ;  s.  c.  9  S.  E.  Rep.  751  ;  38  Am.  &  surrendered. 

Eng.  R.  E.  Cas.  559.     In  the  latter  case  2  i>enn  v.  Calhoun   (1887),  121  U.  S. 

the  claimants,  a  firm  of  bankers  who  acted  251  ;  s.  c.  7  Sup.  Ct.  Rep.  906. 
as  financial  agents  of  a  railroad  company,  ^  Penn  v.  Calhoun  (1887),   121  U.  S. 

also  contended  tliat,  as  they  had   surren-  251  ;  s.  c.  9  Sup.  Ct.  Rep.  906.     In  that 

dered   coupons   of    tlie   first   and    second  case,  however,  the  evidence  failed  to  sat- 

mor'gagps,  and  received  in  exchange  bonds  isfy  tlie  court  that  any  part  of  the  money 

secured  by  an  income  or  third  mortgage  lent  liad  been   used  directly  in  the  pay- 

for  sixty  per  cent,  of  their  par  value,  such  ment  of  the  interest, 
bonds  being  guarantied  to  a  certain  extent  *  This  ground  was  also  relied   on   in 

by  a  third  and  solvent  party,  and  issued  Penn   v.   Calhoun,    supra,    but    was    not 

to  pay  the  floating  and  accruing  indebt-  not  established  by  the  evidence. 
eduess  of  the  companj',  they  were  entitled 


634  RAILWAY   BONDS   AND    MORTGAGES.  [CHAP.  XXIX. 

formance.  Even  supposing  such  a  loan  to  have  been  made  by  the 
directors  of  the  company,  and  that,  as  trustees,  tliey  are  entitled 
to  an  equitable  lien  on  the  trust  property  on  the  ground  that  the 
money  was  advauced  for  the  protection  and  preservation  of  the 
property  committed  to  their  care,  it  is  premature  to  attempt 
the  enforcement  of  such  a  lien  until  all  the  instalments  of  the 
purchase  price  have  been  paid.  Whatever  rights  the  lender  may 
have  in  such  a  case  are  necessarily  subordinate  to  those  of  the 
owners  of  the  rolling-stock,  and  until  a  creditor  is  wholly  satis- 
fied, there  can  be  no  interference  with  his  rights  or  his  securities, 
which  may,  even  by  bare  possibility,  prejudice  or  embarrass  him 
in  any  way  in  the  collection  of  the  residue  of  his  claim.  For 
this  reason  a  petition  will  be  denied  by  which  persons  thus  ad- 
vancing money  seek,  immediately  after  the  institution  of  a  fore- 
closure suit  and  the  appointment  of  a  receiver,  and  while  several 
instalments  of  the  price  of  the  rolling-stock  remain  unpaid,  to 
obtain  an  order  directing  the  receivers,  if  they  decide  to  retain 
possession  of  the  rolling-stock,  to  pay  to  the  petitioners  the 
amount  of  their  advances  out  of  the  first  money  that  comes  in 
their  hands.  Such  an  order  might  greatly  prejudice  the  vendors 
in  the  enforcement  of  their  right  to  the  control  of  the  property 
which  constitutes  tlieir  only  security,  and,  in  effect,  would  actu- 
ally place  the  petitioners  in  a  better  position  than  the  vendors, 
by  giving  them  a  prior  right  to  the  only  fund  out  of  which  pay- 
ment can  be  made  to  either  party.  The  presentation  of  such  a 
petition  at  such  a  time  is  also  premature,  for  the  reason  that  it 
amounts  to  an  attempt  at  an  early  stage  of  a  foreclosure  suit  to 
establish,  in  an  irregular  manner,  the  priority  of  a  lien.  All 
those  who  claim  liens  antagonistic  to  the  lien  thus  set  up  have 
a  right  to  be  heard,  and  the  consideration  of  the  su!>ject-matter  of 
such  a  petition  must  therefore  be  j)Ostponed  until  the  court,  uj)on 
the  hearing  of  the  cause,  at  some  other  proper  time,  proceeds  to 
settle  the  respective  rights  and  priorities  of  all  parties  claiming 
liens  u|)on  the  mortgaged  premises.^ 

§  G40.  Preference  for  Lender's  Claim  asserted  on  the  Ground  of 
Estoppel. —  Before  any  legal  proceedings  are  instituted  to  enforce 
the  mortgage,  the  bondholders  may  undoubtedly  exercise  such 
contr(jl  over  the  pro[)erty,  and  may  so  request  and  sanction  the 
act  of  a  third  ))arty  in  advancing  money  for  the  benefit  of  the 
property,  as  to  estop  them  from  setting  up  their  mortgage  as  a 
lien  paramount  to  the  claim  of  one  who  has  thus  acted  on  the 

1  Rccciver.s  of  New  Jersey  Midland  Ily.  Co.  v.  Worteudyke  (187C),  27  N.  J.  Eq. 


§  641.  EXPENDITURES   BY    CREDITORS,   ETC.  635 

faith  of  their  request  or  direction.  But  the  mere  fact  that  the 
bondholders  have  authorized  a  loan  to  be  made  for  construction 
purposes  does  not  of  itself  give  one  who  subsequently  pays  the 
debt  for  the  accommodation  of  the  company  an  equity  superior  to 
the  mortgage.  To  obtain  such  an  equity,  he  must  show  that  he 
acted  under  such  inducements  from  the  bondholders,  and  had 
such  dealings  with  them  in  the  transaction,  as  to  be  entitled  to 
claim  against  them  the  benefit  of  an  estoppel  in  pais. ^ 

§  041.  What  Protection  is  accorded  and  Preferences  given  to 
Sureties  on  Bonds  given  by  the  Company  during  Litigation.  — 
(a)  Appeal  Bonds,  Sureties  on.  —  If  a  debt  established  against 
the  company  by  the  judgment  of  a  trial  court  is  not  itself  of  such 
a  character  as  to  be  entitled  to  priority  over  the  mortgage,  the 
surety  on  an  appeal  bond  does  not,  by  paying  the  judgment,  after 
it  has  been  affirmed  by  the  appellate  court,  acquire  any  equitable 
claim  to  be  reimbursed  out  of  the  funds  in  the  hands  of  a  re- 
ceiver appointed  while  the  appeal  was  pending  in  preference  to 
the  bondholders.^ 

That  the  surety  in  such  a  case  is  the  attorney  of  the  company 
does  not  change  this  rule.^ 

The  fact  that  the  assets  of  the  company  are  preserved  and  in- 
creased by  the  satisfaction  of  such  a  judgment  is  immaterial,  for, 
whatever  the  amount  or  character  of  those  assets,  the  mortgagees 
are  still  entitled  to  be  paid  therefrom  in  preference  to  creditors 
holding  claims  of  a  subordinate  rank.* 

One  who,  while  a  railroad  company  is  apparently  solvent,  and 
not  in  default  as  to  interest  on  its  bonds,  becomes  surety  on  an 
appeal  bond  in  an  action  on  covenants  made  by  the  company, 
will  not  be  considered,  by  his  act  in  becoming  surety,  to  have 
kept  the  company  a  going  concern  to  the  benefit  of  the  bond- 

1  Kelly  V.  Grepn  Bay  &  Minnesota  R.  surety  in  a  similar  case  to  be  reimbursed 
Co.  (1881),  10  Riss.  151.  It  may  be  out  of  the  funds  in  the  hands  of  the  re- 
noticed  that  the  distinction  between  debts  ceiver,  merely  remarking  that,  "whenever 
for  operating  expenses  and  for  construction  a  party  in  legal  proceedings  has  become 
was  not  adverted  to  in  this  case.  The  security  for  a  railroad,  in  good  faith,  he 
court  rendered  its  decision  solely  upon  the  ought  to  be  protected."  The  distinction 
ground  that,  unless  an  estoppel  was  shown,  taken  in  the  text  was  not  noticed,  but  the 
the  petitioner's  claim  had  accrued  too  long  demand  for  which  judgment  was  given 
before  the  receivership  to  be  enforced  i;n-  was,  as  a  matter  of  fact,  a  lien  demand, 
der  the  "six  months'  rule."  ^  Blair  v.   St.   Louis,   H.   &  K,  R.  Co. 

2  Central  Trust  Co.  v.  Wabash,  St.  Louis,  (1885),  23  Fed.  Rep.  523. 

&  Pac.  R.  Co.  24  Fed.  Rep.  98.     In  Biiyliss  *  Farmers'  Loan  &  Trust  Co.  v.  North- 

V.  Lafayette,  M.   &  B.   R.    Co.    (1879),  9  em   Pac.  R.  Co.  (1895),  68  Fed.  Itep.   36, 

Biss.  90  ;  s.  c.  2  Fed.  Cas.  1080,  Case  No.  distinguishing  Union  Trust  Co.  v.  Morri- 

llil ;  8  Rep.  579,  the  court  allowed  the  son,  infra. 


636  RAILWAY    BONDS    AND    MORTGAGES.  [CHAP.  XXIX. 

holders ;  and,  in  case  of  foreclosure  of  mortgages  afterwards, 
though  he  may  have  had  to  pay  the  bond,  will  have  no  preference 
over  the  mortgagees  against  the  corpus  of  the  property.^ 

Since  the  rights  of  the  owner  of  land  used  for  a  railroad  are 
paramount  to  the  lien  of  the  mortgagees  under  an  after-acquired 
property  clause,  sureties  on  a  bond  given  in  an  appeal  from  a 
judgment  rendered  against  the  company  in  condemnation  pro- 
ceedings are  entitled,  after  being  forced  to  pay  the  judgment,  to 
be  reimbursed  from  the  proceeds  of  sale  in  the  hands  of  a  re- 
ceiver appointed  to  take  charge  of  the  railroad  after  the  appeal 
was  taken.2 

(h)  A  Surety  on  an  Injunction  Bond  given  to  protect  the  rolling- 
stock  and  property  of  the  company  from  execution  and  sale  is 
entitled  to  be  protected  and  indemnified  by  a  receiver  appointed 
while  an  appeal  from  a  decree  dissolving  the  injunction  is  still 
pending.  If,  therefore,  he  pays  a  judgment  against  him  on  his 
bond,  he  is  entitled  to  be  reimbursed  out  of  the  property  and  as- 
sets of  the  company  in  preference  to  the  mortgagees.  To  estab- 
lish his  right  it  is  not  necessary  that  the  surety  should  show  that 
there  has  been  a  diversion  of  earnings.  Such  a  claim  does  not 
stand  on  the  same  footing  as  a  debt  for  labor  supplies  and  the 
like.  It  is  based  on  a  bona  fide  effort  made  to  preserve  the  fund 
itself  from  waste  and  spoliation  after  the  mortgage  was  in  arrear, 
and  the  right  to  reduce  it  to  possession  had  accrued.^ 

Where  property  of  a  railroad  company  absolutely  essential  to 
the  operation  of  its  road  is  levied  upon  by  attachment,  and  the 
trustee  of  a  mortgage  securing  bondholders  requests  a  third  party 
to  go  upon  the  replevin  bonds  in  order  that  the  property  may  be 
retained  for  the  service  of  the  company,  and  the  surety  on  the 
bond  afterwards,  upon  a  judgment  in  favor  of  the  attaching  cred- 
itors, becomes  liable  on  the  bond  and  cannot  restore  the  property, 

1  Wliiteleyw.  Central  Trust  Co.  of  New  by  garnishment  proceedings,  were  held,  in 
York  (189(5),  76  Fi^d.  Rep.  74.  a  foreclosure  proceeding  to  enforce  a  niort- 

2  Rome  &  D.  R.  Co.  v.  Sibert  (1892),  gage  for  bondholders  begun  pending  the 
97  Ala.  393  ;  s.  c.  12  So.  Rep.  69.  appeal,  to  be  entitled  to  have  their  claim 

'  Union  Trust  Co.  v.  Morrison   (1887),  deemed  a  current  operating  expense  accru- 

125  U.  S.  591,  distinguishing  Burnham  v.  inf^  during  receivership  and  paid   out  of 

Bowen  (1834),   111    U.  S.   776;  s.   c.    17  cuiTent  earnings.     See,  as  supporting  this 

Am.  &  Kng.  It.  R.  Cas.  308.  rule.  Farmers'  Loan  &  Trust  Co.  v.  Kansas 

In  Farmers'  I -oan  &  Trust  Co. «.  Northern  City,  W.  &  N.  W.  Ry.  Co.  (1892),  and  the 

Pac.  R.  Co.  (18!15),  71  Fed.  Rep.  245,  sure-  exhaustive   note   of  M.   M.  Cohen,    Esq., 

ties  on  an  appeal  of  the  railroad  company  apjiended  to  this  case,  53  Fed.  Rep.    182- 

from  a  judgment  against  it,  by  whose  action  196:  and   Trust  Co.  v.  Morrison    (1887), 

f.fexecutingtheboiul  the  funds  of  the  com-  125    IT.    S.    591-613;    s.    c.    8    Sup.   Ct. 

pany  had  been  protect(!il  from  abstraction  1001. 


§  642.]  EXPENDITURES   OF   CREDITORS,   ETC.  637 

if  the  trustee  has  instituted  proceedings  for  the  benefit  of  the 
bondholders,  and  receivers  have  been  appointed,  the  court  may 
properly  direct  the  payment  of  the  attaching  creditor's  claims  out 
of  the  proceeds  of  the  sale  of  the  corpus  in  preference  to  the 
mortgagees.^ 

§  642,  Status  of  Persons  paying  Taxes  on  the  Mortgaged  Property. 
—  A  bondholder  has  a  sufficiently  direct  interest  in  the  preserva- 
tion of  the  trust  property  to  be  entitled  to  be  subrogated  to  the 
lien  of  the  State  for  such  taxes  as  he  may  pay  in  order  to  pre- 
vent the  sale  of  the  property .^ 

Such  a  case  obviously  comes  within  the  well-recognized  prin- 
ciple that  the  person  advancing  money  to  pay  a  debt  is  substituted 
to  the  place  of  tlie  creditor,  without  any  express  agreement  to 
that  effect,  when  the  payment  is  made  to  protect  the  rights  of  the 
lender.3 

On  the  other  hand,  where  a  reorganized  company  purchases  and 
receives  possession  of  the  road,  and  thereafter,  with  the  authority 
of  the  court,  pays  certain  taxes  which  would  have  been  a  lien  on 
the  road,  and  also  the  running  expenses  of  the  road  during  the 
receivership,  the  inference  is  that  the  payments  were  made  to 
clear  the  title  to  the  property,  and  the  reorganized  company  will 
not  be  entitled  to  be  reimbursed  out  of  the  proceeds  of  the  sale.'* 

1  Jones  V.   Central   Trust  Co.  of  New  persons  who  exposed  themselves  to  liability 

York   et   al.   (1896),   73    Fed.    Rep.    568.  solely  for  the  accommodation  and  benefit 

Severens,  D.  J.,   said:  "From  what  has  of  the  beneficiaries  under  the  mortgage, — 

been  stated,  it  is  obvious  that  this  liability  the  sureties  having,  so  far  as  ajjpears,  no 

of  the  sureties  was  incurred  for  the  pur-  interest  of   their   own    to   protect."     The 

pose  of   preserving  the  fund   which  will  court  commented  at  length  on  Trust  Co.  v. 

ultimately  be  appropriated  to  the  payment  Morrison  (1887),   125  U.   S.  591;  s.  c.   8 

of  the  mortgage  debt.     It  is  not  the  case  Sup.  Ct.  Rep.   1004,  as  authority  for  the 

of  an  equity  arising,  as  in  many  cases  has  ruling. 

happened,    from  the  diversion   of  current  ^  Humphreys  v.  Allen  (1881),  100  111. 

income  from  the  payment  of  ordinary  cur-  511. 

rent  operating  expenses  to  the  payment  of  ^  Sandford  v.  McLean  (1832),  3  Paige 

the  mortgage  ;  but  it  is  the  case  of  an  Ch.  (N.  Y. )  117. 

equity  arising  from  the  saving  in  a  case  of  *  Central  Trust  Co.  v.  Cincinnati,  J.  & 

necessity  of  the  mortgaged  property  itself,  M.  Ry.  Co.  (1893),  58  Fed.  500, 
and  that  upon  the  call  of  the  trustee  by 


638 


RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  XXX. 


CHAPTER  XXX. 

POWERS   OF   A    COURT    AND    ITS    RECEIVER    IN   MANAGEMENT   OP 

RAILWAY. 


Art.  L  —  In  General. 

§  643.  Power  of  appointing  Court  ple- 
nary in  Regard  to  the  Manage- 
ment of  the  Property. 

644.  Nature   and    Extent   of    Powers 

exercised     by    Receiver,     how 
determined. 

645.  Receivers  have  only  such  Powers 

as  are  conferred  by  Court. 

646.  Principles  upon  which  Contract 

Claims  against   Receivers  will 
be  allowed  or  rejected. 

647.  Powers   conferred   on    Appoint- 

ment liberally  construed. 

648.  Power   of    Court   to   cease    run- 

ning  a   Section   of  Composite 
System. 

649.  Receiver's  Right  to  revoke  Run- 

ning  Powers   given    by   Com- 
pany to  a  Connecting  Road. 

650.  Receiver  authorized  to  take  Lease 

of  another  Road. 

651.  Limited  Powers  of  Receiver  ap- 

pointed for  Special  Purpose. 

652.  Control  over  Property  sometimes 

resei-ved  by  Court  after  Sale. 
Art.  II.  —  Disposition  of  Trust  Fund 
DURING    Receivership    gen- 
erally. 
§  653.   General  Rule  as  to  Expenses  of 
Management. 

654.  Claims      against      Receivership 

should     be    paid     before    Re- 
ceiver discharged. 

655.  Expenses  of  Company  after  Ap- 

pointment   of     Receiver     not 
Proper  Charge  on   Property. 

656.  Exj)enses  of  Refunding  Scheme, 

wlien  not  allowed  ex  parte. 

657.  Expenses  of  carrying  out  Reor- 

ganization Scheme. 


§  658.  When  the  Payment  of  Interest 
on  Bonds  will  be  ordered. 

659.  Property  in  Hands  of   Receiver 

not  exempt  from  Taxation. 

660.  General  Principles  on  Allowance 

of  Operating  Expenses  in  Re- 
ceiver's Accounts. 
6G1.   Expenditures  for  Supplies. 

662.  Office  Rent. 

663.  Interest  on  Money  borrowed  by 

Receiver. 

664.  Interest  paid  on  Bonds. 

665.  Expenditures  usual  in   Business 

with  Dependent  Road. 

666.  Expenditures   to    prevent    Con- 

struction of  Rival  Road. 

667.  Receiver's  Power  to  purchase  on 

Credit. 

668.  Liabilities  arising  from  Contracts 

of  Company  adopted   by   Re- 
ceiver. 

669.  Liabilities   arising   out   of  Torts 

incident  to  Operation  of  Road. 

670.  Compensation    to    Injured    Em- 

ployees. 

671.  Consolidated    System    adminis- 

tered as  Entii'ety 

672.  Restoration  of  Earnings  diverted 

from  Payment  of  Operating  Ex- 
penses during  Receivership. 
Art.  III.  —  PowKR  OF  Receiver  to  raise 
Money  for  Operating  Ex- 
penses BY  Issue  of  First- 
men  Certificates. 
§  673.   R(H'eiver    cannot,    on    his    own 
Motion,  contract  Debts  charge- 
able upon  Fund  in  Litigation. 
674.   Expenses  of  Management  some- 
times made  First  Lien  on  Prop- 
erty by  Order  ajipointing  Re- 
ceiver. 


J 


§  643.] 


POWERS    OF    COURT    AND    RECEIVER. 


G39 


§  675.  General  Principles  u])on  which 
Power  to  issue  First-lien  Cer- 
tificates depends. 

676.  Purchasers  take  Property  Subject 

to  Lieu  for  Operating  Expenses, 
when. 

677.  Lieu   of    Certificates    when    not 

transferred  to  Proceeds  of 
Sale. 

678.  Issue  of  Certificates  to  pay  Op- 

erating Expenses  may  be  au- 
thorized without  Consent  of 
Lien  Creditors. 

679.  Dissent   of   some    Parties  inter- 

ested a  Material  Circumstance. 

680.  Consent    of     Bondholders    Pre- 

requisite to  Issue  of  First-lien 
Certificates. 

681.  Notice  should  be  given  to  Par- 

ties interested. 

682.  Necessity    for    Issue     must     be 

clearly  established. 
Art.  IV.  —  Purposes  fur  which  First- 
lien  Certificates  may    be 

ISSUED. 

§  683.  Funds  required  to  keep  Road  in 
Operation  may  be  procured  by 
Issue  of  First-lien  Certificates. 

684.  Issue  of  First-lien  Certificates  to 

pay  Taxes. 

685.  Issue  of  First-lien  Certificates  to 

pay  Back  Claims  for  Labor, 
Supplies,  etc. 

686.  Issue  of  First-lien  Certificates  to 

keep  up  Single  Divisions  of 
Consolidated  System. 

687.  Issue  of  First-lien  Certificates  to 

pay  for  Construction  Work 
generally. 


§  688.  Certificates  to  pay  for  Construc- 
tion Work  cannot  be  made  First 
Lien  on  Koad  without  Consent 
of  Prior  Lienors. 
Art.  V.  —  Rights  of  Holders  of  Receiv- 
er's Certificates. 

§  689.  Receiver's  Certificates  not  Nego- 
tiable Instruments. 

690.  Purchasers  charged  with  Notice 

of  all  Circumstances  attending 
Issue  of  Certificates. 

691.  Rank  of  Certificates  depends  on 

Final  Decree. 

692.  Negotiation  and  Sale  of  Certifi- 

cates a  Trust  personal  to  Re- 
ceiver. 

693.  Property  is  not  liable  for   Pay- 

ment of  Receiver's  Certificates 
unless  Proceeds  come  under  his 
Actual  Control. 

694.  Purchasers  not  bound  to  see  to 

Application  of  Proceeds. 

695.  Rights  of  Purchasers  not  affected 

by  taking  Collateral  Security. 

696.  Bondholders,  when  estopped  to 

dispute  Validity  of  Certificates. 

697.  Receiver,  when  estopped  to  dis- 

pute Validity  of  Certificates. 

698.  Court,  when  bound  to  recognize 

the  Estoppel  against  Receiver 
to  dispute  Validity  of  Certifi- 
cates. 

699.  Amount  recoverable  by  Holders' 

Certificates. 

700.  Usury  Laws   applicable  to  Cer- 

tificates. 

701.  Holders   need   not  present  Cer- 

tificates for  Payment  before 
Foreclosure  Sale. 


Article  T.  —  In  General. 

§  643.  Power  of  appointing  Court  plenary  in  Regard  to  the  Man- 
agement of  the  Estate.  —  When  a  mortgagee  in  an  action  to  fore- 
close his  mortgage  invokes  the  extraordinary  aid  of  a  court  of 
equity  by  the  appointment  of  a  receiver  of  the  mortgaged  pi'operty 
in  his  interest,  he  thereby  submits  to  the  reasonable  discretion  of 
the  court  in  the  management  and  control  of  the  property  through 
its  receiver,  and  the  action  of  the  court  in  that  respect  represents 
and  binds  the  mortgagee  as  well  as  the  owner.  Upon  the  prin- 
ciple of  this  rule,  a  contract  by  which  a  receiver  in  foreclosure 
proceedings  against  a  railroad  company  permitted  another  com- 


640  RAILWAY    BONDS    AND    MORTGAGES.  [CHAP.  XXX. 

paiij  to  have  perpetual  joint  use  of  a  portion  of  the  route  of  the 
defendant  company,  under  order  of  the  court,  was  held  to  be  a 
binding  one,  and  the  court  denied  the  motion  of  a  purchaser  at 
foreclosure  sale  to  vacate  the  order  or  to  limit  the  duration  of 
the  agreement  or  lease  to  the  time  the  purchaser  went  into 
possession.^ 

A  court  of  general  equity  jurisdiction  has  full  power,  in  dealing 
with  the  estate  of  an  insolvent  corporation  which  has  passed  into 
the  hands  of  a  receiver,  to  direct  the  manner  in  which  the  cor- 
porate property  shall  be  managed  while  in  the  receiver's  pos- 
session, and  the  conditions  on  which  the  funds  shall  be  paid 
out.2 

If,  in  the  course  of  the  receivership,  the  court  makes  an  order 
which  the  parties  to  the  suit  consider  injurious  to  their  interest,  it 
is  their  duty  to  file  a  motion  at  once,  asking  the  court  to  cancel 
or  modify  it.^ 

Where  a  receiver  appointed  by  a  State  court  has  money  in  his 
hands  when  the  cause  is  removed  to  a  federal  court,  the  latter 
court  has  full  authority  to  make  him  account  for  the  funds.'* 

After  a  receivership  is  terminated  by  a  compromise,  carried  into 
effect  by  a  consent  decree  which  defines  the  future  relations  of 
the  various  parties  in  interest,  the  position  of  the  court  ceases  to 
be  one  of  prerogative  and  control,  and  becomes  practically  one  of 
subordination  to  the  agreement  of  the  parties,  its  functions  being 
merely  the  giving  of  formal  assent  and  sanction  to  the  arrange- 
ments devised  by  the  contracting  parties.^ 

§  644.  Nature  and  Extent  of  Powers  exercised  by  Receiver,  by 
what  determined.  —  The  nature  and  extent  of  the  powers,  whether 
ordinary  or  special,  which  a  court  will  undertake  to  exercise 
through  a  receiver,  in  administering  an  insolvent  railroad,  are 
determined  by  the  fact  that  the  office  is  created  to  serve  a  tem- 
porary purpose.  ""  The  management  (of  a  receiver)  is  an  interim 
management ;  its  necessity  and  justification  spring  out  of  the 
jurisdiction  to  liquidate  and  sell ;  the  business  or  undertaking  is 

1  Farmers'  Loan  &  Trust  Co.  v.  Staten  s.  c.  14  Sup.  Ct.  Rep.  86.  The  rule  in 
Island  IJelt  Line  R.  Co.  (1896),  17  Miso..  the  text  was  here  applied  to  a  ca.se  in 
Rep.  107  ;  s.  c.  39  N.  Y.  Su]»pl.  872,  which  the  court  had  ordered  the  receiver 
affirmed  in  Same  v.  Same,  6  App.  Div.  to  pay  rentals  only  after  the  discharge  of 
148;  s.  c.  39  X.  Y.  Siippl.  996  (1896).  preferential  debts. 

2  Woodruff  u.  Erie  Ry.  Co.  (1883),  93  *  Hinckley  w.  Railroad  Company  (1879), 
N.  Y.  609  ;  s.   c.    16  Am.  &  Eng.  R.  R.  100  U.  S.  156. 

Gas.  ."lOl.  6  Vermont  &  Canada  R.  Co.  v.  Vermont 

3  United   States  Trn.st  Co.   r.  Wabnsh     Central  R.  Co.  (1877),  50  Vt.  500. 
Western  Ry.  Co.  (1892),  150  U.  S.  287; 


§  644.]  POWERS   OP   COURT   AND   RECEIVER.  641 

managed  and  continued  in  order  that  it  may  be  sold  as  a  going 
concern,  and  with  the  sale  the  management  ends."  ^ 

Xt  has  indeed  been  laid  down  in  one  case  that  a  court  of  equity 
having  in  charge  the  mortgaged  property  of  a  railroad  company 
is  authorized  to  do  all  acts  not  beyond  the  powers  of  the  company 
itself  that  may  be  necessary  to  preserve  the  property,  and  to  give 
it  additional  value,  not  only  for  the  benefit  of  the  lien-creditors, 
but  also  for  the  benefit  of  the  company,  whose  possession  the 
court  has  displaced.^ 

But  this  sweeping  language  needs  much  qualification,  if  it  is 
intended  to  serve  as  a  statement  of  the  powers  which  a  court  may, 
of  its  own  motion  and  without  regard  to  the  wishes  of  the  lienors 
and  other  creditors,  undertake  to  exercise  in  the  administration 
of  the  estate,  or  even  as  a  statement  of  what  the  court  may  do 
with  the  consent  of  the  various  parties  in  interest.  A  more  cor- 
rect view  of  the  powers  which  a  court  may  legitimately  exercise 
through  a  receiver,  is  that  it  may  authorize  its  officers  to  do  every 
thing  that  may  be  necessary  to  keep  the  property  intact,  and  free 
from  loss  or  injury .^ 

A  court  is  in  any  case  averse  to  making  any  radical  changes  in 
the  condition  of  the  road,  and  its  unwillingness  to  do  so  increases 
in  proportion  as  the  time  for  the  transfer  of  the  property  to  the 
new  owners  draws  nearer.  Probably  a  court  cannot,  without  the 
consent  of  the  secured  creditors,  use  even  the  earnings  in  building 
extensions.* 

And  it  is  certain  that  no  such  work  can  be  undertaken  so  as  to 
prejudice  the  rights  of  those  creditors  in  regard  to  the  corpus  of 
the  property  lien.^ 

1  Gardner  v.  London,  etc.  R.  Co.,  L.  R.  Midi.  &  Grt.  Southern  R.  Co.  (1880),  33 
(1866),  2  Ch.  App.  201,  per  Cairns,  L,  J.  Gratt.  (Va.)  586  ;  s.  c.  1  Am.  &  Eng.  R.  R. 
For  a  general  review  of  the  limits  of  the  Cas.  473,  the  court,  while  declining  to 
powers  which  a  court  may  rightfully  assume  pass  upon  the  abstract  question  of  the 
in  contracting  debts  for  the  conservation  of  power  of  the  court  to  authorize  the  ra- 
the property  during  a  receivership,  see  an  ceiver  to  contribute  from  the  trust  fund 
article  by  the  late  Mr.  Albert  Gallup  in  towards  the  building  of  a  short  branch 
4  Law  Quarterly  Review  (Engl.),  300.  road,  held  that,  as  the  expenditure  had 
This  article  relates  entirely  to  the  practice  turned  out  to  be  eminently  advantageous 
of  the  American  courts.  for  all  the  parties  in  interest,  and  no  ob- 

2  Gibert  r.  Washington  City,  Va.  Midi,  jection  to  the  action  of  the  court  had 
&  Grt.  Southern  R.  Co.  (1880),  33  Gratt.  been  raised  for  two  years,  an  assignment 
(Va.),  586  ;  s.  c.  1  Am.  &  Eng.  R.  R.  Cas.  of  error  based  upon  the  theory  that  such 
473.  action  was  an  excess  of  the  court's  powers 

8  Wabash,  St.  L.  &  Pac.  R.  Co.  v.  Cen-     must  be  overruled, 
tral  Trust  Co.  (1884),  22  Fed.  Rep.  269,  ^  in  Cowdrey  v.  Railroad  Co.   (1870), 

271.  1  Woods,  331,  the  court  refused,  after  the 

*  In   Gibert  v.  Washington  City,  Va.     principal  cause  had  been  taken  up  on  ap- 

41 


642 


RAILWAY   BONDS    AND   MORTGAGES.  [CHAP.  XXX. 


§  645.  Receivers  have  only  such  Powers  as  are  conferred  on 
them  by  the  Court  appointing  them.  —  The  receiver  is  but  the  crea- 
ture of  the  court,  and  has  no  powers  except  such  as  are  conferred 
on  him  by  the  order  of  his  appointment  and  the  course  and  prac- 
tice of  the  court. ^ 

There  is  no  authority  for  the  theory  that,  apart  from  statute,  a 
receiver  may,  in  virtue  of  his  office,  make  a  contract  without  the 
authority  of  the  court,  which  will  bind  the  trust,  or  which  the 
court  will  be  bound  to  recognize  without  regard  to  its  necessity  or 
propriety.  He  may,  it  is  true,  appropriate  moneys  in  his  hands 
belonging  to  the  trusts  to  such  purposes  connected  with  the  trust 
as  he  may  think  proper,  always  taking  the  risk  that  the  court  will 
finally  approve  his  action  ;  but  until  his  contracts  are  approved 
the  court  is  at  liberty  to  deal  with  them  as  it  may  deem  to  be  just, 
and  may  either  modify  them  or  disregard  them  entirely .^ 


peal,  to  authorize  the  receiver  to  purchase 
a  bridge,  or  to  build  or  contract  to  use  a 
loop  line  for  the  purpose  of  making  con- 
nections with  another  road. 

1  Booth  V.  Clark  (1854),  17  How.  322, 
citing  Verplanck  v.  Mercantile  Ins.  Co. 
(1831),  2  Paige  Ch.  438,  452;  Davis  v. 
Gray  (1872),  16  Wall.  203.  In  Ellis  v. 
Boston,  Hartford,  &  Erie  R.  Co.  (1871), 
107  Mass.  1,  is  given  a  resume  of  a  com- 
prehensive order  of  appointment  of  a  rail- 
road receiver.  For  another  example  of 
such  an  order,  see  Bank  of  Montreal  v. 
Chicago,  C.  &  W.  R.  Co.  (1878),  48  Iowa, 
518.  In  Central  Trust  Co.  v.  Wabash, 
St.  L.  &  Pac.  Ry.  Co.  (1885),  23  Fed. 
Rep.  863,  will  be,  found  set  out  the  proper 
orders  to  be  entered  concerning  the  opera- 
tion and  management  by  receivers  of  a 
system  of  roads  extending  through  several 
States,  made  up  of  various  consolidated 
and  leased  lines.  See  also,  as  to  payments 
to  be  made  by  a  receiver,  the  order  quoted 
in  Fosdick  v.  Schall  (1879),  99  U.  S.  235. 

2  Lehigh  Coal  &  Navigation  Co.  v. 
Central  R.  Co.  of  New  Jersey  (1882),  35 
N.  J.  Eq.  426  ;  s.  c.  9  Am.  &  Kng.  R.  R. 
Cas.  479,  per  Van  Fleet,  V.  C,  who 
pointed  out  that  the  passage  quoted  be- 
low, from  Mr,  Justice  Bradley's  opinion 
in  Cowdrey  v.  Railroad  Co.,  simj)ly  ])r(!- 
scribes  what  expenditures,  out  of  tlie 
funds  in  his  hands  as  receiver,  the  conrt 
will  recognize  as  legitimate  and  ]iroper, 
when  the  receiver   comes  to  account  for 


the  administrations  of  his  trust.  In  a 
later  New  Jersey  case  it  was  held  that  the 
statute  of  that  State  which  provides  that, 
if  the  property  of  an  insolvent  railroad 
company  passes  into  the  hands  of  a  re- 
ceiver under  the  order  of  a  chancellor, 
"the  receiver  shall  operate  the  railroad 
for  the  use  of  the  public,  subject  to  the 
order  of  the  chancellor,"  enlarged  the 
powers  of  a  receiver  by  constituting  him 
in  effect  a  statutory  agent,  authorized  to 
do  with  the  railroad  what  he  thinks 
proper  for  the  public  intere.st,  unless  re- 
strained by  the  express  order  of  the  chan- 
cellor, —  the  result  being  that  he  possesses 
as  an  incident  of  the  duties  imposed  upon 
him  an  implied  power  to  make  all  such 
contracts  for  labor  and  supplies  as  are 
reasonably  necessary  to  enable  him  to  per- 
form the  duties  of  his  office,  and  that  his 
contracts  for  such  purposes  bind  the  trust. 
Lehigh  Coal  &  Navigation  Co.  v.  Central 
R.  Co.  of  New  Jersey  (1886),  41  N.  J.  Eq. 
167.  But  this  view  was  rejected  by  the 
Court  of  KiTors  and  Appeals  (s.  c.  (N.  J. 
Eq.,  1888)  35  Am.  &  Eng.  R.  R.  Cas.  18), 
where  the  conclusion  of  the  majority  of 
the  judges  was  that  there  was  "nothing 
in  this  legislation  giving  the  contracts  of 
a  receiver  in  running  a  railroad  any  greater 
force  than  contracts  made  by  a  receiver  for 
tlie  preservation  of  the  property  of  any 
insolvent  railroad."  At  the  same  time  it 
was  held  that  there  was  nothing  in  the 
enactment  to  countenance  the  notion  that 


§  645.] 


POWERS    OF    COURT    AND    RECEIVER. 


643 


A  receiver  of  a  corporation  appointed  and  ordered  to  operate 
and  manage  the  property  pending  the  action  in  which  he  is  ap- 
pointed is  not  bound  to  carry  out  an  executory  contract  made  by 
the  corporation  prior  to  liis  appointment,  and  may  in  his  discretion 
refuse  to  do  so.  Nor  is  his  action  in  such  case  affected  by  the  act 
of  Congress  (24  U.  S.  Stats,  at  Large,  554,  §§  2,  3).i 

Where  plans  for  work  to  be  done  upon  a  building,  say  upon 
land  belonging  to  a  railroad  company,  not  covered  by  a  mortgage 
executed  by  the  company  in  process  of  foreclosure  under  a  con- 
tract with  the  receiver,  are  submitted  to  the  court  and  approved, 


a  receiver's  contract  might  be  revoked  or 
annulled  at  the  pleasure  of  the  chancellor. 
Theoretically  the  chancellor  had  the  power 
to  retain  in  his  hands  the  administration 
of  the  trust,  and  personally  to  direct  and 
order  each  contract  into  which  the  receiver 
should  enter  ;  but,  in  the  nature  of  the 
case,  it  must  have  been  contemplated  by 
the  legislature  that,  in  the  performance  of 
the  multifarious  duties  involved  in  the 
operation  of  the  road,  some  degree  of  dis- 
cretion might  be  accorded  to  the  receiver. 
This  legislation,  therefore,  seems  virtually 
to  be  considered  as  merely  a  declaration 
that  the  discretionary  powers  of  a  receiver, 
appointed  in  pursuance  of  it,  are  to  be 
what  they  are  under  the  ordinary  rules 
observed  by  courts  of  equity  in  adminis- 
tering upon  insolvent  estates  of  other 
kinds. 

For  a  case  in  which  the  extent  of  the 
powers  of  receivers  appointed  by  si)ecial 
legislative  provision  to  take  charge  of  a 
railroad  to  enforce  a  lien  in  favor  of  the 
State,  see  State  of  Tennessee  v.  Edgefield 
&  Kentucky  R.  Co.  (1880),  6  Lea  (Tenn.), 
353  ;  .s.  c.  4  Am.  &  Eng.  R.  R.  Cas.  87. 
There  the  statutory  receivers  were  held  to 
be  in  a  manner  public  agents,  who  did 
not  bind  the  State  unless  they  ac^ted 
within  the  scope  of  their  powers.  They 
had  no  authority,  it  was  said,  to  contract 
debts  to  be  paid  otherwise  than  out  of  the 
earnings  of  the  road.  Nor  could  they 
lease  the  road.  Any  lease  made  by  them, 
not  previously  authorized  or  subsequently 
ratified  by  the  State,  was  absolutely  void, 
and  not  susceptible  of  being  validated  by 
the  fact  that  the  receivers  had  acce])ted 
rents  from  the  lessee.  The  lessee  conse- 
quently  could  not  recover  for  improve- 


ments made  on  the  road  under  such  a 
lease.  The  powers  of  these  receivers  was 
again  considered  in  Lafayette  Co.  v.  Neely 
(1884),  21  Fed.  Rep.  738.  After  one  of 
the  roads  under  the  charge  of  one  of  them 
had  passed  into  the  hands  of  a  purchaser, 
a  stockholder  filed  a  bill  for  an  account- 
ing, and  questioned,  among  other  things, 
the  propriety  of  his  expending  some  of  the 
earnings  on  betterments.  The  court  was 
of  opinion,  upon  general  principles,  that 
his  outlay  upon  permanent  improvements, 
and  on  such  articles  as  rails,  which  had 
been  delivered,  but  had  not  been  fully 
paid  for  when  the  receivership  began, 
could  not  be  complained  of.  Besides  this, 
he  was  by  law  invested  with  plenary  pow- 
ers in  the  matter  of  managing  the  road  ; 
and  as  the  imjirovement  of  the  road  was 
certainly  conducive  to  the  interests  of  the 
State,  which  were  paramount  to  those  of 
the  stockholders,  he  was  clearly  entitled 
to  expend  the  earnings  in  bringing  the 
road  into  such  a  condition  that  it  was  fit 
to  be  used  as  one  of  the  links  in  the  great 
transportation  system  of  which  it  formed 
a  part. 

1  Scott  et  al.  V  Rainier  Power  &  Rail- 
way Co.  et  aJ.  (1895),  13  Wash.  108  ; 
s.  c.   42  Pac.  Rep.  531. 

That  a  receiver  of  a  corporation  is  not 
bound  to  carry  out  its  executory  contracts 
except  as  he  elects,  see  Central  Trust  Co. 
V.  East  Tennessee  Land  Co.  (1897),  79 
Fed.  Rep.  19. 

As  to  the  remedy  of  a  lessor  in  such  a 
case  against  a  receiver,  to  compel  an  elec- 
tion, see  Thomas  v.  Cincinnati,  N.  0.  & 
,T.  P.  Ry.  Co.  (1896).  77  Fed.  Rep.  667. 
See  also  Spencer  v.  Brooks  (Ga.,  1896),  25 
S.  E.  Rep.  480. 


644  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  XXX. 

this  will  dispense  with  the  necessity  of  a  prior  order  of  the 
court  to  the  receiver  to  contract  for  such  work,  and  the  fact 
that  there  was  no  prior  order  entered  will  not  invalidate  the 
contract.^ 

It  is  not  absolutely  necessary  where  there  are  receivers  of 
corporate  property  that  the  contracts  made  with  third  parties  for 
the  benefit  of  the  property  be  executed  by  all  the  receivers  to  bind 
the  trust  property.^ 

A  receiver  has  no  power  to  contract  for  legal  services  so  as  to 
bind  the  fund  in  his  hands,  or  the  property,  except  by  order  of  the 
court  appointing  him.^ 

Any  acts  of  a  receiver  not  within  the  scope  of  the  authority 
conferred  by  the  order  appointing  him,  and  not  otherwise  author- 
ized by  the  court,  do  not  bind  the  court.* 

"  Under  ordinary  circumstances,  the  submission  by  the  receiver 
of  his  accounts  to  the  master  at  frequent  intervals,  so  that  the 
latter  may  ascertain  from  time  to  time  the  character  of  the 
expenditures  made,  and  disallow  whatever  may  not  meet  his 
approval,  will  be  regarded  as  a  sufficient  reference  to  the  court 
for  its  ratification  of  the  receiver's  proceedings.  But,  in  ex- 
traordinary cases,  involving  a  large  outlay  of  money,  the  receiver 
should  always  apply  to  the  court  in  advance,  and  obtain  its  au- 
thority for  the  purchase  or  improvement  proposed."  ° 

Loans  of  a  large  amount,  if  effected  without  obtaining  the 
authority  of  the  court,  will  not  be  allowed  a  priority  as  against  the 
bonds,  even  though  the  money  is  applied  to  the  payment  of  ex- 
penses, which  the  court  may  authorize  to  be  met  by  creating  a 
first  lien  on  the  property.^ 

Nor,  as  a  general  principle,  has  a  receiver  any  power  to  bind  the 
trust  by  contracts  which  involve  large  outlays,  and  which  may 
extend  beyond  the  life  of  the  receivership.' 

A  person  managing  and  controlling  a  road,  as  its  receiver, 
will  not  be  assumed  to  have  exceeded  his  authority  in  making 

1  Girard  Insurance  &  Trust  Co.  i'.  *  Farmers'  Loan  &  Trust  Co.  v.  Chicago 
Cooper  (1896),  162  U.  S.  529;  s.  c.  16  &  A.  Ry.  Co.  (1889),  42  Fed.  Eep.  6; 
Sup.  Ct.   Rep.  879.                                           s.  c.   8  Ry.  &  Corp.  L.  J.   184. 

2  Ibid.  6  Cowdrey    v.    Railroad   Co.   (1870),  1 
8  International  &  Great   Northern   R.     Woods,  331,  per  Bradley,  J. 

Co.  V.  Herndon  (Tex.  Civ.  App.,  1895),  33  ^  Union  Trust  Co.  v.   Illinois  Midland 

S.  W.   Rep.   377.     See  also   International  Ry.  Co.  (1887),   117  U.  S.  434;  s.  c.  25 

&  Great  Northern  R.  Co.   v.  Wentworth  Am.  &  YMrr.  R.  R.  Cas.  560. 
(1894),   8  Tex.  Civ.   App.  5.  ''  Chinaffo    Deposit   Vault   Co.   v.   Mo- 

As   to    emyiloyment  of  counsel  by  re-  Nulta  (1894),  153  U.  S.  554. 
ceiver,   see  ^^■^^well  v.  Great  Western  Tel. 
Co.  (1896),  44  N.  E.  Rep.  891. 


§  646.]  POWERS   OP    COURT    AND    RECEIVER.  645 

a  contract  of  rebatement.  Sucli  excess  of  authority  must  be 
affirmatively  shown.^ 

§  646.  Principles  upon  v^hich  Contract  Claims  against  Receivers 
will  be  allovred  or  rejected  by  the  Court.  —  Tlie  first  question  to 
be  determined  in  every  case  in  which  a  claim  based  upon  contract 
is  presented  against  a  road  in  the  hands  of  a  receiver  is  whether 
it  is  of  a  character  to  entitle  the  applicant  to  the  relief  asked  for. 
If  the  contract  has  been  completely  performed,  and  its  performance 
accepted  by  the  receiver,  and  the  claim  is  merely  for  compensation, 
relief  of  that  kind  would  seem  to  be  proper  in  all  cases,  unless 
where  the  applicant  has  dealt  fraudulently  oi-  collusively  with 
the  receiver,  to  the  detriment  of  the  trust.  Even  if,  in  the  judg- 
ment of  the  court,  the  contract  was  injudicious,  or  improvident, 
and  unreasonable,  no  just  reason  can  be  given  for  debarring  the 
contractor  from  the  stipulated  compensation,  unless  he  had  notice 
of  the  improper  character  of  the  contract ;  for  the  receiver  may  be 
required,  as  a  penalty  for  his  misconduct  or  negligence,  to  re- 
imburse to  the  trust  fund  any  payment  on  account  of  such  a 
contract. 

But  if  the  contract  has  not  been  performed,  the  court  will  pro- 
ceed on  the  principle  that  every  one  who  contracts  with  the  re- 
ceiver must  be  assumed  to  know  that,  if  he  seeks  to  enforce  his 
contract,  it  must  come  under  the  scrutiny  of  a  court  of  equity  ; 
and  that,  if  it  there  appears  to  be  injurious  to  the  trust,  the  court 
will  not  carry  it  out.     He  cannot  complain,  therefore,  if  the  court 

1  Baylest).  Kansas  Pacific  E.  Co.  (1889),  receiver  :  Re  Joshua  Stubbs  (1891),  1  Ch. 

13  Colo.  181;  s.  c.  22  Pac.  Rep.  341;  6  (C.   A.)    475,  482;  British  Linen  Co.   v. 

Ry.  &  Corp.  L.  J.  448  ;  40  Am.  &  Eng.  South  American  &  Mexican  Co.,  37  Sol.  J. 

Corp.  Cas.  42.  840  ;   Willraott  v.   London  Celluloid  Co. 

Order  of  court  as  to  wages  of  employees  (1885),  34  Ch.  Div.  147  ;  Perry  v.  Orien- 

of  a  company  under  its  control,  when  not  tal  Hotels  Co.,  5  Ch.  App.  420  ;  Tottenham 

violated   by  receiver.      Dexter   v.    Union  v.   Swansea  Zinc  Ore  Co.,  32  Wkly.  P,ep. 

Pac.  Ry.  Co.  (1896),  75  Fed.  Rep.  947.  716.     Powers  as  to  books  :  General  Assets 

As   to   a   court's   right   to   continue  a  Purchase     Co.    v.    Chesterton     Coal    Co. 

receiver  of  a  street  railway  in  the  posses-  (1888),  32   Sol.   J.  645  ;    Re   Clyne   Tin 

sion  of  the  streets  of  a  city.     Louisville  Plate  Co.,  47  L.T.  Rep.  439;  Engel  t;.  South 

Trust   Co.   V.   Cincinnati    Inclined   Plane  Metropolitan  Brewing  Co.   (1892),  1  Ch. 

Ry.  Co.  (1897),  78  Fed.  Rep.  307.  442. 

As  to  powers  of  receiver  appointed  at  As  to  the  discretion  of  the  court  in 

instance  of  debenture-holders  and  liqui-  such  appointments,  see  Stanford  Banking 

dator   in   winding-up    proceedings    under  Co.  r.  AUchin  (1891),  26  L.  J.  N.  S.  38  ; 

English  rules  and  statutes,  see  Campbell  Industrial  Trust  Co.  v.   South  American 

V.   f'ompaffnie  Generale  de  Bellegarde,    2  Co.  (1893),  W.  N.  160  ;  Giles  v.  Nuttall, 

Ch.  Div.  181  ;  Bartlett  v.  Northumberland  Re    House    Improvement    Supply    Assn. 

Avenue  Hotel  Co.   (1885),  35  L.  T.  Rep.  (1885),   W.    N.   51  ;    Re  Pound,    Son,   & 

611  ;    Strong  v.  Carlyle  Press    (1893),   1  Hutchins  (C.  A.  1889),  42  Ch.  Div.  402. 
Ch.    (C.  A.)   268.     Liquidator  acting  as 


64:Q  RAILWAY   BONDS    AND   MORTGAGES.  [CHAP.  XXX. 

declines  to  direct  such  a  contract  to  be  performed,  or,  in  case  it 
has  been  repudiated  by  the  receiver,  refuses  to  award  damages,  at 
least  in  the  ordinary  sense  of  the  term,  for  its  non-performance. 
If,  however,  the  contractor  has  in  good  faith  entered  into  a  con- 
tract with  a  receiver  clothed  with  discretionary  powers,  and  before 
the  unreasonableness  and  improvidence  of  such  contract  has  been 
brought  to  his  notice  or  judicially  determined,  has  expended  money 
or  contracted  obligations  which,  if  the  contract  go  unperfoi'med, 
he  cannot  be  protected  against,  it  is  obviously  equitable  that  he 
should  not  be  allowed  to  suffer  any  actual  loss  ;  and  since  the 
receiver  merely  represents  the  fund,  the  claimant  should  be  made 
whole  out  of  that  fund,  and  not  left  to  such  redress  as  he  may  be 
entitled  to  against  the  receiver.  If  the  conduct  of  the  receiver 
require  it,  the  court  might  compel  him  to  reimburse  the  fund  for 
what  would  thus  be  taken  from  it.^ 

An  example  of  an  unreasonable  contract  which  the  court  would 
feel  bound  to  repudiate  would  be  one  for  tlie  furnishing  of  sup- 
plies for  a  period  so  extended  as  to  be  manifestly  greater  than 
that  required  for  winding  up  the  affairs  of  the  receivership  by 
foreclosure  or  otherwise.  On  the  other  hand,  if  the  contractor, 
not  knowing  that  the  receiver's  power  is  about  to  be  terminated, 
is  proceeding  in  good  faith  to  perform  the  contract  for  supplies, 
the  court,  although  it  will  not  compel  the  performance  of  the  con- 
tract, or  award  the  contractor  damages,  will  indemnify  him  against 
actual  loss.^ 

So,  if  the  court  has  actually  sanctioned  a  contract  for  supplies, 
the  amount  due  thereon  must  be  paid  without  reference  to  the 

^  Tlie  statement  in   the  text  is   sum-  formance  of  the  contracts  up  to  the  time 

marized  from  the  opinion  in  Vanderbilt  v.  when  they  were  repudiated.     The  practi- 

Little  (1887),  43  N.  J.   Eq.  669;  s.  c.  35  cal  result  of  this  decision  was  to  modify 

Am.  &  Eng.  R.  R.  Cas.  18.     This  case  was  the  rigorous  rule  laid  down  in  the  trial 

decided  witli  reference  to  the  New  Jersey  court  in  Lehigh  Coal  &  Navigation  Co.  v. 

statute,  but  the  reasoning  of  the  court  in  Central  R.  Co.  of  New  Jersey  (1882),  35 

this  i)art  of  the  opinion  seems  to   be  of  N.  J.  Erj.  426  ;  s.  c.  9  Am.   &  F^ng.  R.  R. 

general  application.  ('as.  479,   and   to  establish  the  principle 

2  Vanderbilt  v.  Little  (1887),  43  N.  J.  that  a  chancellor,  although  he  will  always 

Eq.  609  ;  s.  c.  35  Am.  &  Eng.  R.  R.  Cas.  refuse    to   direct   the    performance   of    an 

18.     In  this  case  certain  contracts  for  the  improvident  contract,   will  not  leave  the 

deliver}'  of  ties  were,    upon  a  review   of  contractor  entirely  remediless,    if  he  has 

the  circinn.stances,   esyiecially  the  near  ap-  acted  in  good  faith.     The  lower  court  had 

proach  of  tlie  termination  of  the  receiver-  declined  to  go  any  further  than  to  admit 

ship,    hfild    to    be   imjjrovident ;    but,    as  that    it    would    be   ])ro])er   to  receive  the 

there  was  notliing  to  sliow  that  the  claim-  material  if  it  was  reasonably  necessary  for 

ants  were  guilty  of  bad  faith,  they  were  tlie  use  of  tlie  rond  in  the  near  future,  and 

awarded  comjie.nsation  for  what  tliey  had  was  offered  at  a  fair  iniee.    The  two  courts 

actually  done   in   preparing   for  the  per-  diilered  as  to  the  ellect  of  the  evidence. 


§  647.]  POWERS   OF   COURT    AND    RECEIVER.  647 

question  whether  such  payment  will  prove  injurious  to  the  proper 
management  of  the  road  by  the  receiver.^ 

Belivery  of  supplies  to  the  agents  of  a  receiver  is  sufficient  to 
take  a  contract  out  of  the  Statute  of  Frauds,  so  far  as  regards 
the  liability  of  the  trust  fund.^ 

§  647.  Po-wers  bestowed  on  Receiver  in  Order  of  Appointment 
liberally  construed.  —  The  powers  of  a  receiver  bestowed  in  the 
order  of  appointment  are  liberally  construed  in  view  of  the  pecu- 
liar character  of  the  property  which  he  is  authorized  to  take  into 
his  hands.^ 

The  details  of  the  business  intrusted  to  a  receiver  must  of 
necessity  be  left  to  his  discretion,  and  to  this  extent  he  pos- 
sesses all  the  incidental  powers  requisite  to  effect  the  object 
of  his  appointment.* 

The  receiver  may  call  in  or  put  out  the  securities  of  the  com- 
pany as,  in  his  judgment,  will  best  enable  him  to  secure  the  prop- 
erty to  the  stockholders  and  pay  off  its  creditors,  subject  always  to 
the  check  of  the  court.^ 

The  functions  of  a  court  during  a  receivership  being  essentially 
preservative  in  their  nature,  it  follows  that,  in  the  case  of  a  rail- 
road, the  value  of  which  mainly  depends  upon  its  being  kept  in 

1  Matter  of  U.  S.  Rolling  Stock  Co.  demonstrated  receivers  ;  the  former,  man- 
(1878),  57  How.  Pr.  16.  agers,  • — and  a  wider  discretion  must  be 

^  Vanderbilt  v.   Little   (1887),   43    N.  allowed  them,   because,  at  every  moment 

J.  Eq.  669  ;  s.  c.  35  Am.  k  Eng.  K.  R.  in  the  administration  of  such  a  trust,  there 

Cas.  18.  is  a  demand  for  the  exercise  of  judgment 

2  Langdon  v.  Vermont  &  Canada  R.  in  occurring  incidents  of  vital  interest  to 
Co.  (1882),  54  Vt.  593;  s.  c.  11  Am.  &  the  property  and  to  the  public  that  cannot 
Eng.  R.  R.  Cas.  688.  There  the  court  be  postponed  nor  evaded.  The  exactions 
pointed  out  in  the  following  words  the  which  the  law  makes  in  such  cases  upou 
peculiar  features  of  a  railroad  receivership,  court  managers  are  modified  by  reason  and 
which  call  for  the  application  of  special  justice  as  applied  to  the  nature  and  char- 
rules  in  determining  the  proper  limits  of  acter  of  the  trust." 

a  receiver's  powers:  "The  business  in  *  Bank  of  Montreal  v.  Chicago,  C.  & 
this  case  was  necessarily  administrative  ;  W.  R.  Co.  (1878),  48  Iowa,  518. 
the  operating  of  railroads  is  a  thing  in  its  ^  In  re  Fifty-four  First-mortgage  Bond- 
nature  continuous  and  without  limitation,  holders  (1881),  15  S.  C.  304,  305;  9  Am. 
requiring  in  the  operation  large  expendi-  &  Eng.  R.  R.  Cas.  739.  The  court  in  this 
tures  from  day  to  day.  The  duties,  also,  case  said  that,  if  the  receiver  took  up 
of  such  managers,  as  common  carriers,  are  bonds  one  month,  and  reissued  them  the 
largely  to  the  public  as  well  as  to  the  next,  to  save  interest  and  enable  him  to 
parties  in  interest  as  owners.  It  is  not,  in  meet  the  current  expenses  on  the  most 
its  chariicter  and  incidents,  like  a  receiver-  economical  scale,  he  did  not  thereby  de- 
ship  in  an  insolvent  partnership,  or  other  stroy  the  lien  of  the  bonds  taken  up,  which 
like  business,  where  the  only  duty  of  the  made  it  a  secure  investment  when  origi- 
receiver  is  to  marshal  the  assets,  pay  a  nally  issued,  those  bonds  being  supposed 
dividend  to  the  creditors,  and  close  up  the  to  retain  their  lien  as  they  pass  from  hand 
business.     Tiie  latter  are  more   properly  to  hand  around  the  financial  cii'cle. 


648  BAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  XXX. 

good  running  order,  a  receiver  is  deemed  to  be  vested  with  all 
needful  authority  to  operate  the  road  so  as  to  preserve  its  traffic 
and  connections.  That  the  power  of  a  court  of  chancery  to 
appoint  a  receiver  of  a  railroad  is  derived  from  a  statute  which 
merely  confers  authority  to  convert  the  corporate  property  into 
money  and  distribute  it  among  the  creditors  is  immaterial  for  the 
purposes  of  this  rule ;  for  the  language  of  the  legislature  will  re- 
ceive a  construction  appropriate  to  the  character  of  the  property, 
which  is  such  that  the  cessation  of  the  business  would  be  fatal  to 
the  interests  of  all  concerned. ^ 

This  principle  of  liberal  construction,  however,  will  be  applied 
only  to  such  transactions  as  may  reasonably  be  classed  among 
those  expressly  or  impliedly  embraced  in  the  order  of  appoint- 
ment. Thus,  a  receiver  who  is  merely  authorized  to  make  all 
contracts  which  may  be  necessary  in  carrying  on  the  business  of 
the  road,  subject  to  the  supervision  of  the  court,  has  no  power 
to  lease  offices  for  a  term  of  years  without  the  sanction  of  the 
court.2 

So,  where  a  receiver  is  authorized  by  the  terms  of  his  appoint- 
ment to  pay  the  amounts  due  and  maturing  for  materials  and 
supplies  about  the  operation  and  for  the  use  of  the  road,  the 
implication  is  that  only  those  obligations  are  to  be  paid  which  are 
necessary  to  keep  the  road  in  running  order ;  and  the  court  will 
not  extend  the  construction  of  the  order  so  far  as  to  direct  the 
receiver  to  pay  old  obligations,  incurred  several  years  previously. 
Such  demands  are  regarded  as  secondary  to  the  rights  of  the 
mortgagees.^ 

§  648.  Power  of  Court  to  cease  running  a  Section  of  a  Composite 
System.  —  It  would  seem  that,  in  extreme  cases,  a  court  will  not 
hesitate  to  authorize  its  receiver  to  cease  operating  a  subdivision 
of  the  system  covered  by  the  general  mortgage  which  is  the  sub- 
ject of  the  foreclosure  suit.  Such  a  contingency  was  discussed  in 
the  course  of  the  Wabash  litigation,  when  the  system  was  broken 
up  by  the  order  of  the  court  in  another  circuit,  displacing  the 
original  receivers  as  to  all  the  lines  within  its  jurisdiction.  The 
effect  was  to  leave  a  number  of  fragments  of  the  road  under 
the  control  of  the  court  which  had  thus  far  had  the  whole  prop- 
erty under  its  control,  and  as  these  had,  with  one  exception,  been 
run  at  a  dead  loss  up  to  the  dismemberment  of  the  system.  Judge 

1  Vanderbilt  v.  Little  (1887),  43  N.  J.  Nulta  (1894),  153  U.  S.  554. 
Eq.  669;  8.  c.  35  Am.  &  Eiig.  R.  R.  Cas.  »  Brown  v.   New  York  &  Erie  R.  Co. 

18.  (1860),  19  How.  Tr.  84. 

^  Chicago   Deposit  Vuult  Co.    v.  Mc- 


§§  649-651.]      POWERS  OP  court  and  receiver.  649 

Treat  said  that,  unless  the  receivers  were  guarantied  against 
loss,  they  would  have  to  give  up  running  these  unprofitable 
divisions.^ 

§  (J49.  Right  of  Receiver  to  revoke  Running  Powers  given  by  the 
Company  to  a  Connecting  Road.  —  A  receiver  is  warranted  in  deny- 
ing to  a  connecting  road  the  benefits  of  a  contract  by  which  the 
latter  enjoys  the  use  of  the  road  and  certain  terminal  facilities, 
where  the  stipulated  compensation  is  three  months  in  arrears, 
and  it  has  failed  to  comply  with  a  demand  for  the  payment  even 
of  a  portion  which  has  accrued  since  the  beginning  of  the  receiver- 
ship a  full  month  after  it  has  fallen  due.  In  such  a  case  ho  is  not 
obliged  to  apply  to  the  court  for  instructions,  it  being  evident  that 
he  would  have  been  directed  to  do  precisely  what  he  did  on  his 
own  motion,  —  namely,  require  the  payment  of,  or  security  for, 
the  arrears  within  a  very  brief  period.  The  convenience  of  the 
public  must  under  these  circumstances  be  subordinated  to  the 
rights  of  those  by  whom  the  lines  of  railroad  are  owned.^ 

§  650.  Receiver  may  be  authorized  to  take  a  Lease  of  another 
Road.  —  The  receiver  may  be  authorized  to  take  a  lease  of  other 
roads  where  such  a  course  is  to  the  advantage  of  the  estate.^ 

§  651.  Limited  Powers  of  a  Receiver  appointed  for  a  Special 
Purpose.  —  The  powers  of  a  receiver  appointed  merely  to  realize 
profits  to  pay  off  arrears  of  rents  are  necessarily  even  more  cir- 
cumscribed than  those  of  one  who  is  appointed  with  a  view  to  the 
ultimate  sale  of  the  property  for  the  satisfaction  of  debts  of  the 
company  generally.  The  property  in  the  hands  of  such  a  receiver 
must  not  be  subjected  to  deterioration  and  waste  merely  because 
the  current  use  of  it  looks  especially  to  the  realizing  of  net  in- 
come. "  It  should  be  kept  in  proper  condition,  not  only  for  doing 
the  current  business  during  the  receivership,  but  for  continuing 
to  do  it,  without  the  necessity  for  an  extraordinary  outlay  on  its 
passing  back  to  the  possession  of  the  owners.  But  for  any  legit- 
imate purpose  the  receivership  cannot  be  extended  to  the  control 
and  maintaining  and  repairing  and  equipping  other  roads,  or  to 
the  building  and  buying  of  other  roads,  or  to  the  control  and 
operating  of  lines  of  steamboats,  or  steamboats  in  the  lines  of 
other  roads,  even  with  the  view  of  larger  earnings  and  larger  net 
income  of  the  property  which  is  the  subject  of  the  receivership."  * 

1  Central  Trust  Co.  v.  Wabash,  St.  &  Great  Southern  R.  Co.  (1880),  33  Gratt. 
Louis,  &  Pac.  R.  Co.  (1886),  29  Fed.  Rep.  586;  s.  c.  1  Am.  &  Eng.  R.  R.  Cas. 
618.  473. 

2  Elmira  Iron  &  Steel  Rolling  Mill  Co.  *  Vermont  &  Canada  R.  Co.  v.  Vermont 
V.  Erie  Ry.  Co.  (1875),  26  N.  J.  Eq.  284.  Central  R.  Co.  (1877),  50  Vt.  500  ;  s.  c. 

8  Gibert  t;.  Washington  City,  Va.  Midi.     14  Am.  Ry.  Rep.  497. 


650  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  XXX. 

S  652.  Control  over  the  Property  sometimes  reserved  by  Court 
after  Sale.  —  In  an  order  confirming  a  sale  and  discharging  a  re- 
ceiver, the  court  may  insert  provisions  for  the  payment  of  undis- 
posed of  claims  against  the  receiver  in  the  management  of  the 
property,  and  for  continuing  the  lien  therefor  upon  the  property. 
Such  an  order  may  also  reserve  control  of  the  property  with  a  view 
to  enforcing  the  claims  in  case  the  purchaser  fails  to  pay  them.^ 

So  if  the  price  of  rolling-stock,  purchased  by  the  receiver,  is,  by 
an  order  of  the  court,  made  a  lien  on  "  the  mortgaged  premises, 
and  all  proceeds  which  may  come  into  this  court,"  the  intend- 
ment is  that  it  is  to  be  a  lien  on  the  corpus  ;  and,  if  no  proceeds 
in  cash  are  ultimately  realized  from  the  foreclosure  sale,  that  lien 
will  attach  to  the  property  in  the  hands  of  the  purchasers  and  all 
assignees  without  notice.^ 

Where  no  provision  is  made  in  the  order  of  sale  for  the  pay- 
ment of  the  debts  contracted  by  the  receiver,  nor  for  their  as- 
sumption by  the  purchaser,  a  claim  for  legal  services  will  not  be 
given  the  status  of  a  lien  debt  on  the  property  in  the  hands  of 
that  purchaser.  Even  if  such  purchaser  recognizes  the  claim  and 
makes  a  payment  on  account,  it  will  stand  merely  on  the  footing 
of  other  simple  contracts.  The  claimant,  therefore,  cannot  have 
a  charge  declared  in  his  favor  on  the  funds  in  the  hands  of  a  re- 
ceiver appointed  in  a  suit  to  foreclose  a  mortgage  executed  by 
that  purchaser.  In  such  a  case  it  does  not  avail  the  petitioner 
that  his  services  were  of  such  a  character  as  to  inure  to  the  ben- 
efit of  the  parties  secured  by  the  mortgage.^ 

Article  II.  —  Disposition  op  the  Trust  Fund  during  the 
Receivership  generally. 

§  653.  General  Rule  as  to  Expenses  of  Administration.  —  The 
general  rule  is  that  trust  estate  must  bear  the  expenses  of  its 
administration.  It  is,  therefore,  the  duty  of  a  court  which  ap- 
]Kjints  a  receiver  to  pay  from  the  trust  fund  in  its  possession 
all  the  deljts  which  it  incurs  in  its  judicial  capacity  while  admin- 
istering the  trust  assumed,  pending  the  litigation,  in  behalf  of  the 
litigating  parties.* 


'ri  r 


1  Farmers'  Loan  &  Trust  Co.  v.  Central  became  the  substitute  for  the  property  so 
R.  Co.  of  Iowa  (1883),  17  Fed.  Rep.  far  as  the  lienholders  are  concerned,  and 
758.  thi'  purchaser  takes  the  land  free   from 

2  Vilas  V.  Parje  (1887),  106  N.  Y.  439.  thuir  claims. 

The  court  distinfoii^lic'l    Railroad  Co.  v.  ^  Bound   v.    South    Carolina   Ry.  Co. 

Howard  (1808),   7  Wall.  392,  where  the  (1892),  51  Fed.  Rep.  58. 
^rcncral  rule  was  laid  down  that,  upon  the  *  Myer  v.  Car  Co.  (1880),  102  U.  S.  1, 

sale  of  mortgaged  prcmi.ses,  the  proceeds  13. 


§  653.]  POWERS   OP   COURT   AND   RECEIVER.  051 

The  proceeds  and  profits  of  the  business  in  the  receiver's  hands 
are  subject,  in  the  first  place,  to  the  charges  of  administration  and 
management,  and  the  liens  and  trusts  in  behalf  of  which  he  was 
appointed.  Neither  the  railroad  company  itself,  nor  any  party 
whose  claim  is  based  on  the  company's  rights,^  nor  the  bond- 
holders,^  have  a  right  to  any  portion  of  the  income  in  his  hands 
until  the  expenses  of  the  receivership  have  been  satisfied. 

These  expenses  are,  in  the  first  place,  payable  out  of  the  in- 
come ;  but,  if  that  is  inadequate  for  the  purpose,  they  are  charge- 
able upon  the  fund  produced  by  the  sale  of  the  property .^ 

The  operating  expenses,  which  constitute  a  paramount  charge 
upon  the  trust  fund,  are,  broadly  speaking,  those  which  it  is  rea- 
sonably  necessary  to  incur  for  the  purpose  of  keeping  up  the  road 
as  a  "  going  concern,"  or,  as  it  is  sometimes  expressed,  those 
which  conduce  to  the  conservation  of  the  property.  The  claims 
to  which  the  priority  is  accorded  form  a  much  more  numerous 
class  than  those  which  belong  to  the  category  of  "  preferential 
debts  "  (see  Chap.  XXVII.,  ante).  But  in  determining  the  jus- 
tifiable limits  of  a  receiver's  outlay,  the  essentially  temporary 
character  of  his  office  is  never  lost  sight  of,  and  many  expendi- 
tures which  the  company  itself  may  make  without  laying  itself 
open  to  the  charge  of  misapplying  the  income  will  neither  be 
authorized  nor  ratified  by  a  court  which  assumes  control  of  the 
company's  property. 

In  one  important  respect,  however,  the  powers  of  the  court  in 
regard  to  the  expenditures  which  it  does  actually  consider  it 
legitimate  to  order  are  much  more  extensive  than  those  of  the 
company,  as  it  may,  even  without  the  consent  of  prior  incum- 
brancers, make  a  loan  procured  for  the  purpose  of  defraying 
those  expenditures  a  paramount  charge  on  the  corpus  of  the  es- 
tate, if  the  revenue  is  insufficient  to  furnish  the  necessary  funds. 
See  §§  696  et  seq.,  post,  as  to  the  scope  of  this  principle. 

Judgments  against  a  receiver  of  a  railroad  company,  in  fore- 
closure proceedings,  are  considered  a  part  of  the  operating  ex- 
penses of  the  railroad,  and  have  a  priority  of  lien  over  the 
mortgages  given  to  secure  bondholders.* 

1  Schutte  V.  Florida  Central  R.  Co.  As  to  the  operating  expenses  of  a  rail- 
(1879),  3  Woods,  692.  road  company  for  a  limited  time  prior  to  a 

2  Lfingdon  v.  Vermont  &  Canada  R.  Co.  receivership  having  a  preference  from  the 
(1882),  54  Vt.  593  ;  s.  c.  11  Am.  &  Eng.  subsequent  income,  and  if  that  is  in- 
R.  R.  Cas.  688.  sufficient,  from  the  coupons  of  the  prop- 

3  Central  Trust  Co.  v.  Thurman  (1894),  erty  over  bondholders'  claims,  see  Ames 
94  Ga.  735  ;  s.  c.  20  S.  E.  Rep.  141.  et  al.  v.  Pacific  Ry.  Co.  et.  al  (1896),  74 

*  St.  Louis  S.  W.  R}-.  Co.  v.  Holbrook     Fed.  Rep.  335,  344,  345. 
(1896),  73  Fed.  Rep.  112. 


652  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  XXX, 

§  654.  Claims  against  Receivership  should  be  paid  before  Receiver 
is.  discharged.  —  A  receiver  still  retains  the  power  to  resume  pos- 
session of  the  trust  estate  for  the  purpose  of  enforcing  all  claims 
to  or  liens  upon  it  which  result  from  previous  orders  or  decrees. 
The  court  being  still  the  proper  and  only  forum  to  give  relief  to 
one  having  a  claim  against  the  receiver,  it  is  judicial  error  to  dis- 
miss a  petition  praying  to  have  such  a  claim  paid.^ 

§  655.  Expenses  of  Company  after  Appointment  of  Receiver  not 
a  Proper  Charge  on  the  Trust  Fund.  —  A  receiver  will  not  be  directed 
to  pay  the  company  moneys  to  be  used  in  contesting  the  validity 
of  the  bonds,  or  in  paying  the  salaries  of  the  corporate  officers,  or 
office  expenses  incurred  by  the  company  after  his  appointment.^ 

§  656.  Expenses  of  Refunding  Scheme,  'wrhen  not  allo^wed  ex 
parte.  —  Where  lien-creditors  have  become  parties  to  a  suit  in 
which  a  receiver  has  been  appointed,  not  for  the  purpose  of  realiz- 
ing the  property,  but  mei'ely  of  preserving  it,  the  court  will  not 
allow  the  expenses  of  a  refunding  scheme  proposed  by  the  re- 
ceiver, unless  upon  notice  to  the  new  parties,  even  though  the 
receiver  may  have  been  authorized  to  incur  the  liability  before  the 
intervention  of  those  parties.^ 

§  657.  Expenses  of  carrying  out  Reorganization  Scheme.  —  The 
expenses  of  carrying  out  a  scheme  of  reorganization  may  to 
a  limited  extent  be  defrayed  out  of  the  funds  of  the  receiv- 
ership. Thus  under  a  case  involving  some  peculiar  features, 
where  a  syndicate  had  proposed  to  effect  a  readjustment  of  the 
affairs  of  the  company  by  the  advancement  of  funds  to  purchase 
overdue  coupons  and  interest,  the  court  granted  permission  to  the 
receivers  to  pay  the  syndicate  2^  per  cent  commission  on  the 
money  so  advanced  in  case  the  plan  became  effective.* 

§  658.  When  the  Payment  of  Interest  on  Bonds  ■will  be  ordered.  — 
Where  the  interest  on  a  lien  debt  is  about  to  mature,  the  question 
whether  it  shall  be  allowed  to  go  to  default  must  be  determined 
with  reference  to  the  interests  of  the  trust  estate  as  a  whole.  The 
court  will,  without  hesitation,  direct  its  receiver  to  pay  any  interest, 
default  in  which  would  lead  to  a  foreclosure  suit  and  the  possible 

1  Thornton  v.  Hi;,'lilaiid  Ave.  &  B.  R.  Co.  (1894),  65  Fed.  Rep.  872.  The  report 
Co.  (1892),  94  Ala.  266  ;  s.  c.  10  So.  Rej).  of  the  master,  which  was  adopted  by  the 
442.  court,  took  the  ground  that  tlie.se  coniniis- 

2  Union  Loan  &  Trust  Co.  v.  Southern  sions  were  only  an  element  of  the  net  price 
Caiiforida  Motor  Road  Co.  (1892),  51  Fed.  to  be  obtained  for  the  corporate  assets, 
Rep.  106.  and  that  the  provision  for  their  payment 

'  Clarke  v.  Central  Railroad  &  15kg.  did  not  impair  the  obligation  of  income 
Co.  (1893),  54  Fed.  Reji.  556.  mortgages. 


4 


Piatt  V.  Philadelphia  &  Reading  R. 


I 


§  658.]  POWERS   OF   COURT   AND   RECEIVER.  653 

loss  of  valuable  parts  of  the  property.  Such  interest  should  be 
paid,  even  though  it  is  an  open  question  whether  any  title  con- 
veyed by  the  foreclosure  sale  would  not  be  subordinate  to  a  mort- 
gage securing  the  bondholders  whose  trustee  is  petitioning  to  have 
the  receiver  instructed.  The  receiver  should  not  be  allowed  to 
speculate  upon  the  decision  of  another  court.  The  interests  of 
all  the  creditors,  including  the  bondholders  themselves,  impera- 
tively demand  that  no  such  risk  shall  be  taken.^ 

The  court  will  direct  a  receiver  appointed  at  the  instance  of 
subordinate  creditors  to  pay  the  interest  on  first-mortgage  bonds, 
where  such  disposition  of  the  funds  is  desired  by  them,  and  the 
circumstances  show  that  it  is  to  the  interest  of  all  creditors  in- 
ferior in  rank  to  the  holders  of  the  first-mortgage  bonds  that  the 
maturity  of  those  bonds  shall  not  be  precipitated.^ 

If  necessary  the  court  may  even  authorize  a  loan  for  the  pur- 
pose of  paying  such  interest,  and  make  such  loan  a  charge  on  the 
surplus  earnings  of  the  road,  ranking  next  after  claims  for  oper- 
ating expenses,  and  a  lien  upon  the  corpus  subordinate  only  to  the 
first-mortgage  bonds  and  to  the  claims  that  may  be  adjudged 
superior  thereto.^ 

But  it  has  been  held  that  interest  on  bonds  secured  by  a  prior 
divisional  mortgage  should  not  be  paid  at  the  request  of  the  trus- 
tee of  a  junior  consolidated  mortgage,  when  the  reasons  urged  for 
granting  this  relief  are  merely  that  such  trustee  will  be  enabled 
to  foreclose  the  general  mortgage,  and  procure  a  comprehensive 
decree,  and  that  the  preferential  creditors  would  thus  be  placed  in 
a  more  favorable  position.  The  court  took  the  ground  that  it 
was  its  first  duty  to  pay,  as  soon  as  it  reasonably  could,  the  in- 
debtedness incurred  by  it  since  the  appointment  of  the  receiver, 
and  that  it  would  be  unjust  at  that  time  to  the  unsecured  credit- 
ors to  make  any  further  diversion  of  the  earnings  to  the  payment 
of  interest.^ 

1  Park  V.  New  York,  L.  E.  &  W.  R.  Co.  four  mortgage  bondholders  upon  the  trust 
(1894),  64  Fed.  Rep.  190.  fund.     The  court  admitted  the  soundness 

2  Lloyd  V.  Chesapeake,  0.  &  S.  W.  R.  of  the  ruling  in  the  first  case  cited  in  this 
Co.  (1895),  65  Fed.  Rep.  351.  section;  but  it  is  not  easy  to  see  why  its 

^  Ibid.  suggestion  is  not  equally  pertinent  to  the 

*  Cleveland,  C.  &  S.  R.  Co.  v.  Knick-  circumstances  of  that  case  as  well,  for  it 

erbocker  Trust  Co.  (1894),  64  Fed.  Rep.  would  certainly  seem  that  the  benefit  to  be 

623.    In  this  case  the  court  suggested  that,  derived  by  preventing  the  dismemberment 

if  the  advantages  to  accrue  to  the  petitioner  of  a  sj'stera  has  some  money  value  to  the 

were   as   great   as   represented,  he  might  creditors,  who  will  suffer  most  from  the 

properly  advance  the  necessary  money  and  resulting    depreciation    of    the    property, 

payoff  the  interest,and  then  assert  his  right  The   distinction   implied   in   the   opinion 

to  be  subrogated  to  the  claims  of  the  first  would  therefore  appear  to  be  an  unsub- 


654  RAILWAY    BONDS   AND   MORTGAGES.  [CHAP.  XXX. 

As  funded  coupon-bonds,  investing  the  holders  with  all  the 
rights  of  the  holders  of  the  defaulted  coupons  which  they  replace, 
are  necessarily  payable  before  any  subsequent  instalments  of  inter- 
est, the  receiver  should  be  directed  to  pay  the  coupon-bonds  in 
preference  to  any  of  the  later  coupons.^ 

§  659.  Property  in  the  Hands  of  a  Receiver  not  exempt  from 
Taxation.  —  There  is  no  sound  principle  upon  which  the  property 
of  a  person  or  a  corporation  which  is  placed  in  the  hands  of  a  re- 
ceiver by  a  court  of  justice,  for  the  purposes  of  a  suit  pending  in 
such  court,  can  be  regarded  as  being  thereby  rendered  exempt 
from  the  operation  of  the  tax  laws  of  the  government  within 
whose  jurisdiction   such  property  is  situated.^ 

The  State  has,  therefore,  a  paramount  right  to  collect  out  of 
the  gross  income  of  the  receivership  all  taxes  which  the  corpora- 
tion itself  would  have  been  obliged  to  pay  if  it  had  remained  in 
possession,  and  the  receiver  may  recognize  this  paramount  right 
by  paying  the  taxes  which  become  due  while  he  is  in  charge  of 
the  property.^  (As  to  the  proper  and  allowable  procedure  for 
enforcing  this  paramount  claim,  see  Chap.  XXVIII.) 

As  to  the  allowance  of  the  receiver's  personal  compensation 
and  of  the  fees  of  his  counsel,  see  Chap.  XXX.,  post. 

I  660.  What  will  be  allowed  as  Operating  Expenses  in  a  Receiver's 
Accounts.  General  Principle.  —  It  has  been  shown  that  it  is  some- 
times the  duty,  and  always  the  right,  of  the  receiver  to  consult 
the  court  as  to  the  management  of  the  property  in  a  doubtful 
case.  If  he  omits  to  do  this,  he  will  not  be  allowed  in  his  ac- 
counts any  expenses  except  those  which  were  absolutely  essential 

stantial   one.     Dismemberment,  after  all,  charge  these  paramount  claims  at  an  ear- 
is  only  one  of  the  ways  in  which  the  trust  Her  date,  sacrifice  the  interest  of  all  the 
property  may  be  depreciated,  and  possibly  other  creditors.     Yet  this  is  perhaps  the 
the  only  question  which  it  is  necessary  to  only  reason  that  can  he  urged  against  the 
ask,  in  the  case  of  an  application  to  have  course  here  suggested. 
the  interest  on  bonds  paid,  is  whether  the  ^  Park  v.   New  York,  L.  E.  &  W.  R. 
amount  of  money  finally  available  for  all  Co.  (1894),  64  Fed.  Rep.  190. 
the  creditors  will   be    increased  by  such  -  Stephens   v.    New   York    &    Oswego 
payment.     The   answer   to   this  question  Midland   R.  Co.  (1875),  13  Blatch.  104  ; 
necessarily  includes  an  answer  to  the  ques-  s.   p.   State  of   New   Jersey,  New  .Jersey 
tion  emphasized  by  the  court  in  this  case  ;  Southern  R.   Co.,   Prosecutor,  v.  Railroad 
viz.,  whether  the  position  of  the  creditors  Commissioners  (1879),  41  N.  J.  L.  235. 
of  the  receivership  and  of  those  holding  »  Central  Trust  Co.  v.  New  York  City 
preferential  claims  will  be  jeopardized  by  &  Northern  R.  Co.  (1888),  110  N.  Y.  250; 
the  payment;   for  if  the  trust  fund  as  a  s.  c.  18  N.  E.  Rep.  92;  13  Centr.  Rep.  484; 
whole   is   increased,   their   position   must  /ji  re  Tyler  (1893),  149  U.  S.  164  ;  Greeley 
necessarily  be  improved.     It  seems  to  us  a  v.    Provident  Snv.    Bank    (1889),  98  Mo. 
very  dubious  doctrine  that  the  court  should,  458;  High  on  Rec,  §  140,  note, 
merely  for  the  sake  of  being  able  to  dis- 


§  661.]  POWERS   OF   COURT    AND   RECEIVER.  655 

for  the  preservation  and  use  of  the  property,  as  contemplated  by 
his  appointment.^ 

The  principles  upon  which  it  will  be  determined  whether  any 
given  expenditure  comes  within  the  limits  thus  prescribed  have 
been  thus  stated  by  Mr.  Justice  Bradley  :  "  It  may  be  laid  down  as 
a  general  proposition  that  all  outlays  made  by  the  receiver  in  good 
faith,  in  the  ordinary  course,  with  a  view  to  advance  and  promote 
the  business  of  the  road,  and  to  render  it  profitable  and  success- 
ful, are  fairly  within  the  line  of  discretion  which  is  necessarily 
allowed  to  a  receiver  intrusted  with  the  management  and  opera- 
tion of  a  railroad  in  his  hands. 

"  His  duties,  and  the  discretion  with  which  he  is  invested,  are 
very  different  from  those  of  a  passive  receiver,  appointed  merely 
to  collect  and  hold  moneys  due  on  prior  transactions  or  rents  ac- 
cruing from  houses  and  lands.  And  to  such  outlays  in  ordinary 
course  may  properly  be  referred  not  only  the  keeping  of  the  road, 
and  rolling-stock  in  repair,  but  also  the  providing  of  such  addi- 
tional accommodations,  stock,  and  instrumentalities  as  the  neces- 
sities.of  the  business  may  require."  ^ 

§  661.  Allowable  Expenses  for  Supplies.  —  Allowable  expendi- 
tures for  supplies  include  not  merely  those  incurred  for  articles 
used  in  the  actual  operation  of  the  road,  such  as  fuel,  etc.,  but  for 
all  the  accessories  which  are  commonly  used  for  the  transaction 
of  the  business  of  a  company  engaged  in  tlie  transportation  of 
passengers  and  freight.  A  receiver  may,  therefore,  purchase 
scales,  where  they  are  reasonably  necessary  for  the  use  of  the 
road,  and  there  is  no  ground  for  imputing  improvidence  in  mak- 
ing the  purchase.  He  is  also  warranted  in  buying  a  truck  wagon 
and  horses  for  the  delivery  of  freight,  and  incurring  the  expense 
of  maintaining  the  same,  the  proof  being  that  this  was  a  profitable 
outlay  for  enabling  the  railroad,  by  furnishing  additional  accom- 
modation to  customers,  to  compete  with  an  opposition  line.^ 

Expenditures  for  rails  are  among  those  which  should  perhaps 
be  made  only  under  the  authority  of  the  court ;  but,  if  upon  a 
proper  investigation  they  seem  to  have  been  proper,  the  court  will 
not  refuse  to  confirm  them.^ 

1  Cowdreyu.  Galveston,  H.&H.R.  Co.  Eq.  N.  S.  729,  Fry,  J.,  held  that 
(1876),  93  U.  S.  352,  per  Bradley,  J.  stranger  to  action  could  not  apply  for 
Compare  Crunilish's  Admrs.  v.  Shenan-  order  to  receiver  directing  hiin  to  pay 
doah  Valley  R.   Co.   (1895),  40  W.   Va.  working  expenses. 

627  ;   s.  c.  22  S.  E.  Rep.  90.  8  Cowdrey   v.  Railroad  Co.    (1870),   1 

2  Cowdrey  v.   Railroad  Co.   (1870),   1     Woods,  331. 

Woods,    331.      In    Brocklebank   v.    The  *  Phinizy   v.    Augusta  &   K.    R.    Co. 

East   London   Ry.    Co.  (1879),    48   L.  J.     (1894),  62  Fed.  Rep.  771. 


656  RAILWAY   BONDS   AND    MORTGAGES.  [CHAP.  XXX. 

§  662.  Office  Rent.  —  Office  rent  will  be  allowed  where  the  ac- 
commodation is  not  shown  to  be  excessiv^e.-^ 

§  663.  Interest  on  Money  borrowed  by  Receiver. — Interest  on 
money  which  the  receiver  is  obliged  to  borrow  in  order  to  keep 
a  railroad  in  operation  is  necessarily  a  legitimate  charge  against 
the  trust  fund  if  the  loan  itself  was,  within  the  scope  of  his 
authority  .2 

§  664.  Interest  paid  on  Bonds.  —  Money  applied  to  the  payment 
of  interest  on  the  bonds  of  a  subordinate  road  forming  a  part  of 
the  entire  system  administered  by  the  receiver  will  be  admitted  as 
a  valid  claim  in  his  favor,  ranking  next  after  the  sum  necessary 
to  satisfy  the  bonds  and  coupons  secured  by  prior  mortgages.^ 
(As  to  when  the  payment  of  bonded  interest  will  be  ordered,  see 
sect.  658,  ante.^ 

§  665.  Expenditures  usual  in  Business  ■with  a  Subordinate  Road. 
—  The  fact  that  certain  expenditures  are  usual  in  the  business  of 
carrying  on  a  railroad  will  sometimes  be  a  sufficient  justification 
for  incurring  them.  In  this  category  have  been  placed  payments 
made  by  receivers  to  connecting  roads  for  moneys  due  to  and  pre- 
viously received  for  them,  according  to  the  customary  practice ;  * 
and  rebatements  on  freight,  or  allowances  returned  to  shippers 
in  consideration  of  securing  their  business  and  good-will  to  the 
road,  there  being  proof  that  such  allowances  were  quite  com- 
monly made  by  transportation  lines,  and  that  they  were  necessary 
in  the  given  case  in  order  to  secure  business,  as  this  method 
of  attracting  customers  had  been  previously  adopted  by  the 
companies.^ 

§  666.  Expenditures  to  prevent  Construction  of  Rival  Road  not 
allowed.  —  Expenditures  incurred  to  defeat  a  subsidy  which  a 
rival  company  is  trying  to  obtain  from  a  city  will  be  disallowed  in 
a  receiver's  accounts.  It  is  no  part  of  his  duty  to  interfere  with 
the  construction  of  a  parallel  line  of  railway,  or  to  attempt  to 
defeat  any  contemplated  aid  for  such  an  enterprise.  The  fact 
that  the  success  of  the  enterprise  may  possibly  diminish  the  future 
earnings  of  the  company  whose  road  is  in  his  charge  will  not 
justify  such  an  outlay.  As  an  officer  of  the  court,  the  receiver 
cannot  be  allowed  to  determine  the  question  of  the  importance  of 
the  proposed  lines,  either  to  the  public  or  to  the  company,  and, 

1  Cowdrey  v.    Railroad   Co.   (1870),  1  <  Meyer   v.   Johnston  (1882),  64  Ala. 

Woods,  331.  603  ;  s.  c.  8  Am.  &  Eng.  R.  R.  Cas.  584. 

a  Ibid.  6  Cowdrey  v.  Railroad   Co.   (1870),    1 

»  Phinizy  v    Augusta   &   K.    R.    Co.  Woods,  331. 
(1894),  02  Fed.  Rep.  771. 


§§  GGT-669.]       POWERS  of  couiix  and  receives.  657 

acting  upon  such  determination  to  appropriate  funds  in  his  cus- 
tody, to  aid  or  defeat  the  competing  road  ;  that  they  actually  had 
the  effect  of  securing  a  large  amount  of  business,  and  that  without 
them  tlie  road  would  not  have  paid  expenses,  will  not  warrant  the 
allowance  of  such  an  itcm.^ 

§  667.  Receiver's  Power  to  make  Purchases  on  Credit.  —  A  re- 
ceiver authorized  by  the  decree  appointing  him  to  run  a  hotel,  and 
for  that  purpose  to  make  such  purchases  as  may  be  necessary,  has 
the  implied  authority  to  purchase  the  necessary  supplies  for  the 
hotel  on  credit,  where  he  has  no  money  on  hand,  and  no  provision 
was  made  by  the  court  for  raising  any.^ 

One  selling  goods  to  a  receiver  vested  with  authority  to  pur- 
chase goods  on  credit,  if  without  funds,  is  not  bound  to  know 
that  at  the  time  of  the  purchase  the  receiver  had  funds  available 
therefor.^ 

§  668.  Liabilities  arising  from  the  Contracts  of  the  Company 
adopted  by  the  Receiver.  —  Liabilities  arising  from  the  contracts 
of  the  company  which  are  adopted  by  a  receiver  must,  of  coui'se, 
be  reckoned  among  the  operating  expenses  to  be  provided  for  out 
of  the  trust  fund.  To  this  category  belong  the  sums  due  to  other 
companies  for  rent  of  track,  under  leases  ratified  by  the  receiver, 
and  the  amounts  to  be  paid  for  the  rent  of  rolling-stock,  hired 
by  the  company  and  used  by  the  receiver.* 

If  the  rolling-stock  so  used  is  subject  to  a  vendor's  lien,  the 
rental  for  its  use  will  be  a  prior  charge  on  the  proceeds  of  the 
sale,  and  not  merely  on  the  earnings.^  (As  to  the  effect  of  the 
appointment  of  a  receiver  on  the  rights  and  liabilities  arising 
from  car  trusts  and  other  conditional  sales  of  rolling-stock,  see 
Chap.  XV.) 

§  669.  Liabilities  arising  out  of  Torts  incident  to  the  Operation  of 
the  Road.  —  Ijiabilitics  arising  out  of  torts  incident  to  the  opera- 
tion of  the  road  by  the  receiver  constitute  an  obligation  against 

1  Cowdrey  v.  Galveston,  H.  &  H.  R.  «  United  States  Trust  Co.  r.  Wii!>asl 
Co.  (1876),  93  U.  S.  .352.  Compare  In  re  Western  Ry.  Co.  (1892),  150  U.  S.  287 
Mersey  Ry.  Co.  (1895),  64  L.  J.  Ch.  623,  Union  Trust  Co.  v.  Illinois  Midland  Ry, 
expenses  for  promotion  of  bill  in  Par-  Co.  (1887),  117  U.  S.  434  ;  s.  c.  25  Am 
liament,  not  "working  expenses"  or  &  Eng.  R.  R.  Cas.  560;  Thomas  r.  West 
"  other  proper  outgoings  in  respect  of  the  ern  Car  Co.  (1892),  149  U.  S.  95,  110 
undertaking."  Kneeland  v.  American  Loan  &  Trust  Co 

2  Thornton  v.  Highland  Ave.  &  B.  R.  (1890),  136  U.  S.  223;  s.  c.  43  Am.  & 
Co.  (1892),  94  Ala.  353  ;  s.  c.  10  So.  Rep.  Eng.  R.  R.  Cas.  102. 

442.  5  Kneeland  v.  American  Loan  &  Trust 

3  Highland  Avenue  &  Belt  R.  Co.  v.  Co.  (1891),  138  U.  S.  509  ;  s.  c.  43  Am. 
Thornton  (1894),  105  Ala.  225;  s.  c.  16     &  Eng.  R.  R.  Cas.  520. 

So.  Rep.  699. 

42 


658  RAILWAY   BONDS   AND    MORTGAGES.  [CHAP.  XXX. 

the  trust-funds  which  must  be  discharged  before  the  bondholders 
are  entitled  to  any  part  thereof.^ 

Claims  based  upon  such  liabilities  stand  on  the  same  footing  as 
the  other  expenses  of  administration.^ 

For  tlie  purposes  of  this  rule  it  is  immaterial  whether  the  claims 
have  been  reduced  to  judgments  or  not.^ 

But  until  they  are  actually  reduced  to  judgment  by  a  suit 
against  the  receiver,  and  the  amount  due  definitely  fixed,  they 
will  not  bear  interest.* 

Claims  for  damages  resulting  from  the  operation  of  the  road  are 
a  charge  on  the  earnings  of  the  receivership  only.^ 

§  670.  Compensation  to  Injured  Employees,  to  •what  Extent 
proper.  —  The  doctrine  that  receivers,  as  officers  of  the  court, 
should  be  required  to  act  toward  their  employees  as  persons  of 
ordinary  humanity  and  right  feeling  would  act  under  similar  cir- 
cumstances has  been  adduced  to  justify  the  allowance  of  compen- 
sation to  an  employee  injured  by  a  fellow-servant's  negligence  for 
the  time  lost  while  he  is  incapacitated  from  working.^ 

But  such  an  allowance  should  be  made  only  to  faithful  and  de- 
serving employees,  who  merit  special  consideration  from  the 
receiver.  To  hold  him  legally  liable  to  make  compensation  in 
every  case,  irrespective  of  the  question  of  his  own  negligence, 
would  engraft  a  new  principle  on  our  jurisprudence.  " 

S  671.  Consolidated  System  of  Roads  administered  as  an  Entirety.^ 
—  In  administering  a  consolidated  property  made  up  of  several 
lines,  the  court  must  consider  not  merely  the  interest  of  the  mort- 
gagee in  a  general  mortgage,  but  also  the  separate,  and  sometimes 
conflicting,  interests  of  the  various  subdivisions  and  their  respec- 

1  Cowdrey  v.  Galveston,  H.  &  H.  K.  while  there  was  a  quasi  receivership  of  the 
Co.  (1876),  93  U.  S.  352,  where  compen-  property  under  the  management  of  the 
sation  to  the  owners  of  goods  lost  in  officers,  and  afterwards  made  the  subject 
transportation,  and  compensation  paid  for  of  petition  to  a  court  which  took  direct 
damages  to  property  during  the  receiver-  control  by  a  regularly  a]ipointed  receiver, 
ship,  were  allowed  by  the  court  in  the  ^  Hand  v.  Savannah  &  Charleston  R. 
receiver's  accounts.  Co.  (1881),  17  S.  C.  219  ;  s.  c.  12  Am.  & 

2  Kain  V.  Smith  (1880),  80  N.  Y.  4.58  ;  Eng.  R.  R.  Cas.  495  ;  Ryan  v.  Hays  (1884), 
Mobile  &  Ohio  R.  Co.  v.  Davis  (1884),  62  62  Tex.  42  ;  s.  c.  23  Am.  &  Eng.  R.  R. 
Miss.   271;   s.  c.   26  Am.  &  Eng.   R.  R.  Cas.  501. 

Cas.  425.  ^  Missouri  Pac.  Ry.  Co.  v.  Texas  Pac. 

»  (Jibhos  V.  Greenville  &  Cohunbia  R.  Ry.   Co.    (1888),  33  Fed.   Rep.  701  ;    41 

Co.  (1882),  18  S.  C.  87  ;    s.  c.  17  Am.  &  Fed.  Rep.  319  (1890). 
Eng.  R.  R.  Cas.  302.  7  Thomas  v.  East  Tennessee,  V.  &  Ga. 

*  Gibbes  V.  Greenville  &  Columbia  R.  Ry.  Co.    (Cook,    Intervener),    (1894),  60 

Co.  (1882),  18  S.  C.  87  ;  s.  C.   17  Am.  &  Fed.  Rep.  7,  limiting  the  case  just  cited. 
Eng.  R.  R.  Cas.  302.     In  that  case  judg-  *  Compare  previous  references  to  sub- 

meut  had  been  taken  against  the  company,  ject. 


§  671.]  POWERS    OP    COURT    AND    RECEIVER.  "  G59 

tive  incumbrances,  and  behind  all  that  the  duty  which  every  rail- 
road corpoi-ation  owes  to  the  public  of  keeping  the  road  in 
operation.  That  duty  is  not  limited  to  the  operation  merely  of 
that  particular  fragment  of  a  road  which  is  peculiarly  profitable, 
but  it  extends  to  the  road  as  an  entirety,  and  to  all  its  parts  ; 
differing  in  that  particular  from  the  duty  which  would  rest  upon 
the  court  if  it  had  sim|)ly  taken  possession  of  property  used  for 
private  purposes,  in  which  case  the  single  question  might  well  be 
said  to  be  one  of  pecuniary  profit.^ 

Claims  for  the  rent  of  separate  subdivisions  of  a  corporate  sys- 
tem of  roads,  if  based  upon  an  order  which  is  expressly  subordi- 
nated to  a  former  order  directing  the  payment  of  the  expenses  of 
the  receivership,  and  of  certain  preferential  debts  of  the  lessor, 
can  never  be  enforced  unless  there  is  a  surplus  after  paying  the 
debts  thus  provided  for.  Hence,  as  long  as  the  avails  of  the  prop- 
erty are  insufficient  to  discharge  such  debts,  it  is  improper  to 
direct  the  receiver  to  pay  the  rent  of  a  branch  which  is  earning 
more  than  its  operating  expenses.^ 

On  the  other  liand,  it  has  been  held  that,  as  a  court  which  takes 
possession  of  and  operates  a  leased  line  together  with  the  rest  of 
the  property  does  this  for  the  benefit  of  the  lessee,  not  of  the 
lessor,  no  part  of  the  expenses  of  the  receivership  can  properly  be 
charged  against  the  property  of  the  lessor.^ 

^  Central  Trust  Co.  v.  Wabash,  St.  Where,  under  a  decree  of  foreclosure 
Louis,  &  Pac.  Ry.  Co.  (1885),  23  Fed.  Rep.  against  a  railroad  company,  reference  had 
863,  per  Brewer,  J.  been  made  to  a  master  to  ascertain  the 
In  that  case  the  learned  judge  laid  gross  earnings  and  expenses  of  a  certain 
down  the  following  rules  as  lieing  appro-  section  of  the  road  covered  by  a  mortgage, 
priate  under  the  circumstances :  (1)  When  it  is  not  an  erroneous  principle  for  the 
a  division  earns  a  surplus  over  expenses,  master  to  make  a  pro  rata  estimate  of  the 
the  rental  or  subdivisional  interest  should  earnings  and  expenses  of  the  whole  road, 
be  paid  to  the  extent  of  the  surplus,  and  it  being  shown  before  him  that  such  sec- 
only  to  that  extent;  and  if  there  has  been  tion  had  not  been  operated  separately,  but 
any  past  division  of  that  surplus  for  gen-  as  a  part  of  the  whole  road,  aud  no  sep- 
eral  operating  expenses,  it  should  be  made  arate  accounts  kept  of  the  income  or 
good  by  the  issue  of  receiver's  certifi-  expenses  of  any  particular  part.  Though 
cates,  if  need  be.  (2)  Where  a  subdivi-  such  a  rule  leads,  not  to  actual  results, 
sion  earns  no  surplus,  and  simyily  pays  but  to  approximation  merely,  it  is  the  best 
ojjerating  expenses,  no  rental  or  subdi-  which  could  be  adopted.  Pullan  v.  Cin- 
visional  interest  should  be  paid.  (3)  cinnati  &  Chicago  Air  Line  R.  Co.  (1873), 
Where  a  subdivision  fails  to  pay  operating  5  Biss.  237. 

expenses,  the  strictest  economy  should  be  ^  Central    Trust   Co.    v.    Wabash,    St. 

practised,  with  a  view  of  keeping  the  out-  Louis,   &  Pac.    Ry.    Co.    (1889),    38  Fed. 

lay   within    the   receipts  ;    but,    if    there  Rep.  63,   reversing  s.  c.   (18S8),   34  Fed. 

should   still    be  a   deficiency   after   every  Rep.  259. 

expedient    for    saving    money    has    been  ^  Brown  v.    Toledo,    P.  &  W.  R.  Co. 

tried,  it  must  be  paid  out  of  the  general  (1888),  35  Fed.  Rep.  444. 
earnings  of  the  system,  or,    if  necessary, 
by  the  issue  of  receiver's  certificates. 


6G0  RAILWAY    BONDS    AND    MORTGAGES.  [CHAP.  XXX. 

Where,  in  proceedings  to  foreclose  a  general  mortgage  in  a 
composite  system,  it  appears  that  the  several  divisions  have  re- 
ceived the  advantage  of  the  use  of  certain  leased  lines  and  terminal 
facilities,  and  it  is  impossible  to  separate  the  several  interests  as 
to  expenditures  and  benefits,  the  rents  will  be  apportioned  among 
the  several  divisions  on  the  basis  of  the  relative  length  of  the 
roads.  Bondholders  secured  by  a  divisional  mortgage  who  with- 
held their  assent  from  the  transactions  resulting  in  the  consolida- 
tion of  the  lines,  and  the  issue  of  the  general  mortgage  which  is 
the  subject  of  the  suit,  will  be  estopped  to  question  tlie  propriety 
of  such  an  apportionment  if  they  remain  inactive,  and  allow  the 
court  and  the  receivers  to  go  on,  during  the  entire  litigation,  con- 
tracting debts  on  the  theory  that  the  whole  line  is  to  be  operated 
as  a  unit.i 

As  the  company  which  has  obtained  control  of  the  property  of 
another,  and  operated  it  as  a  subdivision  of  aa  extensive  system, 
not  under  any  contractual  relation,  but  solely  by  virtue  of  the 
voting  power  acquired  by  the  purchase  of  stock,  cannot  look  to 
its  controlled  subordinate  for  reimbursement  for  money  advanced 
in  operations  conducted  for  the  benefit  of  the  controlling  com- 
pany, so  a  receiver  appointed  to  take  the  place  of  the  latter  is  in 
no  better  position,  and  must,  as  against  creditors  secured  by  a 
mortgage  on  the  subordinate  line,  bear  the  loss  which  may 
result  from  its  operation,  as  part  of  the  system  which  he  was 
appointed  to  preserve.^ 

§  672.  Restoration  of  Earnings  diverted  from  the  Payment  of 
Operating  Expenses  during  the  Receivership.  —  The  principle  that 
the  operating  expenses  are  a  paramount  charge  on  the  income  of 
the  receivership  involves  the  corollary  that,  if  the  fund  available 
for  the  payment  of  operating  expenses  proves  to  be  inadequate 
at  any  time  for  that  purpose,  because  of  the  application  of  the 
earnings  to  expenses  of  some  other  kind,  the  court  will  treat  the 
case  as  one  of  diversion,  to  be  rectified,  by  ordering  the  stop- 
page of  every  outlay  which  does  not  belong  to  the  favored  class 
until  the  {)referred  creditors  are  fully  paid  off.-"^ 

If  the  earnings  have  been  devoted  by  the  receiver  to  making 

^  Union  Trust  Co.  v.   Illinois  Midland  to  continue  the  payments  under  a  contract 

Ry.  Co.  (1887),   117  U.  S.   434;  s.  c.  25  of  conditiojial   sale  of  rolling-stock,    but 

Am.  &  Knt;.  R.  R.  Cas.  560.  as  it  appeared  that  some  payments   had 

^  IMiinizy    v.    Augusta    &    K.    R.    Co.  been  made  during  the  receivership  at  the 

(1894),  62  Fed.  Rep.  771.  expense  of  the  labor  and  supply  creditors, 

*     Frank  v.  Denver  &  Rio  Ornnde  Ry.  it  was  ordered  that  the  payments  should 

Co.    (188.';),   33   Fed.   Rep.    123.     In    this  be  suspended  until  the  claims  of  the  latter 

case  the  court  liail  authorized  the  receiver  were  satisfied. 


§  673.]  POWERS    OP    COURT    AND    RECEIVER.  661 

permanent  improvements  so  that  the  value  of  the  bondholder's 
security  has  been  enhanced,  the  restoration  of  those  earnings  to 
the  current  debt  fund  may  be  effected,  even  by  making  the  claims 
for  operating  expenses  a  lien  on  the  corpun.^ 

A  similar  rule  applies  to  cases  in  which  the  payment  of  back 
claims,  which  would,  in  the  regular  course  of  procedure,  be  dis- 
charged out  of  the  income,  is  postponed  in  order  to  bring  the 
road  into  a  fit  condition  for  traffic. ^ 

The  use  of  earnings  in  making  permanent  improvements  is  a 
diversion  of  the  earnings  as  against  claimants  for  damages 
caused  by  the  operation  of  the  road  by  the  receiver,  and  if  the 
property  is  subsequently  returned  to  the  possession  of  the  mort- 
gagor company  while  such  damages  remain  unpaid,  an  action 
may  be  maintained  against  it  for  the  recovery  of  the  amount 
thus  diverted.^ 

(As  to  the  restoration  of  earnings  diverted  prior  to  the  receiver- 
ship, see  Chap.  XXVII. ,  §  16.) 

Article  III.  —  Power  of  Receiver  to  raise  Money  for  the 
PayxMent  of  Operating  Expenses  by  the  Issue  op  First- 
lien  Certificates. 

§  673.  The  Receiver  cannot,  of  his  own  Motion,  contract  Debts 
chargeable  upon  the  Fund  in  Litigation.  —  The  COUrt  must  authorize 

1  Thomas  v.  Peoria  &  R.  L  R.  Co.  rolling-stock,  and  in  the  construction  and 
(]8S8),  36  Fed.  Rep.  808  :  s.  c.  36  Am.  &  repair  of  side-tracks,  bridges,  station 
Eng.  R.  R.  Cas.  381  ;  Union  Trust  Co.  v.  houses,  etc.,  thus  adding  to  the  security 
Illinois  Midland  Ry.  Co.  (1887),  117  U.  S.  of  the  mortgagees  by  enhancing  the  value 
434  ;  s.  c.  35  Am.  &  Eng.  R.  R.  Cas.  582  ;  of  the  property.  It  has  been  thought 
Burnham  v.  Bowen  (1883),  111  U.  S.  that,  under  the  same  equitable  discretion 
776.  which    has    been    heretofore    referred    to, 

2  Turner  v.  Indianapolis,  B.  &  W.  Ry.  this  gave  the  operatives  and  material-men 
Co.  (1878),  8  Biss.  315.  Judge  Drummond  a  quasi  claim  upon  the  property  itself.  It 
said  :  "  In  general,  when  the  mortgagees  has  not  unfrequently  happened  that  rail- 
have  come  before  the  court  to  ask  for  the  roads  which  were  comparatively  worthless 
api'ointmpnt  of  a  receiver,  the  property  when  they  came  into  possession  of  the 
hsis  been  in  a  very  dilapidated  condition,  court  have  become,  under  its  administra- 
tho  rails  nearly  worn  out,  the  ties  need-  tion,  valuable  property.  But  under  the 
intr  replacement,  the  rolling-stock,  station  more  modern  practice,  the  funds  for  this 
houses,  and  bridges,  repairs,  —  the  whole  purpo.se  would  doubtless  be  obtained  by 
property  being  in  a  condition  to  render  the  issue  of  receiver's  certificates,  so  that 
the  transit  of  per.sons  and  merchandise  the  labor  and  supply  creditors  might  not 
dangerous.  The  practice  has  therefore  be  forced  to  await  the  distribution  of  the 
been,  instead  of  immediately  directing  the  proceeds  of  the  sale." 

receiver  to  jiay  for  labor  or  supplies,   or  *  Tex.  &  Pac.  Ry.  Co.  v.  Bloom  (1894), 

materinls  previously  furnished,  to  expend  60  Fed.  Rep.  979,  citing  Railroad  Co.  v. 

the  receii)ts  in  repairs  of  the  road,  in  the  Johnston  (1894),   151  U.  S.  81  ;  s.  C.  14 

purchase    of    new   iron    or    steel    and   of  Sup.  Ct.  Rep.  250. 


662 


RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  XXX. 


expenditures  on  account  of  the  property  before  they  can  be 
charged  thereon ;  and  while  it  may,  and  does,  in  its  discretion, 
allow  expenses  incurred  by  a  receiver  strictly  for  preservation 
to  be  charged  upon  the  fund,  although  incurred  without  the 
prior  authorization  of  the  court,  it  is  nevertheless  the  order  of 
the  court,  and  not  the  act  of  the  receiver,  which  creates  the 
charge,  and  on  which  its  validity  depends.^ 

The  view  sanctioned  by  the  Supreme  Court  of  the  United 
States  would  seem  to  be  that  one  who  lends  money  to  the 
receiver  to  pay  operating  expenses  is  not  necessarily  precluded 
from  obtaining  reimbursement  out  of  the  proceeds  of  the  corpus, 
merely  because  the  loan  has  not  previously  been  authorized  by 
the  court,  but  that  the  creditor,  unless  the  authorization  is 
given,  runs  the  risk  of  the  court's  refusing  to  allow  his  claim 
any  precedence  over  the  bonds.^ 

§  674.  Expenses  of  Management  sometimes  made  a  First  Lien  on 
the  Property  by  Order  appointing  Receiver.  —  The  expenses  of  the 
management  may  be  made  to  constitute  a  lien  on  the  property 
paramount  to  the  mortgage  by  inserting  a  special  provision  to 


1  Vilas  V.  Page  (1887),  106  N.  Y.  439. 
In  Union  Trust  Co.  v.  Chicago  &  Lake 
Huron  R.  Co.  (1881),  7  Fed.  Rep.  513, 
the  court,  arguing  that  the  doctrine  stated 
in  the  text  was  the  correct  one,  declared 
that  the  negotiation  of  the  certificates  was 
a  personal  trust  which  could  not  be  dele- 
gated. 

2  Union  Trust  Co.  v.  Illinois  Midland 
Ry.  Co.  (1887),  117  U.  S.  434  ;  s.  c.  25 
Am.  &  Eng.  R.  R.  Cas.  560.  There  the 
court  ruled  that  a  loan  made  by  the  re- 
ceiver to  pay  operating  expenses  could  not 
be  charged  as  a  first  lien  on  the  trust  estate, 
on  the  ground  that  it  was  too  large  to  fall 
within  the  conceded  discretionary  powers 
of  the  receiver  in  regard  to  outlays.  This 
rule  is  perha[)s  more  conformable  with 
reason  and  justice  than  the  more  rigorous 
one  applied  in  South  Carolina,  where  it 
lia.s  been  denied  that  labor  claims  against 
the  receiver  can  be  charged  upon  the  pro- 
ceeds of  the  sale,  in  cases  where  the  in- 
come is  insufficient  to  liquidate  them, 
unless  they  are  secured  or  y)rovided  for  in 
some  way  by  receiver's  certificates  issued 
under  the  authority  of  the  court.  Such 
claims,  it  was  said,  were  simply  "debts 
contracted  witti  a  receiver,  limited  in  au- 
thority of  an  insolvent  railroad,  known  to 


be  covered  with  mortgages,  and  not  mak- 
ing expenses."  Hand  v.  Savannah  & 
Charleston  R.  Co.  (1880),  17  S.  C.  219; 
s.  c.  12  Am.  &  Eng.  R.  R.  Cas.  495.  The 
court,  in  Union  Trust  Co.  v.  Illinois  Mid- 
land Ry.  Co  (1887),  117  U.  S.  434  ;  s.  c. 
25  Am.  &  Eng.  R.  R.  Cas.  560,  considered 
itself  to  be  bound  by  the  terms  of  the 
order  of  appointment  which  contemplated 
the  payment  of  expenses  out  of  the  income 
only.  As  to  the  latter  objection,  it  seems 
clear,  on  principle  and  authority,  that  the 
terms  of  an  order  of  appointment  do  not 
limit  the  power  which  a  court  would  other- 
wise have  to  order  claims  to  be  paid  out 
of  the  proceeds  of  the  property  itself. 
Nor  is  it  entirely  clear  why  the  case  is  not 
a  proper  one  for  applying  the  princiiile 
that  the  subsequent  ratification  of  the 
court  should  be  held  to  have  the  same 
efi'ect  as  a  prior  anthorization.  Those 
who  contract  with  an  agent  of  limited 
powers  are  always  entitled  to  take  the 
risk  that,  if  the  contract  is  in  excess  of 
his  powers,  his  principal  will  validate  it 
by  a  subsequent  sanction  ;  and  there  is  no 
adequate  reason,  it  would  seem,  for  de- 
nying the  benefit  of  this  rule  to  parties 
dealing  with  receivers. 


§  675.]  POWERS    OP    COURT    AND    RECEIVER.  603 

that  effect  in  the  order  appointing  the  receiver,  and  requiring 
the  assent  of  the  bondholders  tliereto  as  a  condition  of  making 
the  appointment.  "In  its  efforts  to  coerce  a  corporation  to  pay 
its  debts,  a  court  should  not  contract  obligations  of  its  own,  and 
neglect  to  make  provision  for  their  payment."^ 

An  issue  of  certificates  is  sometimes  ordered  at  the  com- 
mencement of  the  receivership  to  pay  back  claims  for  labor, 
supplies,    etc.^ 

But  there  cannot  be  made  a  charge  on  the  earnings,  except  in 
the  cases  adverted  to  below.  But,  generally  speaking,  the  issue 
of  these  instruments  of  indebtedness  is  authorized,  upon  a 
special  application  made  by  the  receiver,  at  some  time  subse- 
quent to  his  appointment. 

Loans  to  pay  operating  expenses  cannot  be  made  a  lien  on  the 
corpus,  where  the  statute  under  which  the  receiver  was  appointed 
declares  that  they  shall  be  paid  out  of  earnings.^ 

§  675.  General  Principles  upon  w^hich  the  Power  to  issue  First- 
lien  Certificates  depends.  —  The  peculiar  nature  of  the  property  to 
be  administered  in  the  case  of  a  railroad  receivership  has  been 
held  to  justify  any  extremely  liberal  application  of  the  doctrine 
that  a  court  may  authorize  a  receiver  to  do  whatever  is  necessary 
for  the  preservation  of  the  estate  placed  in  his  charge.  Both 
the  theory  that  the  principal  value  of  a  railroad  consists  in  its 
being  kept  up  as  a  "going  concern,"  and  the  theory  that  the 
right  of  the  public  to  have  the  traffic  carried  on  continuously  is 
paramount  to  the  interests  of  the  lien-creditors,  have  been 
declared  to  point  logically  to  the  conclusion  that,  if  the  income 
which  the  receiver  obtains  from  the  operation  of  the  road  is 
insufficient  to  pay  current  expenses,  the  court  may  empower  him 
to  make  up  the  deficiency  by  issuing  certificates  or  other  evi- 
dences of  debt,  which  shall  be  a  charge  on  the  corpus  superior 
to  all  existing  liens.^ 

1  Daw  V.  Mempliis  &  Little  Rock  R.  Eiig.  R.  R.  Cas.  464  ;  Meyer  v.  Johnston 
Co.  (1884),  20  Fed.  Rep.  260,  269;  s.  c.  (1875),  53  Ala.  237;  s.  c.  15  Am.  Ry. 
17  Am.  &  Eng.  R.  R.  Cas.  324.  Rep.  467.     In  the  case  of  a  land  and  cattle 

2  Central  Trust  Co.  v.  "Wabash,  St.  company,  where  the  power  was  asked  to  be 
Louis,  &  Pac.  R  Co.  (1885).  23  Fed.  Rep.  exercised  to  pay  taxes  and  get  crops  in, 
863  ;  Wallaces.  Loomis  (1877),  97  U.  S.  Barnes,  J.,  said  :  "Whence  is  the  juris- 
146.  diction  to  allow  the   receiver   to   borrow 

s  State   of    Tennessee   v.    Edgefield   &  denied  ?     And  the  trustee  for  the  deben- 

Kentucky  R.  Co.  (1880),   6  Lea  (Tenn.),  ture-holders   replied,    *  It   is,  we   submit, 

353  ;  s.  c.  4  Am.  &  Eng.  R.  R.  Cas.  86.  interest  in  the  court;  we  do  not  know  how 

*  Wallace  v.   Loomis  (1877),  97   U.S.  el.se  it  ai-ises.'"    Murrietta  y.  Nevada,  L.  & 

146  ;  Miltenbergpr  v.  Logansport  Ry.  Co.  C.  Co.  (1892),  68  Law  Times,  442. 
(1884),   106  U.   S.   286  ;  s.  c.   12  Am.   &  This    doctrine    has,    however,    elicited 


664:  RAILWAY   BONDS   AND    MORTGAGES,  [CHAP.  XXX. 

The  double  basis  on  which  this  doctrine  rests  is  very  clearly 
brought  out  in  the  following  passage  from  the  opinion  of  Mr. 
Justice  Blatchford  in  an  important  case:  " Property  subject  to 
liens,  and  claims  and  debts  of  various  characters  and  ranks, 
which  is  brought  within  the  cognizance  of  a  court  of  equity  for 
administration  and  conversion  into  money  and  distribution,  is  a 
trust  fund.  It  is  to  be  preserved  for  those  entitled  to  it.  This 
must  be  done  by  the  hands  of  the  court  through  officers.  The 
character  of  the  property  gives  character  to  the  peculiar  species 
of  preservation  which  it  requires.  A  railroad  and  its  appurte- 
nances is  a  peculiar  species  of  property.  Not  only  will  its 
structures  deteriorate  and  decay  and  perish,  if  not  cared  for  and 
kept  up,  but  its  business  and  good-will  will  pass  away  if  it  is 
not  run  and  kept  in  good  order.  Moreover,  a  railroad  is  a  matter 
of  public  concern.  The  franchises  and  rights  of  the  corporation 
which  constructed  it  were  given  not  merely  for  private  gain  to 
the  corporators,  but  to  furnish  a  public  highway;  and  all  persons 
who  deal  with  the  corporation  as  creditors  or  holders  of  its 
obligations  must  necessarily  be  held  to  do  so  in  the  view  that, 
if  it  falls  into  insolvency,  and  its  affairs  come  into  a  court  of 
equity  for  adjustment,  involving  the  transfer  of  its  franchises 
and  property,  by  a  sale,  into  other  hands,  to  have  the  purpose 
of  its  creation  still  carried  out,  the  court,  while  in  charge  of  the 
property,  has  the  power,  and  under  some  circumstances  it  may 
be  its  duty,  to  make  such  repairs  as  are  necessary  to  keep  the 
road  and  its  structures  in  a  safe  and  proper  condition  to  serve 
the  public"! 


some  vigorous  protests.    The  most  weighty  ties  of  a  law  the  existence  of  which  could 

reason  against  it  is  that  it  undoubtedly  not  even  have  been  suspected  by  any  one 

deprives  the  bondholders  of  a  vested  right  not  possessed  of  the  gift  of  prophecy.     Nor 

without   compensation,    and    thereby   in-  can  it  be  denied  that  there  is  much  force 

fringes   a  well-known   constitutional  pro-  in  the  consideration  that,  if  there  be  this 

vision.     The  answer  to  this  objection  is  gi-eat  public  inconvenience  in  the  stoppage 

that   bondholders   are  assumed  to  accept  of  a  railroad,  it  would  be  fairer  that  the 

tlieir  security  suVyect  to  the  implied  linii-  ])ublic  itself  should  provide  for  obviating 

tation  that  their  interests  are  to  be  sub-  this  inconvenience  by  appropriate  legisla- 

ordinated  to  the  right   of  the  public  to  tion,  or  even  con.stitutional   amendment, 

have  tlie  road  0])erated  continuously.     But  than  that  tiie   burden  should   be   thrown 

it  cannot  seriously  be  contended  that  this  on  a  few  private  individuals.     See  the  re- 

hy[ioth(!sis  is,  as  regards  mortgagees  whose  marks  of  Judge  Walker  in   his  dissenting 

secuiity   was    created    before   tlie   view   of  opinion  in  Humphreys  t'.  Allen  (1S82),  101 

the  paramoimt  right  of  the  public  obtained  111.  490,  501  ;  s.  C.  4  Am.   &  Eng.   R.  R. 

currency,  more  than  a  legal  fiction  coined  Cas.  14. 

to  fit   the  ])eculiar  circumstiinccs  of  these  i  Union  Trust  Co.   v.  Illinois  Midland 

receiverships.     There    is    no    liltle    hard-  R.   Co.    (1887),    117   U.   S.    434;  8.  C.  25 

8hip  in  visiting  upon  creditors  the  penal-  Am.  &  Eng.  R.  R.  Cas.  5G8. 


§  676.]  POWERS   OF   COURT   AND   RECEIVER.  665 

The  same  doctrine  has  been  more  briefly  expressed  in  another 
case,  where  it  was  said  that  authority  to  issue  receivers'  certifi- 
cates is  based  on  the  ground  that  it  is  necessary  to  keep  the 
road  a  going  concern,  and  in  order  to  do  so  it  is  for  the  benefit 
of  the  bondholder,  as  well  as  a  duty  to  the  sovereign  whose 
franchise  the  bondholders  desire  to  operate,  that  it  should  be 
kept  in  proper  condition.^ 

In  an  oft-cited  Alabama  case,^  the  power  to  issue  first-lien 
certificates  is  rested  entirely  upon  the  public  character  of  func- 
tions discharged  by  railroad  companies.  On  page  348  it  was 
said:  "If  it  were  not  for  the  public  quality  belonging  to  them, 
for  the  injury  that  would  be  done  to  the  interests  of  whole  com- 
munities that  have  become  dependent  on  a  railroad  for  accom- 
modation in  a  thousand  things,  a  chancellor  might  say  to  the 
parties  most  interested,  Unless  you  furnish  means  for  the  pro- 
tection of  this  property,  which  does  not  itself  afford  an  adequate 
income  for  the  purpose,  it  may  become  a  dilapidated  and  use- 
less wreck.  But  the  inconvenience  and  loss  which  this  would 
inflict  on  the  population  of  large  districts,  coupled  with  the 
benefit  to  parties  who  perhaps  are  powerless  to  take  care  of 
themselves  of  preventing  the  rapid  diminution  of  value,  and 
derangement  and  disorganization  that  would  otherwise  result, 
seem  to  require  —  not  for  the  completion  of  an  unfinished  work, 
or  the  improvement,  beyond  what  is  necessary  for  its  preserva- 
tion, of  an  existing  one,  — but  to  keep  it  up,  to  conserve  it  as  a 
railroad  property,  if  the  court  has  been  obliged  to  take  posses- 
sion of  it,  that  the  court  should  borrow  money  for  that  purpose, 
if  it  cannot  otherwise  do  so  in  sufiiciently  large  sums,  by  caus- 
ing negotiable  certificates  of  indebtedness  to  be  issued  consti- 
tuting a  first  lien  on  the  proceeds  of  the  property,  and  redeemable 
when  it  is  sold  or  disposed  of  by  the  court." 

So  also,  in  a  recent  case,  Mr.  Justice  Brewer  has  referred, 
arguendo,  to  the  obligation  of  continued  operation  which  rail- 
road property  must  discharge  to  the  public,  as  being  the  founda- 
tion, of  the  power  of  the  court  to  make  the  expenses  of  a 
receivership  a  prior  lien  of  the  corpus  of  the  estate.^ 

§  676.  Purchasers  take  the  Property  Subject  to  Lien  for  Operat- 
ing Expenses,  when.  —  The  power  of  the  court  to  create  debts  for 
payment  of  operating  expenses  does  not  cease  until  the  title  has 

1  Blair  v.  St.  Louis,  H.  &  K.  R.  Co.  ^  Kneeland  v.  American  Loan  &  Trust 
(1885),  25  Fed.  Rep.  232.  Co.  (1890),  ]36  U.  S.  89  ;  s.  c.  43  Am.  & 

2  Meyer  v.  Johnston    (1875),   53  Ala.  Eug.  R.  R.  Cas.  519. 
237  ;  s.  c.  15  Am.  Ry.  Rep.  467. 


666  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  XXX. 

actually  passed  to  the  purchasers  at  the  foreclosure  sale,  and,  if 
the  latter  neglect  for  several  years  to  complete  the  sale,  they 
will  take  the  property  subject  to  the  lien  created  in  favor  of  a 
vendor  of  rolling-stock  which  was  acquired  in  pursuance  of  an 
order  issued  after  the  sale  had  been  made  upon  interlocutory 
judgment,   but  before  it  had  been  confirmed.^ 

A  receiver  of  a  system  consisting  of  several  lines  is  entitled 
to  be  allowed  his  expenditures  for  the  purchase  of  rails  for  any 
part  of  the  system,  but  the  outlay  is  to  be  charged  upon  the 
entire  line,  and  subordinated  to  the  lien  of  any  mortgage  there 
may  be  upon  the  line  where  the  rails  are  used,  —  at  least  where 
the  trustees  of  such  mortgage  have  had  no  part  in  the 
receivership.^ 

The  receivers  of  a  system  of  railroad  companies,  composed  of 
various  roads,  are  entitled  to  reimburse  themselves,  where  one 
of  the  component  companies  has  failed  to  equal  in  revenue  the 
amount  they  may  have  expended  in  operating  it,  for  the  defi- 
ciency, out  of  the  corpus^  in  preference  to  bondholders  of  the  com- 
pany.3  This  upon  the  principle  that  receivers  cannot  divert  the 
income  or  property  of  a  system  of  railroads  in  their  charge  from 
its  creditors  and  stockholders  to  pay  the  deficit  of  one  of  the 
constituent  companies,  the  property  of  the  system  being  a  trust 
in  their  hands  for  the  benefit  of  its  own  creditors  and  stock- 
holders. 

§  677.  Lien  of  Certificates  •when  not  transferred  to  Proceeds  of 
Sale.  —  The  lien  of  receivers'  certificates  is  not  transferred  to 
the  proceeds  of  the  foreclosure  sale,  when  the  purchasers  pay  in 
only  enough  money  to  meet  the  costs  and  other  expenses  of  the 
case,  and  for  the  residue  of  the  price  turn  in  bonds,  and  the 
decree  confirming  the  sale  directs  the  conveyance  to  be  made 
subject  to  the  payment  of  any  sums  which  the  court  may  there- 
after direct  to  be  paid  in  cash  on  account  of  the  purchase- 
money.* 

§  678.  Issue  of  Certificates  to  pay  Operating  Expenses  may  be 
authorized  without  the    Consent  of   the   Lien  Creditors.  —  It   is   well 

1  Viliis  V.  Page  (1887),  106  N.  Y.  439  ;  430.  In  the  latter  ease  the  court  said  : 
s.  c.  13  N.  Vj.  Kep.  743.  "  It  could  not  have  been  the  intention  of 

2  Phinizy  v.  Augusta  &  K.  R.  Co.  the  court  to  make  a  constructive  payment 
(18;)4),  f)2  Fed.  Rep.  771.  on  a  ymrchase  by  the  mortgagees,  through 

^  Ames  ft  n.l.    V.   Union    Pac.  Ry.   Co.  a    cancellation     of     the    mortgage    debt, 

el  al.  (1806),  74  Fed.  Rep.  33.').  equivalent  to  an  actual  payment,  so  as  to 

*  Mercantile  Trust  Co.  v.  Kanawlia  k  relieve  the  property  of  the  charge.     Such 

Ohio    R.    Co.   (1802),  .'jO  Fed.   Rep.   874.  a  lien  would  be  illusory  merely,  having  no 

Compare  Vilas  v.  Page  (1887),  106  N.  Y.  substantial. quality." 


§  078. ]  rowEKS  OP  court  and  receiver.  GG7 

settled  that  the  power  of  a  court  to  make  a  receiver's  certificates 
issued  to  raise  money  for  the  preservation  of  the  road  a  para- 
mount lien  thereon  docs  not  depend  upon  the  consent  of  those 
who  hold  prior  liens.  ^ 

In  Greenwood  v.  Algeciras  (Gibraltar)  Ry.  (1894),  7  Reports 
Ch.  App.  620,  Kekewich,  J.,  although  of  opinion  that  it  would 
be  to  the  advantage  of  all  concerned  in  the  company  that  the 
order  should  be  made,  declined  to  make  it,  inasmuch  as  he 
doubted  whether  the  court  had  jurisdiction  to  do  so  unless  all 
the  debenture-holders  who  were  formally  represented  in  the 
actions  were  personally  present,  having  regard  to  the  fact  that 
the  money,  if  raised,  would  have  priority  over  the  existing 
debentures.  On  appeal,  Lindley,  L.  J.,  said  that  the  orders 
which  have  been  made  in  previous  cases  justified  the  court  in 
acceding  to  the  application.      (See  cases  cited.) 

Such  consent  is  desirable, ^  but,  in  the  nature  of  the  case,  can 
rarely  be  practicable  where,  as  so  often  occurs,  the  debts  exceed 
the  value  of  the  property.^ 

Where  the  counsel  who  makes  the  application  represents  all 
the  holders  of  one  class  of  bonds,  and  a  large  proportion  of  the 
holders  of  another  class,  and  the  trustees  of  both  mortgages 
have  expressed  their  desire  that  the  certificates  shall  be  issued, 
the  court  will  be  fully  justified  in  making  the  necessary 
order.* 

As  the  trustees  represent  the  bondholders  in  proceedings 
affecting  the  mortgage  lien,^  and  the  receiver  represents  the 
company,  neither  the  company  nor  the  bondholders  can  assail 
the  validity   of  an   order   authorizing  the  purchase  of  rolling- 

1  Wallafe  v.  Loomis  (1877),  97  U.  S.  lien  on  the  income,  revenues,  and  earnings 

146,    162 ;    Union    Trust    Co.    v.    Illinois  of  the  railroad  company,  after  deducting 

Midland  Ry.  Co.  (1887),   117  U.  S.  434,  therefrom  the  operating  expenses,  and  all 

455  ;  s.  c.  25  Am.  &  Eng.  R.  R.  Cas.  560  ;  other  property  of  the  coni])any,  real  and  per- 

Meyer  v.  Johnston  (1875),  53  Ala.  237  ;  sonal.      See,  for  examjile,  Turner  v.  Peoria 

s.   c.   15    Am.    Ry.    Rep.    467;    Vilas    v.  k  Springfield  R.  Co.  (1880),  95  111.  134; 

Page  (1887),  106  N.  Y.  439.     Vermont  &  s.  c.  1  Am.  &  Eng.  R.  R.  Cas.  348, 

Cannda  R.  Co.  v.  Vermont  Central  R.  Co.  ^  Wallace  v.   Loomis  (1877),  97  U.  S. 

(1877),  50  Vt.  500 ;  s.  c.  14  Am.  Ry.  Rep.  146. 

497,  is  apparently  contra ;  but  the  court  in  ^  Union  Trust  Co.  v.  Illinois  Midland 

that  case  was  not  dealing  with  a  technical  Ry.  Co.  (1887),  117  U.  S.  434,  455 ;  s.  c. 

receivership  looking  to   a  final   sale,   the  25  Am.  &  Eng.  R.  R.  Cas.  560. 

appointment  having  been  made  in  pursu-  *  Hoover   v.    Montclair    &    Greenwood 

ance  of  an  agreement  between  the  parties.  Lake   Ry.   Co.    (1878),   29   N.  J.   Eq.   4; 

and  merely  for  the  purpose  of  realizing  s.  c.   18  Am.  Ry.   Rej).   565. 

profits  to  pay  arrears  of  rent.  ^  See  ante,  chapter  on  trustees  and  on 

Receivers'  certificates  arp,  by  the  order  parties, 
authorizing  their  issue,  usually  made  a  first 


668  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP,  XXX. 

stock,  which  is  granted  on  the  application  of  the  receiver  and 
other  trustees.^ 

Two  constituent  railroad  companies  of  a  consolidated  company 
had  executed  a  first  and  second  mortgage.  The  consolidated 
company  executed  a  mortgage  also.  The  trustee  of  the  latter 
proceeded  to  foreclose.  The  trustee  of  the  mortgages  first 
named  afterward  filed  bills  to  foreclose  its  mortgages,  but, 
upon  its  assent,  the  court  consolidated  its  suits  with  the  first 
filed.  In  this  suit  the  court  ordered  the  receiver  to  issue  cer- 
tificates to  be  used  for  the  purpose  of  constructing  a  bridge 
over  a  river  on  the  line  for  the  advantage  of  all,  and  made 
them  a  first  lien  prior  to  that  of  the  bondholders.  The  final 
decree  of  the  court,  declaring  this  priority  of  the  certificates 
to  be  paid  out  of  the  proceeds  of  the  sale,  was  objected  to  by 
the  trustee  of  the  constituent  mortgages.  This  trustee,  hav- 
ing been  charged  with  notice  of  the  original  order,  and  hav- 
ing failed  at  the  time,  or  at  the  commencement  of  its  suit, 
and  the  extension  of  the  receivership  to  its  suits,  to  object  to 
the  order,  and  having  permitted  the  receiver  to  issue  the  cer- 
tificates and  use  them  for  the  purpose  proposed,  the  Circuit 
Court  of  Appeals  held,  was  bound  by  the  order,  and  the  decree 
was  sustained.^ 

A  trustee  of  divisional  mortgages,  who,  after  the  filing  of  a 
foreclosure  suit  by  the  trustee  of  a  consolidated  mortgage,  brings 
suits  to  foreclose  his  mortgages,  and  then  has  the  first  suit 
extended  to  his;  and  with  full  knowledge  of  the  issue  of  certifi- 
cates by  the  receiver  under  an  order  of  court  for  the  purpose  of 
constructing  a  bridge,  making  them  a  lien  prior  to  the  bond- 
holders', fails  at  any  time  to  object  to  the  order,  and  allows  the 
receiver  to  issue  and  use  them,  is  bound  by  the  order  originally 
authorizing  them.^ 

The  South  Carolina  Supreme  Court  has  declared  the  rule  that 
a  court  of  equity  which  has  placed  the  property  of  a  railroad 
company  in  the  hands  of  a  receiver  should  not  grant  orders  that 
the  receiver  issue  certificates  for  the  maintenance  of  the  road, 
making  them  a  lien  upon  the  corpus  of  the  property  on  an  ex 

1  Vilas  V.  Page  (1887),  106  N.  Y.  439  ;  »  Boston  Safe  Deposit  Co.  i;.  Holders  ot 
Wallace  v.  Looinis  (1877),  97  U.  S.  146,  $130,500  of  Receiver's  Certificates  (1896), 
162.  75   Fed.    Kep.   193,    reaffirmed   in    Boston 

2  Central  Trust  Co.  of  New  York  eJ  nl.  Safe  Deposit  &  Trust  Co.  v.  Croome  et  al. 
V.  Marietta  &  \.  Oa.  R.  Co.  et  al.  ;  Boston  (1896),  75  Fed.  Rep.  209,  in  which  case 
Safe  De]>osit  &  Trust  Co.  v.  Holders  of  the  certificates  were  authorized  by  the 
8130,500  of  Receiver's  Certificates  (1896),  court,  with  a  yy'xnv  lien,  for  the  purpose 
75  Fed.  Rep.  193.  of  purchasing  rolling-stock,  etc. 


§§  679,  680.]      POWERS  of  court  and  receiver.  669 

parte  application  of  the  receiver;  that  all  the  parties  interested 
as  holders  of  prior  liens  should  have  notice  of  such  aj)plication, 
and  be  heard  upon  it.  ^ 

§  679.  Dissent  of  some  of  the  Parties  in  Interest  a  Material  Cir- 
cumstance. —  The  dissent  of  some  of  the  parties  in  interest, 
though  not  a  conclusive  reason  for  declining  to  authorize  an 
issue  of  certificates,  will  often  have  great  weight  with  the  court, 
where  the  circumstances  show  that  the  result  might  be  produc- 
tive of  serious  injustice  to  the  protestants.  Thus  an  order  for 
such  an  issue  has  been  refused  in  a  case  where  it  was  opposed 
by  the  minority  of  the  bondholders,  the  evidence  showing  that 
the  road  had  a  merely  local  business,  that  it  was  wrecked  and 
irretrievably  insolvent,  and  that  its  future  was  quite  problem- 
atical even  if  it  should  be  put  in  running  order,  and  furnished 
with  an  equipment  of  its  own.^ 

Still  less  will  a  court,  at  the  instance  of  a  small  stockholder, 
restrain  a  foreclosure  suit  and  authorize  an  issue  of  certificates 
for  the  purpose  of  putting  the  road  in  good  condition,  and  thus 
demonstrating  its  earning  capacity  before  it  is  offered  for  sale, 
especially  where  it  is  apparent  that  the  net  earnings  would  not 
in  any  reasonable  time  suffice  to  cancel  the  certificates  and  at 
the  same  time  pay  the  current  interest  on  the  bonds. ^ 

§  680.  Consent  of  Bondholders  a  Prerequisite  to  the  Issue  of 
First-lien  Certificates  by  a  Receiver  of  a  Private  Corporation.  —  As 
the  essential  ground  on  which  the  power  to  issue  first-lien  cer- 

^  State  V.    Port  Royal   &  A.  Ry.  Co.  had  filed  consents  to  an  order  for  the  is- 

et  al.  (S.  C,  1895),  23  S.  E.  Rep.  380.  sue,  but  a  minority  protested.     The  court 

2  Investment  Co.  of  Pennsylvania  v.  said  that,  if  these  majority  bondholders 
Ohio  &  X.  W.  Pi.  Co.  (1888),  36  Fed  Rep.  desired  it,  an  order  would  be  granted  au- 
48.  The  court  reasoned  as  follows :  "  If  the  thorizing  the  issue  of  certificates;  that  it 
court  authorizes  certificates  to  be  issued,  should  not  be  a  charge  on  the  interest,  or 
and  made  a  lien  upon  the  railroad  supe-  aff'ect  the  lien  of  the  minority  bondholders, 
rior  to  the  mortgages,  for  the  purchase  The  court  doubted  whether  it  was  even 
and  laying  of  steel  rails,  for  the  purchase  right,  or  within  the  power  of  a  court, 
of  equipments,  and  for  the  completion  of  against  the  objection  of  the  mortgagees 
the  road,  the  j-esult  may  be  to  cause  those  and  others  having  a  large  pecuniary  inter- 
things  to  be  done  at  the  expense  of  and  to  est  in  a  railroad  property,  to  undertake  to 
the  detriment  of  the  bond  and  lien  hold-  carry  out  expensive  improvements  of  this 
ers,  and  for  the  benefit  of  the  purchasers,  class.  There  is  good  ground  for  holding 
or  of  a  syndicate  holding  a  majority  in  that  such  improvements  stand  on  the  same 
amount  of  the  bonds  and  liens,  having  footing  as  actual  construction  work,  which, 
peculiar  advantages  as  bidders,  and  in-  it  is  agreed,  cannot  be  authorized,  at  least 
tending  to  become  purchasers  at  the  sale  ;  on  borrowed  money,  against  the  will  of  the 
for  it  rarely  occurs  that  improvements  and  secured  creditors.  (See  below.) 
bettei-ments  add  to  the  salable  value  of  the  ^  Street  v.  Maryland  Central  Ry.  Co. 
road  anything  near  their  cost."  A  large  (1893),  59  Fed.  Rep.  25. 
majority  of  the  bondholders  in  this  case 


670  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  XXX. 

tificates  to  keep  railroads  in  operation  is  that  they  are  public 
ageiicies,  it  follows  that  this  power  cannot  be  exercised  in  the 
case  of  private  corporations  unless  all  the  parties  holding  prior 
liens  assent  thereto.  ^ 

Still  less  will  any  priority  be  accorded  to  certificates  issued 
to  creditors  of  such  a  corporation  for  claims  arising  in  the 
ordinary  course  of  business  prior  to  the  receivership. ^ 

It  has  been  held  in  Texas  that  a  waterworks  company  stands 
on  the  same  footing  as  a  railroad  company  in  regard  to  the 
power  of  the  court  to  provide  for  the  expenses  of  a  receivership 
by  issuing  first-lien  certificates;^  but  this  case  cannot  be  recon- 
ciled with  the  ruling  of  the  Supreme  Court  of  the  United 
States  in  Wood  v.  Guarantee  Trust  &  Safe  Deposit  Co.,*  where 
it  was  held  that,  so  far  as  the  doctrine  of  back  claims  was 
concerned,  such  a  company  cannot  be  treated  as  a  railroad 
company. 

It  is  not  in  the  power  of  a  court  of  equity,  in  a  foreclosure 
suit  of  a  mortgage  of  the  property  of  any  private  corporation 
other  than  a  railroad  company,  to  order  an  issue  of  certificates 
by  its  receiver  for  the  preservation,  etc.,  of  the  property,  and 
malfe  them  a  lien  prior  to  the  mortgage,  upon  either  the  earn- 
ings of  the  receivership  or  the  corpus  of  the  property.^ 

§  681.  Notice  should  be  given  to  Parties  interested.  —  Notice  to 
persons  interested  should  be  given  before  the  issue  of  certifi- 
cates is  authorized,  so  that  they  may  have  an  opportunity  of 
disputing  the  necessity  of  raising  money  in  this  manner.^ 


1  Farmers'  Loan  &  Trust  Co.  v.  Grape  *  128  U.  S.  416  (1888) ;  s.  c.  9  Sup.  Ct. 
Creek  Coal  Co.  (1892),  50  Fe(L  Rep.  481  ;  Rep.  131. 

Fidelity  Insurance,  Trust,  &  Safe  Deposit  ^  Hanna  et  al.  y.  State  Trust  Co.  et  al. 

Co.  V.  "Roanoke  Iron  Co.  (1895),  68  Fed.  (1895),  70  Fed.  Rep.  2  ;  s,  c.  16  0.  C.  A. 

Rep.  623.  586,  the  court  referred  to  Scott  v.  Trust 

In  Neafie's  Appeal  (Pa.,  1888),  12  Atl.  Co.  (1895),  69  Fed.  Rep.  17. 

Rep.  271,  tlie  receiver  of  a  sliip-building  ^  Union  Trust  Co.  v.  Illinois  Midland 

company  was  autliorized  to  continue  build-  Ry.  Co.  (1887),  117  U.  S.  434,  455  ;  s.  c. 

ing  some  unfinished  ships,  and,  with  the  25   Am.  &  Eng.  R.  R.   Cas.   560;  Dorn  & 

consent  of  all  the  creditors,  was  authoiized  McKee,  Trustees,  v.  Crank  (1892),  96  Cal. 

to  raise  a  sum  for  that  purpose  on  first-lien  383;  Ex  parte  Mitchell  (1879),   12  S.  C. 

certificates.  83. 

2  Laughlin  v.  United  States  Rolling  Debenture-holders  do  not  re])resent 
Stock  Co.  (1894),  64  Fed.  R''p.  25;  other  debenture-holders.  Securities  Co. 
Hooper  v.  Central  Trust  Co.  (1895),  81  v.  Brighton  Alhambra  (1893),  68  L.  T. 
Md.  559  ;  s.  c.  32  Atl.  Rep.  505  ;  Raht  v.  (Ch.)  249.  See  also  In  re  Regent's  Canal 
Attrell  (1887),  106  N.  Y.  423.  Co.  (1876),  3  Ch.  D.  421,  per  James,  L.J.  ; 

8  V,\\\-i  V.    Vernon  Ice,  Light,  &  Water  In  re  Ormerod,  Grierson,  &  Co.,   W.  N., 

Co.   (1895),  86  Tex.  109  ;  s.  c.  23  S.  W.  Dec.  13,  1890,  p.  217,  per  Stirling,  J. 
Rep.  858. 


§  682.] 


POWERS   OF    COURT   AND    RECEIVER. 


671 


Circumstances  may  be  judicially  equivalent  to  notice;  as 
where  those  who  will  be  affected  by  the  issue  have  had  their  day 
in  court,  and  been  heard,  on  evidence,  as  to  the  propriety  of  the 
expenditures  proposed,  and  of  making  them  a  first  lien  on  the 
property.^ 

Unless  prior  notice  is  given  to  the  parties  interested,  both 
the  receiver  and  those  lending  money  on  the  certificates  take 
the  risk  of  such  final  action  as  the  court  may  take  in  regard 
to  the  loans. 2 

A  bondholder  cannot  complain  that  certificates  were    issued 
without  due  notice  to  the  class  of  lienors  to  which  he  belono-s 
where   the  trustees   of  the   mortgage   securing  his  bonds  were 
parties  to  the  suit,   and,  having  due  notice  of  the  application, 
made  no  objection  to  its  being  granted. ^ 

§  682.  The  Necessity  for  the  Issue  must  be  clearly  established.  — 
The  necessity  for  the  issue  of  the  certificates  must  be  clearly 
established,  and  to  that  end  the  court  should  not  authorize  such 
a  step,  unless  a  detailed  statement  is  first  made  out,  specifying 
the  items  of  the  sum  needed  and  the  purposes  to  which  it  is  to 
be   applied,    and   satisfactory  evidence   is   offered,    after  proper 


1  Union  Trust  Co.  v.  Illinois  Midland 
Ry.  Co.  (1887),  117  U.  S.  434,  455  ;  s.  c. 
25  Am.  &  Eng.  R.  R.  Cas.  560. 

2  Union  Trust  Co.  v.  Illinois  Midland 
R.  Co.  (1887),  117  U.  S.  434,  455;  s.  c. 
25  Am.  &  Eng.  R.  R.  Cas.  560 ;  Hervey  v. 
Illinois  Midland  R.  Co.  (1886),  28  Fed. 
Rep.  169,  176.  In  the  latter  case  Mr.  Jus- 
tice Harlan  said:  "The  holder  of  certifi- 
cates issued  by  a  receiver,  under  authority 
of  the  court  to  borrow  money  and  give 
certificates  therefor,  for  the  protection  of 
the  trust  j)roperty,  must  be  deemed  to 
have  taken  them  subject  to  the  rights  of 
parties  who  liave  prior  liens  upon  the 
property,  and  who  have  not,  but  should 
have,  been  brought  before  the  court  ;  and 
where  such  piior  lienholders  are  brought 
before  the  court,  they  are  entitled  to  con- 
test the  necessity,  validity,  effect,  and 
amount  of  such  certificates,  the  same  as  if 
such  questions  were  then  first  presented, 
and  the  court  will  then  declare  such  cer- 
tificates to  be  superior  or  subordinate  to 
such  prior  liens  as  equity  may  require. 
If  it  appears  that  they  ought  not  to  have 
been  made  a  charge  upon  tlie  property 
superior  to  the  lien  created  by  the  mort- 
gagees, then   the   contract   rights   of  the 


prior  lienholders  must  be  protected.  On 
the  other  hand,  if  it  appears  that  the  court 
did  what  ought  to  have  been  done,  even 
had  the  trustee  and  the  bondholders  been 
before  it  at  the  time  the  certificates  were 
authorized  to  be  issued,  the  property 
should  not  be  relieved  from  the  charge 
made  upon  it  for  its  protection  and  preser- 
vation. Of  the.se  rules  or  principles  the 
parties  (judgn)ent  creditors)  who  inaugu- 
rated this  litigation  cannot  fully  complain. 
They  were  not  ignorant  of  the  fact  that 
there  were  existing  moilgages  upon  this 
property,  and  that  fact  should  have  been 
brought  to  tlie  attention  of  the  court  at 
the  very  outset.  Nor  have  the  bondhold- 
er.s  any  ground  of  complaint  if  tlie  court 
charges  upon  the  property  such  expendi- 
tures as  now  appear  to  have  been  right- 
fully made  in  the  interest  of  all  concerned 
in  its  management  while  in  the  hands  of  a 
receiver." 

3  Wallace  v.  Loomis  (1877),  97  U.  S. 
146;  Hoover  v.  Montclair  &  Greenwood 
Lake  Ry.  Co.  (1878),  29  N.  J.  Eq.  4  ; 
s.  c.  18  Am.  Ry.  Eep.  565.  As  to  the 
re]iresentative  position  of  the  trustee  in 
litigation  affecting  the  bonds,  see  Chap. 
XXIV.,  a7Ue  (parties). 


672  RAILWAY   BONDS   AND  MORTGAGES.  [CHAP.  XXX. 

notice  to  the  parties  interested,  that  the  statement  is  correct, 
and  that  it  is  indispensable  for  the  preservation  of  the  estate  to 
raise  the  money.  ^ 

A  receiver  will  not  be  authorized  to  borrow  money  for  the 
equipment  of  the  road  by  creating  a  car  trust,  when  the  only 
purpose  of  effecting  the  loan  is  to  set  the  earnings  free  for 
application  to  the  bonded  interest.  Such  a  course  would  be 
inconsistent  with  the  essentially  temporary  character  of  the 
administration  of  the  property,  as  well  as  with  the  principle 
that  such  loans  are  justified  only  by  the  necessity  of  providing 
funds  for  the  operation  of  the  road.^ 

Article  IV.  —  Purposes   for   which    First-lien   Certificates 

MAY    BE    issued    DURING    A    RECEIVERSHIP. 

§  688.  Funds  required  to  keep  the  Road  in  Operation  may  be 
procured  by  Issue  of  First-lien  Certificates.  —  Whatever  funds  are 
required  to  keep  up  the  business  as  a  going  concern  may,  as  a 
necessary  consequence  of  the  principles  stated  above,  be  pro- 
cured by  issuing  first-lien  certificates  for  the  purpose  of  putting 
the  road  in  repair,  and  operating  it,  for  the  purchase  of  rolling- 
stock  or  other  equipment,  and  for  the  payment  of  claims  for 
labor  and  rental.^ 

Where  the  mineral  property  of  a  mining  company  has  no 
marketable  value  without  a  railroad  operated  in  connection 
therewith,  the  proceeds  of  first-lien  certificates  may  be  used  in 
rebuilding  a  bridge  to  restore  communications  between  the  two 
properties,  and  in  acquiring  by  condemnation  proceedings  a 
perfect  title  to  a  portion  of  the  road-bed.^ 

§  68-1.  Issue  of  Certificates  to  pay  Taxes.  —  The  lien  for  taxes 
being  superior  to  all  other  liens  whatsoever,  except  judicial 
costs,  certificates  issued  to  pay  such  a  lien  are  accorded  a  cor- 
responding priority.^ 

1  Meyer  i-.   Johnston   (1875),   53  Ala.  &  En,?.  R.  R.  Cas.  464;  Union  Trust  Co. 

237;   s.   c.    15   Am.  Ry.    Rep.   467.     See  v.  Illinois  Midland  Ry.    Co.   (1887),   117 

Securities,  etc.  Co.  v.  Pjrij^liton  Alhambra,  U.  S.  434  ;  s.  c.  25  Am.  &  Encj.  R.  R.  Cas. 

Lim.  (1893),  68  L.  T.  (Ch.)  249.  560  ;  Vilas  v.  Paj-e  (1887),  106  N.  Y.  439  ; 

-  Taylor  v.  Philadolphia  k  Reading  R.  Knecland  v.  American  Loan  &  Trnst  Co. 

Co.    (1881),   14   Phil.   501;   .s.  c.   9   Fed.  (1890),  136  U.S.   89;  Kneeland  v.  Bass 

Rep.   1  ;  3  Am.  &  En^.  R.  R.  Cas.  177.  Foundry,   etc.    Works   (1891),    140   U.  S. 

8  Wabash,  St.  Louis,  &  Pao.  R.  Co.  v.  592. 
Central  Trust  Co.   (1884),   22   Fed.   Rep.  <  Ram  r.  Rorer  Iron  Co.  (1890),  86  Va. 

269,  271  ;  Wallace  i-.   Loomis  (1877),  97  754  ;  s.  c.  11  S.  E.  Rep.  431. 
U.S.  116;  Miltenherf:jerv.  liogansjjort  Ry.  ^  Union  Trust  Co.  v.  Illinois  Midland 

Co.  (1884),  106  U.  S.  286  ;  8.  c.  12  Am.  R.  Co.  (1887),  117  U.S.  434  ;  s.  c.  25  Am. 


I 


§  685.]  POWERS   OP   COURT    AND   RECEIVER.  673 

Taxes  being  the  first  and  paramount  lien  on  all  property 
where  the  property  of  a  corporation  of  any  kind  is  in  the  hands 
of  a  receiver,  the  court  will  authorize  him,  if  he  has  no  funds 
in'  his  hands  for  the  purpose,  to  borrow  money  to  pay  the  taxes, 
and,  whatever  the  obligation  given  by  the  receiver,  whether 
certificates  or  otherwise,  for  the  borrowed  money  it  will  be  a  prior 
lien  on  the  property  on  which  the  taxes  were  due.^ 

§  685.  Issue  of  Certificates  to  pay  Back  Claims  for  Labor,  Sup- 
plies, &c.  —  To  justify  making  receiver's  certificates  for  the 
payments  of  back  claims  a  first  lien  on  the  corpus  of  the  property, 
it  must  appear  either  that  (1)  there  has  been  a  diversion  of  the 
earnings  to  the  prejudice  of  the  claimants,^  or  (2)  that  it  is 
absolutely  necessary  for  the  conservation  of  the  property  to  raise 
money  in  this  way.  In  the  latter  case,  back  claims  will  come 
within  the  principle  which  justifies  the  issue  of  first-lien  certifi- 
cates to  meet  the  charges  which  accrue  after  the  commencement 
of  the  receivership.^ 

The  mere  fact  that  the  value  of  the  mortgage  lien  has  been 
enhanced  by  the  labor  of  a  claimant  is  not  a  sufficient  reason 
for  displacing  that  lien  in  his  favor.  If  this  argument  were 
allowed  to  prevail,  it  is  obvious  that  the  foreclosure  of  a  mort- 
gage might  in  many  instances  be  rendered  inoperative  and 
useless.^ 

&  Eng.   E.  R.  Gas.    560.     This   was   one  ceiver  to  issue  certificates  with  a  lien  prior 

ground  for  issue  of  certificates  in  Mui-rietta  to  the  mortgage  or  trust  deed,  see  Ames 

V.  The  Nevada  Land  &  Cattle  Co.,  Lim.  et  aJ.  v.  Union  Pac.  Ry.  Co.  et  al.   (1896), 

(1892),  93  Law  Times,  442.  74  Fed.  Rep.  335,  345. 

1  Hanna  et  al.  v.  State  Trust  Co.  ct  al.  ^  Miltenberger  i;.  Logansport  Ry.  Co. 
(1895),  70  Fed.  Rep.  29.  See  Dummer  r.  (1884),  106  U.  S.  286;  s.  c.  12  Am.  & 
Lindley  et  al.  (j\Iich.,  1896),  68  N.  W.  Eng.  R.  R.  Cas.  464.  For  an  extract  from 
Rep.  260,  264.  the  opinion  in  this  case,  showing  the  cir- 

2  Street  v.  Maryland  Central  R.  Co.  cumstances  under  which  the  doctrine 
(1893),  59  Fed.  Rep.  25  ;  Union  Trust  stated  in  the  text  was  applied,  see  Chap. 
Co.   V.   Illinois   Midland   Ry.  Co.   (1887),  XX VIL,  (preferential  debts). 

117  U.  S.  434  ;  s.  c.  25  Am.  k  Eng.  R.  R.  ■*  Metropolitan  Trust  Co.  v.  Tonawanda 
Cas.  560  ;  St.  Paul  Title  Ins.  &  Trust  Co.  Valley  &  Cuba  R.  Co.  (1886),  103  N.  Y. 
et  ah  V.  Diagonal  Coal  Co.  et  al.  (Guuson  245  ;  s.  c.  8  N.  E.  Rep.  488.  The  court 
etal.,  Interveners),  (Iowa,  1896),  64  N.  W.  said:  "  No  case  has  been  cited  where  an 
Rep.  606,  where  the  order  appointing  a  unsecured  creditor,  however  meritorious 
receiver  in  the  foreclosure  suit  provided  for  the  consideration  of  his  claim,  has  been 
the  borrowing  of  money  by  the  receiver  for  given  a  priority  over  a  lien  contracted  for 
the  payment  of  wages,  etc.,  due  laborers  and  in  force  when  his  debt  was  created. 
for  the  ninety  days  prior  to  the  receiver-  When,  as  in  this  case,  the  plaintiff  pro- 
ship,  and  making  the  obligation  given  for  cures  the  appointment  of  a  receiver,  with 
the  loan  a  preferred  lien  upon  the  corpus  power  to  control  and  operate  the  mort- 
of  the  property.  gaged  railroad,  he  cannot  well  object  to  the 
As  to  what  class  of  claims  for  the  pay-  depreciation  of  his  security  by  expenses 
ment  of  which  a  court  may  order  a  re-  incurred  for  those  purposes,  but  he  may 

43 


674 


RAILWAY    BONDS    AND    MORTGAGES.  [CHAP.  XXX. 


But  as  the  fund  available  for  the  payment  of  "  back  claims  " 
which  are  allowed  a  priority  is  produced  by  the  administration 
of  the  court,  it  may  be  distributed,  at  the  discretion  of  the  court, 
in  such  a  manner  as  not  to  embarrass  the  receivers ;  and  these 
claims  may  therefore  be  paid  by  certificates,  bearing  interest 
and  payable  out  of  any  funds  applicable  thereto,  at  such  dates 
as  may  afterwards  be  fixed  Ijy  the  receivers.  ^ 

The  income  on  which  certificates  issued  for  the  payment  of 
back  claims  is  chargeable  is,  of  course,  the  net  income  after  the 
payment  of  the  expenses  of  the  receivership,  and  there  are 
obvious  practical  difficulties  in  the  way  of  anticipating  such 
earnings.  Some  agreement  between  the  parties  would  seem  to 
be  absolutely  necessary  in  order  to  procure  money  in  this 
manner,  if  it  is  desired  to  give  immediate  relief  to  the 
creditors.^ 

§  686.  Issue  of  Certificates  to  keep  up  Single  Divisions  of  a  Con- 
solidated System.  —  The  same  considerations  which  point  to  the 
propriety  of  keeping  a  single  road  in  operation  by  the  issue  of 
certificates  are  applicable  to  cases  where  the  property  consists 
of  several  divisions.     If  any  of  those  divisions  are  operated  at 


properly  seek  to  have  excluded  any  pre- 
vious one."  In  view  of  the  two  cases 
cited  above,  this  sweeyting  statement  must 
evidently  be  taken  with  some  qualification. 
The  court  also  referred  to  some  New  York 
statutes  relied  on  by  the  claimant.  By 
the  laws  of  1850,  ch.  140,  §  10,  and 
of  1854,,  ch.  282,  §  16,  a  laborer  was 
given  a  remedy  in  certain  cases  against 
the  stockholders  upon  default  of  the  cor- 
poration to  meet  its  obligations.  This,  it 
was  pointed  out,  could  not  justify  a  decree 
which  required  the  payment  of  such  a 
creditor  out  of  the  property  of  other 
creditors.  By  the  act  of  1885,  eh.  376, 
the  receiver  of  an  insolvent  corporation 
was  required  to  pay  the  wages  of  em- 
ployees in  preference  to  the  other  debts. 
It  was  doubted  whether  this  statute  was 
applicable  to  foreclosure  proceedings,  but 
it  was  held  that,  as  it  had  not  been  enacted 
when  the  proceedings  were  instituted,  it 
could  not  be  invoked  to  sustain  the  decree 
ap[)calod  from. 

1  Taylor  v.  ?hiladel[ihia  &  Reading  R. 
Co.  (1881),  7  Fetl.  Hej).  377.  In  Central 
Trust  Co.  V.  Wabash,  St.  Louis,  &  I'ac.  K. 
Co.  (1885),  23  Fed.  Rep.  863,  it  was  men- 


tioned that  an  issue  of  certificates  was 
authorized  at  the  inception  of  the  receiv- 
ership to  procure  funds  to  payback  claims, 
but  no  more  than  about  one-sixth  of  the 
number  authorized  were  sold,  as  the  earn- 
ings were  found  to  be  sufl[icient  to  discharge 
the  debts.  Compare  Gurney  v.  Atlantic  & 
Great  AVestern  R.  Co.  (1874),  58  X.  Y. 
358  ;  Atkins  v.  Petersburg  R.  Co.  (1879), 
3  Hughes,  307.  In  this  last  case  the  cer- 
tificates were  issued  to  repay  the  advances 
of  one  who  had  lent  money  to  avert  an 
impending  strike.  The  circumstances 
were,  therefore,  virtually  the  same  as  in 
Miltenberger  v.  Logansport  Ry.  Co.,  supra, 
and  under  the  doctrine  of  that  case  it 
would  seem  that  the  certificates  might 
have  been  declared  a  lien  on  the  corpus, 
unless  the  fact  that  the  proceeds  were  not 
paid  directly  to  the  creditors  whose  con- 
duct threatened  the  safety  of  the  road 
may  be  thought  to  make  a  diff'erence. 
The  court,  however,  went  no  further  than 
to  declare  that  the  certificates  might  be 
made  a  lien  on  the  income. 

2  See  Street  v.   Maryland  Central  Ry. 
Co.  (1893),  59  Fed.  Rep.  25. 


§  687.]  POWERS    OF    COURT    AND    RECEIVER.  675 

a  loss,  the  deficiency  should  be  paid  out  of  the  earnings  of  the 
entire  system,  supplemented,  if  need  be,  by  the  proceeds  of  cer- 
tificates chargeable  on  the  whole  trust  fund.^ 

§  687.  Issue  of  Certificates  to  pay  for  Construction  'Work 
generally.  — Since  the  functions  of  a  court  which  is  administer- 
ing a  road  through  a  receiver  are  essentially  preservative  in 
their  nature,  it  is  clear  that  the  construction  of  additional  lines 
is,  strictly  speaking,  beyond  the  scope  of  its  powers. ^ 

A  road  "  should  be  kept  in  proper  condition,  not  only  for  the 
current  business  during  the  receivership,  but  for  continuing  to  do 
it,  without  the  necessity  for  special  and  extraordinary  outlay  on 
passing  back  to  the  possession  and  use  of  the  owners.  But  for 
any  legitimate  purpose  a  receivership  cannot  be  extended  to  the 
controlling  and  maintaining,  and  repairing  and  equipping,  other 
roads,  or  to  the  building  or  buying  of  other  roads,  or  to  the 
control  and  operating  of  lines  of  steamboats,  or  steamboats  in 
the  lines  of  other  roads,  even  with  the  view  of  larger  earnings, 
and  larger  net  income  of  the  property  which  is  the  subject  of 
the  receivership.  It  is  fundamental  in  the  law  that  a  receiver- 
ship is  temporary,  — to  serve  an  existing  exigency  of  a  temporary 
nature,  and  when  that  is  done,  to  cease.  "^ 

A  court  is  reluctant  to  apply  even  the  current  income  to  the 
construction  of  new  lines;*  though  it  does  not  now  admit  of 
question  that  the  earnings  will  even  be  anticipated  by  the  issue 
of  certificates,  for  the  purpose  of  procuring  funds  to  construct 
unfinished  portions  of  the  line,  where  there  is  a  reasonable 
prospect  that  the  resulting  increase  of  business  will  soon  reim- 
burse all  moneys  expended.^ 

1  Central  Trust  Co.  v.  Wabash,  St.  Central  R.  Co.  (1877),  50  Vt.  500;  s.  c. 
Louis,  &  Pac.  R.  Co.  (1885),  23  Fed.  Rep.     14  Am.  Ry.  Rep.  497. 

866.  *  In  Gilbert  v.  Washington  City,  Va. 

2  Clap  V.  Interstate  St.  R.  Co.  (1894),  Midi.  &  Grt.  Southern  R.  Co.  (1880),  33 
61  Fed.  Rep.  537.  The  ground  was  here  Gratt.  ( Va.)  586  ;  s.  c.  1  Am.  &  Eng.  R.  R. 
taken  that  it  was  not  the  business  of  a  Cas.  473,  the  lower  court  had  authorized . 
court  to  build  railroads,  or  to  set  railroads  the  construction  of  a  short  branch  to  con- 
in  operation  which  have  ceased  to  run,  neet  with  another  road.  The  appellate 
but  merely  to  continue  the  operation  of  court  waived  the  question  as  to  the  right 
the  roads  of  which  it  may  take  charge  to  make  such  an  expenditure,  but  said 
wherever  it  is  practicable,  and,  there  that  it  was  too  late  to  make  any  objection 
being  no  ])roof  of  a  request  from  the  after  two  years  had  been  allowed  to  pass 
parties  in  interest,  an  application  from  without  raising  any  objection,  especially 
the  receiver  for  authority  to  expend  a  as  the  pecuniary  result  of  the  court's 
large  sum  of  money  to  rebuild  the  power-  action  had  been  eminently  beneficial, 
house  of  one  of  the  branches  of  a  street  ^  Jliltenberger  v.  Logansport  R.  Co. 
railway  was  refused.  (1884),   106  U.   S.   286;    s.  c.  12  Am.  & 

3  Vermont  &  Canada  R.  Co.  v.  Vermont  Eng.  R.  R.  Cas.  464. 


676  RAILWAY   BONDS    AND   MORTGAGES.  [CHAP.  XXX. 

The  objections  to  a  court's  engaging  in  construction  work  are 
much  stronger  where  the  necessary  funds  can  be  procured  only 
by  borrowing  on  first-lien  certificates.  Yet  it  is  now  the  estab- 
lished doctrine  that  exceptional  circumstances  may  arise  which 
will  justify  a  court  in  taking  even  this  extreme  step.  Being  an 
extraordinary  exercise  of  power,  this  displacement  of  earlier 
liens  is  admitted  to  be  permissible  only  in  cases  of  the  most 
urgent  necessity.  Such  a  necessity,  it  is  held,  is  presented  when 
the  building  of  an  additional  line  or  lines  is  requisite  to  give 
the  mortgagees  the  full  benefit  of  their  security.  Thus  where  a 
conditional  land-grant  covered  by  the  mortgage  is  in  danger  of 
being  forfeited  because  the  embarrassed  condition  of  the  com- 
pany prevents  it  from  finishing  the  road  within  the  period  fixed 
by  the  legislature,  it  is  not  improper  to  appoint  a  receiver  with 
power  to  raise  such  money  as  may  be  requisite,  and  to  make  the 
loan  a  paramount  lien  on  the  estate. ^ 

vSo  it  has  been  held  that  where,  under  the  provisions  of  cer- 
tain acts  of  Congress,  lands  covered  by  the  mortgage  of  a  canal 
company  were  to  revest  in  the  United  States  unless  the  canal 
was  finished  within  a  given  time,  the  court  might  legitimately 
authorize  a  receiver  of  the  property  to  raise  money  to  complete 
the  work  by  issuing  first-lien  certificates. ^ 

1  Allen  V.   Dallas   &   "Wichita  E.   Co.  allowed  the  bondholder  complainants  and 

(1878),  3  Woods,  316  ;  Kennedy  f.  St.  Paul  the   receiver   to    be   made    parties   to    an 

&  Pacific  R.  Co.,  5  Dill.  519.     At  p.  525  of  application  to   permit   outside   parties  to 

the  opinion  in  the  last  case,  Judge  Dillon  build  this  bridge,  and  approved  a  contract 

said:   "  I  assent  in  the  fullest  manner  to  for   its   construction  and  use,   subject   to 

the   proposition   that   a   court   of    equity  certain  conditions  limiting  the  duration  of 

ought    not   to    enter   upon   the   work   of  the  contract,  and  regulating  the  compen- 

either  operating  or  building  a  railroad,  if  sation  to  be  paid  for  the  use  of  the  bridge 

this  can  possibly  be  avoided  without  the  by  the  railroad  company,  or  its  assigns, 

certain  and  great  sacrifice  of   the    rights  or  successors,    or    the   purchasers   at   the 

and  securities  of  the  parties  in  interest,  foreclosure    sale.      In    the  matter  of    La 

The  original  order  in  this  case  was  made  Crosse   Railroad    Bridge    (1873),    2    Dill, 

upon  tliis  principle,  and  upon  the  e.xcep-  465. 

tional  case  which  the  road  presented.     It         In    Kropholler   v.    St.    Paul,    Minneap- 

is  not  to  be  inferred  from  the  report  of  olis,  &  Manitoba  Ry.  Co.  (1880),  2  Fed. 

that  case  that  authority  even  to  complete  Rep.  302,   the  propriety  of  an  order  au- 

the   building   of    an    unfinished    line    of  thorizing  a   receiver   to   issue  debentures 

railway,  and  to  issue  debentures  for  that  for  the  completion  of  the  road  was  under 

purpose,   is   to   be   conferred   without   an  review.     The  power  of  the  court  to  make 

overwhelming     neccssit}'.        When     such  sneli    an   issue   was   not   questioned,    the 

authority   is    conferred,    it    ought   to   be  point  ruled  being   that   the  comphiining 

guarded   with   the  utmost   care."     After-  Ijondholder  had  no  ground  for  equitable 

ward.s,  in  tliis  same  matter,  as  the  railroad  relief  on  the  ground  that  the  issue  had 

comjiany  had  a  franchise  to  build  a  bridge  been  excessive. 

across  tlie   Mississippi    River   which    was  ^  Jerome  v.  McCarter,  94  U.  S.  734. 

Dot  included  in  tlie  mortgage,  the  court 


§  688.]  POWERS   OP   COURT   AND   RECEIVER.  677 

A  loan  secured  by  first-lien  certificates  has  also  been  author- 
ized in  a  case  where  some  inconsiderable  portions  of  the  road 
remained  so  far  unfinished  as  to  be  unsafe  for  the  passage  of 
trains.  ^ 

§  088.  Certificates  to  pay  for  Construction  "Work  cannot  be 
made  a  First  Lien  on  the  Road  without  the  Consent  of  Prior  Lienors. 
—  The  court  has,  in  any  event,  no  power  to  charge  a  loan  for 
construction  purposes  as  a  first  lien  on  the  property,  unless  the 
parties  secured  by  earlier  liens  consent  to  have  their  claims 
postponed  in  this  manner.  This  rule  receives  negative  support 
from  the  cases  cited  in  the  foregoing  section,  as  the  application 
for  leave  to  borrow  money  was  made  with  the  concurrence  of 
the  mortgagees  in  every  instance  in  which  a  loan  was  authorized, 
and  has  been  announced  in  direct  terms  in  a  well-known 
Alabama  case.^  The  trial  court  undertook  to  issue  first-lien 
certificates  without  the  consent  of  the  mortgagee,  and  the  appel- 
late court  ruled  that  in  doing  so  he  had  passed  the  bounds  of 
his  jurisdiction.  A  railroad  company,  it  was  pointed  out,  the 
fruits  of  whose  labor  and  expenditures  are  about  to  be  lost  by 
the  failure  of  its  enterprise,  cannot,  in  order  to  raise  money  to 
complete  it,  create  liens  on  its  property  which  will  displace 
older  liens,  and  the  power  of  a  court  of  equity  which  is  manag- 
ing the  property  is  equally  limited.  The  court  said:  "If  the 
action  of  a  chancellor  in  this  cause  goes  to  the  extent  of  tak- 
ing the  property  of  the  defendant,  for  the  purpose,  through  his 
appointees,  of  completing  an  unfinished  work,  or  of  enlarging 
or  improving  a  finished  one,  heyond  what  is  necessary  for  its 
preservation,  and,  to  that  end,  of  raising  money  by  charging  the 
railroad  and  its  appurtenances  with  liens  which  are  to  super- 
sede older  ones,  without  the  consent  of  the  holders  of  these,  he 
has  inadvertently  passed  beyond  the  bounds  of  a  chancellor's 
jurisdiction." 

In  Hale  v.  Nashua  &  Lowell  Railroad  (1880),  60  N.  H. 
333,  it  is  not  apparent  from  the  report  whether  the  consent 
of  the  secured  creditors  was  obtained  before  ordering  the 
com)iletion  of  the  road  by  a  receiver;  but  if  the  cases  are 
intended  to  go  to  that  extent,  it  is  opposed  to  the  current  of 
authority. 

In  other  courts  the  ground  has  been  taken  that  it  is  not  only 
no  part  of  the  duty  of  a  court  to  build  railroads,  but  also  that 


1  Stanton  v.   Alabama  &  Chattanooga  ^  j,j  Mej'er  i;.  Johnston  (1875),  53  Ala. 

K.  Co.  (1875),  2  Woods,  506.  '       237  ;  s.  c.  15  Am.  Ry.  Rep.  467. 


678  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  XXX. 

even  the  assent  of  all  the  parties  interested  cannot  make  it 
such.  1 

Where  this  view  is  taken,  no  difference  will  be  made  between 
building  a  railroad  and  making  extensive  repairs  and  better- 
ments, the  cost  of  which  is  sometimes  nearly  as  great  as  that  of 
the  original  construction.^ 

The  Supreme  Court  of  the  United  States  has  taken  a  middle 
ground,  and,  while  conceding  that  the  power  of  a  court  may, 
under  extraordinary  circumstances,  be  used  to  enable  mort- 
gagees to  protect  their  securities  by  borrowing  money  to  com- 
plete unfinished  roads,  expressed  its  opinion  that  it  is  always 
better  in  such  emergencies  to  reorganize  the  company  on  the 
basis  of  existing  mortgages  as  stock,  or  something  which  is 
equivalent,  and  by  a  new  mortgage  with  a  lien  superior  to  the 
old  raise  the  money  which  is  required.  The  result  of  this  plan, 
so  far  as  incumbering  the  mortgage  security  is  concerned,  is  the 
same  substantially  as  if  first-lien  certificates  are  issued,  while 
the  reorganization  places  the  whole  enterprise  in  the  hands  of 
those  immediately  interested  in  its  prosecution.^ 


Article  V.  —  Rights  of  the  Holders  op  a  Receiver's 
Certificates. 

§  689.  Receiver's  Certificates  not  Negotiable  Instruments.  — 
That  receiver's  certificates  are  not  negotiable  instruments  is 
well   settled.^ 

They  do  not  fulfil  the  conditions  requisite  to  give  written 
instruments  for  the  payment  of  money  the  character  of  negotia- 
bility by  indorsement,  viz.,  that  they  shall  be  payable  absolutely 
and  at  all  events,  independently  of  any  contingency  either  in 
regard  to  the  event  or  the  fund  out  of  which  payment  is  to  be 

^  Paine  v.  Little  Rock  Ky.  Co.  (Circuit  100  U.  S.  605.     In  this  case,  also,  a  land 

Ct.  E.  D.  Arkansas,  1874),  per  Caldwell,  grant  was  imperilled  by  the  non-completion 

J.,    who   declined    to    follow    Stanton    v.  of  the  road. 

Alabama  R.  Co.  and  Kennedy  v.  St.  Paul  *  Union  Trust  Co.  v.  Illinois  Midland 

R.  Co.,  supra,  and  adopted  the  alternative  R.    Co.   (1887),  117  U.  S.  434,  455  ;  s.  c. 

course  of  expediting  the  foreclosure  pro-  25  Am.  &  p]ng.  R.  R.  Cas.   560  ;  Stanton 

ceedings  and  rendering  a  decree  fitted  to  v.  Alabama  &  Chattanooga  R.  Co.  (1875), 

meet  the  exigencies  of  the  case.     This  the  2  Woods,  506  ;    s.   c.    31  Fed.   Rep.  585 

Supreme  Court  of  the   United   States  de-  (1887)  ;  Swann  v.  Clark  (1884),  110  U.S. 

dared  to  be  a  much  more  de.sinible  jilan  602;  I'liion  Trust  Co.  v.  Chicago  &  Lake 

tlian  to  issue  certificates.     (See  below.)  Huron  R.   Co.  (1880),   7  Fed.   Pep.   513; 

"  Ibid.  P,„nk  of  Montreal  v.  Chicago,  C.  &  W.  R. 

8  Sliaw  V.    Kailroa.l  Company   (]S7'.»),  Co.  (1878),  48  Iowa,  518. 


§  690.]  POWERS   OP   COURT   AND   RECEIVER.  679 

made,  or  as  to  the  parties  by  whom  or  to  whom  payment  is  to 
be  made.^ 

•The  most  that  can  be  said  of  them  is  that  they  are  evidence  in 
the  hands  of  the  holder  that  he  is  entitled  to  receive  from  the 
fund  under  the  control  of  the  court  which  authorized  its  ofTicer 
to  issue  them  the  amount  specified,  if  the  fund  is  suflicient  to 
pay  in  full  all  holders  of  such  certificates,  or  if  it  is  not  suffi- 
cient, then  only  a  j9ro  rata  share  with  other  holders.  ^ 

The  mere  fact  that  by  their  terms  they  inure  to  the  benefit 
of  the  "bearer"  does  not  impart  to  them  the  quality  of  com- 
mercial paper.  The  use  of  that  word  imports  assignability,  not 
negotiability,  and,  even  if  it  is  omitted,  they  are  still  capable 
of  transfer.  2 

§  690.  Purchasers  affected  with  Notice  of  all  Circumstances 
attending  the  Issue  of  the  Certificates.  —  Any  one  who  purchases 
certificates  is  bound  to  ascertain  whether  they  were  issued  in 
accordance  with  the  terms  and  contingencies  contemplated  in 
the  order  by  virtue  of  which  they  were  issued,*  and  is  charged 
with  notice  of  all  that  has  been  done  during  the  pendency  of 
the  litigation  up  to  the  date  of  his  purchase,  as  well  as  of  all 
subsequent  proceedings  therein,  and  that  by  the  final  action  of 
the  court  the  validity  or  security  of  the  instruments  may  be 
prejudicially  affected.^ 

If  disposed  of  in  a  manner  and  for  a  purpose  not  authorized 
by  the  order  under  which  they  were  issued,  receivers'  certificates 
are  invalid  and  of  no  effect  as  against  the  property,^  whether  in 
the  hands  of  the  original  holder  or  of  a  subsequent  purchaser 
or  pledgee.  Thus  if  one  of  the  set  of  certificates  authorized  for 
the  purpose  of  paying  off  an  indebtedness  contracted  by  a  former 
receiver  is  issued  to  a  payee  who  has  no  claim  on  the  trust 
fund,  his  transferee  will  stand  in  no  better  position  than  him- 
self in  the  court  where  the  fund  is  being  administered.'^ 

1  Turner  v.  Peoria  &  Springfield  E.  Co.  to  be  proper,  from  whichever  point  of 
(1880),  95  111.  134  ;  s.  c.  1  Am.  &  Eng.  view  the  rights  of  the  parties  were 
R.  R.  Cas.  348.  examined. 

2  Ibid.  4  Bank  of  Montreal   v.  Chicago,  C.  & 
8  Railroad    Co.    v.    Howard    (1868),  7     W.  R.  Co.  (1878),  48  Iowa,  518. 

Wall.  392 :  Turner  v.  Peoria  &  Springfield  ^  Mercantile  Trust  Co.  v.  Kanawha  & 

R.  Co.  (1880),  95  111.  134  ;   s.  c.  1  Am.  &  Ohio  Ry.  Co.  (C.   C.   A.,  1893),  58   Fed. 

Eng.    R.   R.    Cas.    348.     This   latter  case  Rep.  6. 

was  considered  both  with  reference  to  the  ^  Stanton   v.   Alabama  &  Chattanooga 

common-law  rules  regarding  instruments  R.  Co.  (1887),  31  Fed.  Rep.  585. 

for  the  payment  of  money,  and  also  with  "^  Turner  v.  Peoria  &  Springfield  R.  Co. 

reference  to   the    Illinois   statute  on    the  (1880),  95  111.  134  j    s.  c.  1  Am.   &  Eng. 

subject.      The  same  conclusion  was  held  R.  R.  Cas.  348. 


680  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  XXX. 

Authority  to  issue  certificates  "  for  money  borrowed,  material 
furnished^  labor  performed,  or  on  account  of  contracts  made  by 
him  for  or  on  account  of  the  construction  or  completion  of  said 
road  or  any  part  thereof,"  does  not  empower  the  receiver  to 
issue  such  certificates  for  material  which  is  merely  contracted 
to  be  delivered,  even  though  the  order  of  appointment  also  con- 
tains a  general  authority  to  "  do  and  perform  all  the  acts  and 
things  necessary  to  be  done  and  performed  to  construct  said 
line  of  railroad. "  ^ 

Certificates  issued  in  excess  of  the  number  authorized  in  the 
order  of  the  court  are  absolutely  void.^ 

The  rule  that  the  certificate-holder  is  not  bound  to  look  behind 
the  order  which  authorized  the  issuance  may  also  inure  to  his 
benefit.  Thus  where  the  order  does  not  limit  the  payment  to 
any  particular  fund,  any  such  limit  apparent  on  the  face  of  the 
certificates  is  of  no  force  or  consequence,  because  they  are  the 
mere  forms  by  which  the  order  of  the  court  is  executed.^ 

§  691.  Rank  of  Certificates  depends  on  Final  Decree.  —  That  the 
holders  of  receivers'  certificates  depend  for  their  ultimate  rank 
upon  the  final  decree  in  the  cause  in  which  the  certificates  are 
issued  is  well  settled.* 

The  interest  of  the  holder  of  such  instruments  is  acquired  not 
merely  subject  to  all  the  restrictions  imposed  by  the  doctrine  of 
lis  pendens,  but  by  virtue  of  the  litigation.  By  the  very  act  of 
purchasing  the  certificates  he  is  put  upon  inquiry  as  to  all  that 
has  been  done  in  the  course  of  the  litigation,  and  is  charged 
with  notice  of  all  the  subsequent  proceedings  therein  as  if  he 
had  been  an  actual  party  to  the  record.^  For  example,  holders 
of  certificates  issued  subsequent  to  decrees  sustaining  a  me- 
chanic's lien,  and  directing  a  sale  of  the  property  subject  to 
that  lien,  are  privies  to  such  decree  and  take  subject  to  the 
lien.^ 

But  the  lien  of  the  certificates  continues  as  long  as  the  order 
authorizing  their  issuance  remains  in  force.  The  fact  that  a 
referee  is  appointed  to  determine  all  claims  against  the  receiver- 
ship, and  a  report  of  his  has  been  confirmed  which  makes  no 
allusion  to  the  certificates,  in  not  an  adjudication  against  them, 

1  Bank  of  Montreal  v.  Chicago,   C.   &  *  Union  Trust  Co.  v.  Illinois  Midland 

W.  R.  Co.  (1878),  48  Iowa,  518.  Ry.  Co.  (1887),  117  U.  S.  434. 

'^  Newbold  v.  Peoria  &  Springfield  R.  ^  Mercantile  Trust  Co.  v.  Kanawha  & 

Co.  (1879),  5  111.  App.  3f)7.  Ohio  Ry.  Co.  (1893),  58  Fed.  Rep.  6,  11. 

3  Neade's  Appeal  (1888),   12  Atl.  Rep.  «  Gordon  v.  Newman  (1894),  62  Fed. 

271.  Rep.  686  ;  s.  c.  10  C.  C.  A.  587. 


§§  692-695.]      POWERS  op  court  and  receiver.  681 

when  it  appears  that  they  were  not  presented  or  considered,  and 
that  the  holder  had  no  notice  of  the  reference.  ^ 

§  6'J2.  Negotiation  and  Sale  of  Certificates  a  Trust  personal  to 
Receiver.  —  The  negotiation  and  sale  of  receiver's  certificates 
being  a  trust  personal  to  the  receiver  himself,  the  rights  of  one 
who  purchases  them  from  any  person  other  than  the  receiver 
himself  must  be  determined  on  the  assumption  that  the  seller  is 
himself  a  holder,  and  not  an  agent  of  the  receiver.  The  pur- 
chaser, even  though  he  has  paid  a  valuable  consideration  for  the 
certificates,  and  is  without  notice  of  any  facts  bearing  on  their 
validity,  except  such  as  appear  in  the  order  of  the  court,  takes 
them,  under  such  circumstances,  subject  to  all  the  equities  be- 
tween the  original  parties.  If,  therefore,  his  assignor,  though 
actually  intrusted  with  the  certificates  by  the  receiver  for  the 
purpose  of  negotiation  and  sale,  fails  to  account  with  the  receiver 
for  the  proceeds,  the  purchaser  does  not  stand  in  a  position  to 
charge  the  fund  of  the  receivership  with  the  payment  of  the  cer- 
tificates. Especially  is  this  the  case  when  he  is  able  to  effect  the 
purchase  at  a  very  large  discount  very  soon  after  the  certificates 
are  issued,  this  being  sufficient  to  put  him  on  inquiry  as  to  the 
existence  of  some  infirmity.^ 

§  693.  The  Trust  Fund  is  not  liable  for  the  Payment  of  a  Receiv- 
er's Certificates  unless  the  Proceeds  come  under  his  Actual  Control. 
—  This  rule  is  sufficiently  complied  with  where  the  proceeds  are 
deposited  to  his  credit  in  a  bank  in  the  form  of  checks,  drafts,  etc., 
which  are  afterwards  duly  honored  by  the  drawers.  The  validity 
of  the  certificates,  in  such  a  case,  is  not  impaired  by  the  fact  that 
the  bank  has  never,  at  any  time  after  such  deposit  was  made, 
been  in  a  condition  to  pay  over  any  considerable  portion  of  the 
deposit.^ 

§  694.  Purchasers  of  Certificates  not  bound  to  see  to  Application 
of  Proceeds.  —  Persons  having  no  connection  with  the  case  or  the 
parties,  who  take  certificates  directly  from  the  receiver,  are  not 
bound  to  see  that  the  proceeds  are  properly  applied.'* 

§  695.  Rights  of  Purchasers  not  affected  by  taking  Collateral 
Security.  —  Purchasers  of  receiver's  certificates  do  not,  by  taking 
a  special  collateral  security,  make  that  the  only  security  upon 

1  Mercantile  Trust  Co.  v.  Kanawha,  etc.  *  Union  Trust  Co.  v.  Illinois  Midland 
Ry.  Co.  (1892),  50  Fed.  Rep.  874.  Ry.  Co.  (1887),  117  U.  S.    434;    s.  c.  25 

2  Union  Trust  Co.  v.  Chicago  &  Lake  Am.  &  Eng.  R.  R.  Cas.  560  ;  s.  P.  Stan- 
Huron  R.  Co.  (1881),  7  Fed.  Rep.  513.  ton    v.  Alahama   &   Chattanooga    R.    Co. 

3  Ala.  Iron  &  Ry.  Co.  v.  Anniston  Loan  (1875),  2  Woods,  506. 
&  Trust  Co.  (1893),  57  Fed.  Rep.  25. 


682  RAILWAY   BONDS    AND   MORTGAGES.  [CHAP.  XXX. 

which  they  have  a  right  to  rely  to  enforce  the  payment  of  the 
certificates.^ 

§  696.  Bondholders,  ■when  estopped  to  dispute  Validity  of  Cer- 
tificates.—  A  bondholder  who,  with  a  full  knowledge  of  all  the 
circumstances  and  conditions  under  which  certificates  were  is- 
sued, lies  by  and  permits  otliers  in  good  faith  to  invest  their 
money  in  receiver's  certificates,  cannot  afterwards  be  heard  to  as- 
sert that  such  certificates  are  not  a  lien  on  the  property  superior 
to  the  mortgage.^ 

Similarly,  when  the  bondholders  suffer  certain  persons  to  ap- 
pear to  the  world  in  the  character  of  receivers,  and,  as  such,  to 
issue  negotiable  obligations,  the  rights  of  the  purchasers  of  those 
obligations  are  the  same  whether  they  are  strict  receivers  or  not. 
To  such  a  case  the  principle  is  applicable  that,  where  one  of  two 
innocent  parties  must  suffer  by  the  act  of  a  third,  he  who  gave 
the  power  or  opportunity  to  do  the  act  must  bear  the  burden  of 
the  consequences.^ 

§  697.  Receiver,  •wrhen  estopped  to  dispute  Validity  of  Certifi- 
cates. —  As  against  an  innocent  purchaser  of  certificates,  a  re- 
ceiver cannot  be  heard  to  dispute  their  validity  where  he 
authorized  the  president  of  a  bank,  in  which  he  keeps  his  de- 
posits, to  sell  them,  and  afterwards  drew  checks  against  the 
amount  credited  to  him  for  the  proceeds  of  the  sale,  and  reported 
the  transaction  to  the  court.  Under  such  circumstances  it  is 
immaterial  that  the  authority  of  the  president  of  the  bank  to  sell 
the  certificates  was  revoked  before  the  sale  in  question  was  made ; 
and  the  fact  that  the  receiver,  upon  learning  that  the  bank  was 
insolvent,  obtained  from  the  president  certain  collateral  securi- 
ties to  protect  his  deposits,  will  be  regarded  not  as  a  repudia- 
tion, but  rather  as  an  additional  ratification,  of  the  sale  of  the 
certificates.'* 

A  merely  personal  contract,  whereby  the  purchaser  of  a  rail- 
road agrees  to  pay  off  certain  certificates  which  are  invalid  be- 
cause of  the  manner  in  which  they  were  issued,  is  ineffectual  to 

^  Langdon  v.  Vermont  &  Canada  R.  passed  under  the  control  of  the  bondhold- 

Co.    (1880),    53    Vt.    228;  s.  c.  4  Am.   &  ers,    their  authority   being    derived    from 

Eng.    R.  K.  Cas.  33.  various  decrees  and  orders  entered  by  con- 

^  Hum[)hreys  v.  Allen  (1882),  101  111.  sent  of  tlie  jiarties.    The  case,  therefore,  is 

490  ;  a.  c.  4  Am,  &  Eng.  U.  R.  Cas.  14.  a  very  sjjccial  one,  the  rights  of  the  pnr- 

'  l.angdon  v.  Vermont  &   Canada   R.  chasers   being  determined    by   the   prin- 

Co.    (1880),  .''j3  Vt.  228  ;    8.  c.  4  Am.  &  cijile  of  the  estoppel. 
Eng.    II.    R.    Cas.    33.     In    this  case  the  *  Ala.  Iron  &  Ry.  Co.  v.  Anniston  Loan 

receivers   originally   appointed   continued  &  Trust  Co.  (1893),  57  Fed.  Rep.  25. 
to   act   as   such   after   the    property   had 


§§  698-701.]         POWERS   OP   COURT   AND    RECEIVER.  683 

charge  the  property  in  the  hands  of  such  purchaser  when  he  after- 
wards becomes  receiver.^ 

§  698.  Court,  -when  bound  to  recognize  the  Estoppel  of  Receiver 
to  dispute  Validity  of  Certificates.  —  Where  the  receiver  recognizes 
the  validity  of  a  sale  of  certificates  by  accepting  a  credit  at  a  bank 
for  the  amount  of  the  proceeds,  and  afterwards  drawing  against 
the  deposit,  the  court  will  consider  itself  bound  by  the  estoppel 
thus  raised  against  its  agent,  and  treat  the  certificates  as  a  valid 
lien  upon  the  trust  fund  as  against  the  purchasers  at  the  fore- 
closure sale.  Especially  will  such  protection  be  extended  to  in- 
nocent holders  of  the  certificates,  if  the  purchase  of  the  railroad 
was  made  with  full  knowledge  that  the  certificates  were  out- 
standing, and  the  purchasers  have  taken  an  assignment  of  certain 
securities  which  the  receiver  had  obtained  from  the  bank  to  pro- 
tect his  deposits,  and  which,  at  the  same  time  they  were  given, 
were  considered  amply  sufficient  for  that  purpose.^ 

§  699.  Amount  recoverable  by  Holders  of  Receiver's  Certificates. 
—  The  ])urchasers  of  certificates  taken  within  the  limit  of  the  dis- 
count allowed  by  the  court  in  the  order  authorizing  their  issue 
are  entitled  to  the  face  value  of  the  certificates.^ 

Those  who  pay  for  them  less  than  the  lowest  percentage  of  the 
par  value  for  which  they  may  be  disposed  of  can  be  credited  only 
with  the  sum  actually  paid.^ 

§  700.  Usury  La'ws  applicable  only  to  Receiver's  Certificates.  — 
The  Chancellor  has  no  power  to  disregard  the  laws  against  usury, 
by  authorizing  a  receiver  to  borrow  money  by  the  sale  of  interest- 
bearing  certificates  at  less  than  their  face  value.^ 

§  701.  Holders  need  not  present  the  Certificates  for  Payment 
before  Foreclosure  Sale.  —  A  holder  of  certificates  is  not  guilty  of 
laches  in  failing  to  present  them  for  payment  before  the  fore- 
closure sale.  They  are  practically  call  loans,  and  he  has  a  right 
to  assume  that  the  receiver  will  notify  him  when  the  loan  is  to  be 
called  or  the  money  paid.^ 

1  Stanton  v.  Alabama  &  Chattanooga  hypothecated  by  the  receivers  to  secure 
R.  Co.  (1887),  31  Fed.  Rep.  585.  advances,  the  sum  so  received  being  less 

2  Ala.  Iron  &  Ry.  Co.  v.  Anniston  Loan  than  ninety  per  cent  of  their  face  value. 
&  Trust  Co.  (1893),  57  Fed.  Rep.  25.  The  court  allowed  the  pledgees  to  retain 

3  Union  Trust  Co.  v.  Illinois  Midland  only  so  manj^  certificates  as,  rating  them 
R.  Co.  (1887),  117  U.  S.  434  ;  s.  c.  25  Am.  at  ninety  cents  on  the  dollar,  represented 
&  Eng.  R.  R.  Cas.  560.  the  amount  advanced,  and  ordered  the  rest 

*  Stanton  v.  Alabama  &  Chattanooga  to  be  returned  to  the  receiver. 
R.  Co.  (1875),   2  Woods,  506  ;  Swann  v.  ^  Meyer  v.  Johnston    (1875),    53  Ala. 

Clark  (1884),  110  U.  S.  602.     In  the  for-  237  ;  s.  c.  15  Am.  Ry.  Rep.  467. 
mer   case   the  order  prescribed  that   the  ^  Mercantile  Trust  Co.  v.  Kanawlia  & 

certificates  should  not  be  sold  for  less  than  Ohio  Ry.  Co.  (1892),  50  Fed.  Rep.  874. 
ninety  cents  on  the   dollar.     They  were 


684 


RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  XXXI. 


CHAPTER  XXXI. 


LIABILITIES   OF   COMPANY   AND   RECEIVER  DURING   RECEIVERSHIP. 


Art.  I.  —  Liabilities  of  Company  dur- 
ing Receivership. 
§  702.   Contract  Liabilities  of  Company 
suspended  by  Appointment  of 
Receiver. 

703.  Company's     Liability    in     Tort 

ceases   after   the    Receiver   as- 
sumes Control. 

704.  Liability  of  Company,  after  be- 

ing restored  to  Possession,  for 
Claims  arising  during  Receiv- 
ership. 
Art.  II.  —  Liabilities  of  Receiver. 
§  705.   Liability    of     Receiver    that   of 
Common  Carrier. 

706.  Liability  of  Receiver  not  usually 

personal. 

707.  Receiver  officially  liable  to  Third 

Persons  for  Torts  of  his  Em- 
ployees. 

708.  Receiver,  whether  suable  on  Cause 


of  Action  arising  prior  to  Ap- 
pointment. 
§  709.   Receiver's  Liability  for  Injuries 
to  his  own  Employees. 

710.  How  far  Receiver  is  bound  by 

Company's  Contracts  generally. 

711.  Receiver  succeeds  to  Company's 

Rights   as    to    Annulment    of 
Contracts. 

712.  What    Contracts    of     Company 

should  be  carried  out  by  Re- 
ceiver. 

713.  Contract  Liabilities  of  Receivers 

in  Regard  to  Leased  Roads. 

714.  Withdrawal  of  Consideration  of 

Lease  a  Sufficient  Ground  for 
renouncing  it. 

715.  Receiver    cannot    enjoj'   Benefit 

of  Contract  without  assuming 
Burdens. 

716.  When    Receiver's    Liability,    as 

such  ceases. 


Article  I.  —  Liabilities  of  Company  during  Receivership. 

As  to  the  enforcement  of  liabilities  of  receiver,  see  Chap» 
XXIX.,  ante. 

§  702.  Contract  Liabilities  of  Company  suspended  by  Appoint- 
ment of  Receiver.  —  Contractual  obligations  of  the  mortgagor 
company  arising  out  of  the  management  of  the  mortgaged  prop- 
erty, terminate  when  it  loses  power  to  control  the  property. ^ 

But  the  existence  of  the  corporation  is  not  interfered  with,  nor 
its  ofTicers  displaced,  by  an  order  which  constitutes  the  directors 
in  effect  receivers  of  the  corporate  property,  especially  when  the 
corporation  continues  to  carry  on  its  business  as  before,  and 
elects  its  officers  at  regular  periods.    A  note  for  current  debts. 


J  Newport  &  Cincinnati  Bridge  Co.  v.  Douglass  (1877),  12  Bush  (Ky.),  673;  s.  c. 
18  Am.  Ry.  Rep.  221. 


§  703.]  LIABILITIES   OF   COMPANY   AND   RECEIVER.  685 

given  by  the  corporation,  while  such  an  order  remains  in  force, 
and  signed  by  the  president  and  treasurer  as  such,  will,  therefore, 
be  treated  as  having  been  made  and  taken  without  any  reference 
to  the  fund  of  the  quasi  receivership. ^ 

§  703.  Company's  Liability  in  Tort  ceases  after  Receiver  assumes 
Control.  —  "  Where  a  court  of  proper  jurisdiction  seizes  a  railroad, 
takes  it  from  the  custody  and  control  of  its  corporate  ofhcers,  and 
puts  the  same  into  the  hands  of  a  receiver  to  be  operated  under 
the  directions  of  the  court,  such  receiver  is  the  governing  power 
operating  the  road,  and  is  alone  liable  for  wrongs  and  injuries 
committed  by  himself  or  his  servants."  ^ 

A  railway  company,  in  the  absence  of  a  statute  imposing  lia- 
bility, is  not  answerable  for  injuries  resulting  from  the  mistakes 
or  negligence  of  a  receiver  or  his  agents  while  operating  a 
railroad.^ 

A  railroad  company  will  be  held  liable  for  the  acts  of  a  receiver 
where  the  property  is  retui-ned  to  the  company  without  sale,  after 
a  large  expenditure  by  the  receiver  of  current  revenues  in  better- 
ments, etc.* 

Since  injuries  caused  by  the  misconduct  of  the  employees  of  a 
receiver  are  done  while  the  railroad  company  is  out  of  the  pos- 
session of  the  property,  and  has  no  control  over  it,  no  liability 
attaches  to  the  company  on  account  of  those  injuries.^ 

1  Ex  parte  Williams  (1881),  17  S.  C.  Youngblood  v.  Comer  (Ga.,  1895),  23  S. 
396  ;  s.  c.  12  Am.  &  Eng.  R.  R.  Cas.  425.  E.   Rep.   509,    and   Patterson    v.   Central 

2  Ricks,  D.  J.,  in  Chamberlain  v.  New  Railroad  &  Bkg.  Co.  et  al.  (Ga.,  1895),  23 
York,  Lake  Erie,  &  Western  R.  Co.  (1895),  S.   E.   Rep.   509  ;  Brown  v.   Comer  et  al. 
71  Fed.  Rep.  636.     See  Meara's  Admr.  v.  (Ga.,  1896),  25  S.  E.  Rep.  176. 
Holbrook,  20  Ohio  St.  137.  ^  Davis  v.  Duncan  (1884),  19  Fed.  Rep. 

3  Schurr  v.  Omaha  &  St.  Louis  Ry.  Co.  477,  481 ;  Roger  v.  Mobile  &  Ohio  R.  Co. 
(Iowa,  1896),  67  N.  W.  Rep.  280.  See  (Tenn.,  1882),  12  Am.  &  Eng.  R.  R.  Cas. 
Godfrey  v.  Railway  Company,  116  Ind.  442;  Mempliis  &  C.  R.  Co.  v.  Hoechnet 
30  ;  s.  0.  18  N.  E.  Rep.  61  ;  State  v.  (C.  C.  A.,  1895),  67  Fed.  Rep.  456  ;  Metz 
Wabash  Ry.  Co.,  115  Ind.  406  ;  s.  c.  17  o.  Buffalo,  Corry,  &  Pittsburgh  R.  Co. 
K  E.  Rep.  909:  Metz  v.  Railroad  Com-  (1874),  58  N.  Y.  61.  In  the  latter  case  the 
pany,  58  N.  Y.  66  ;  Railroad  Company  v.  court  said  :  "  In  reference  to  the  position 
Stringfellow,  44  Ark.  322  ;  Railroad  Com-  that  the  receiver  and  assignee  was  the 
pany  v.  Donough,  72  Tex.  Ill  ;  s.  c.  10  agent  and  servant  of  the  defendant,  which 
S.  AV.  Rep.  711  ;  Murphy  v.  Holbrook,  20  were  therefore  liable  for  his  acts,  it  must 
Ohio  St.  145  ;  Thurman  v.  Railroad  Com-  be  borne  in  mind  that  the  defendant  was 
pany,  56  Ga.  376  ;  Brockert  v.  Railway  not  a  voluntary  bankrupt.  The  appoint- 
Company,  82  Iowa,  370 ;  s.  c.  47  N.  W.  ment  of  Barrey  as  receiver  was  by  the 
Kep.  1026.  court,  against  its  will.     It  had  nothing  to 

*  Texas  &  Pac.  Ry.  Co.  Watson  ct  al.  do  with  his  appointment,  or  any  control 

(Tex.  Civ.  App.,   1896),  36  S.   W.  Rep.,  over  his  employees.     Upon  what  principle 

290  ;  Henderson  v.  Walker  (1875),  55  Ga.  can  the  defendant  be  held  responsible  for 

481;  Thurman  v.  Railroad  Co.  (1876),  56  their  negligence  ?     A  master  or  emplo3^er 

Ga.    376,   reaffirmed   and   adhered  to   iu  is  held  liable  for  the  negligence  of  those 


686  RAILWAY   BONDS   AND    MORTGAGES.  [CHAP.  XXXI. 

This  rule  is  not  affected  by  the  fact  that  the  president  of  the 
company  is  the  receiver.^ 

But  if  a  road  is  partly  in  the  hands  of  a  receiver  and  partly 
operated  by  a  lessee,  and  the  company  allows  passenger  tickets  to 
be  issued  in  its  name,  it  will  be  liable  to  a  passenger  for  damages 
resulting  from  the  acts  of  employees  engaged  in  operating  the 
road.  In  this  case  the  road  is  run  on  the  joint  account  of  the 
lessees  and  the  receiver,  and  the  servants  are  controlled  by  them 
jointly,  and  not  by  the  receiver  alone.^ 

It  has  also  been  held,  in  a  recent  case,  that  a  receiver  appointed 
by  a  court  which  has  no  jurisdiction  over  the  territory  in  which  the 
property  is  situated,  or  in  proceedings  instituted  by  the  parties  col- 
lusively,  in  order  to  accomplish  a  purpose  unlawful  m  itself,  must 
be  considered  as  the  agent  of  the  company,  which  is  therefore 
liable  for  injuries  resulting  from  the  operation  of  the  road  by  him.^ 

But  a  railroad  company  is  not  relieved  from  responsibility  for 
injuries  caused  by  the  operation  of  the  road,  unless  the  possession 
of  the  receiver  is  exclusive.  Thus  where  the  only  substantial 
duty  discharged  by  the  receiver  is  to  receive  the  net  earnings 
of  the  road,  and  to  account  therefor  to  the  court,  and  upon  his 
appointment  he  continues  to  employ  the  same  officials  in  their 
former  positions,  and  the  business  of  the  road,  so  far  as  is  known 
to  the  public,  is  conducted  upon  the  same  footing  as  before  up  to 
the  time  of  the  accident,  a  verdict  for  damages  for  the  results  of 
a  collision  resulting  from  the  negligence  of  those  operating  the 
road  is  properly  rendered  against  the  company.^ 

in  his  service,  for  the  reason  that  it  is  his  liable  for  the  breach  of  contracts  made  by 

duty  to  enforce  the  observance  of  care  by  him,  and  for  injuries  sustained  by  his  neg- 

them.     He  is  held  liable  to  those  injured  ligence  or  that  of  his  employees  in  their 

by  the  failure  by  him  to  perform  this  duty,  performance."     Rogers  v.  Wheeler  (1871), 

But  this  has  no  application  to  the  present  43  N.  Y.  598. 

case.      Here  the  defendant,  by  the  act  of  Under   the   Iowa   Code,   §   1289,  a  re- 

the  law,  has  been  deprived  of  the  posses-  ceiver  operating  a  railroad,  and  not  the 

sion  of  the  road,  and  of  all   control  over  company,  is  the  proper  party  defendant  in 

those  engaged  in  operating  it ;  and  by  like  an  action  to  recover  double  damages  for 

act  the  possession   and   control    has  been  stock  killed  upon  the  railroad.     Brockert 

given  to  others.     The  defendant  had  not,  v.  Central  Iowa  Ry.  Co.  (1891),  82  Iowa, 

therefore,  anything  to  do  with  operating  369  ;  s.  c.  47  N.  W.  Rep.  1026. 

the  road.     True,    if   profits   were   earned  i  Davis   v.    Duncan    (1884),    19    Fed. 

thereby,  they  would  inure  to  the  benefit  Rep.  477,  481. 

of  the  defendant  by  becoming  assets  for  '^  Railroad  Co.    v.    Brown    (1873),    17 

the  payment  of  debts.     But  this  did  not  Wall.   445. 

make  it  liable  for  the  conduct  of  those  in  ^  Texas  &  Pac.   Ry.  Co.  v.  Gay  (1894), 

110  sense  its  enii)loyees  or  .servants.     Tlie  86  Te.x.  571  ;  s.  c.  26  S.  W.  Rep.  590. 

employees  must  look   to   those  who   em-  *  Pennsylvania  R.  Co.  v.  Jones  (1894), 

ployed  tlicm  for  compensation,  and  tiiose  155  U.  S.  333  ;  s.  c.  15  Sup.  Ct.  Rep.  136, 

who  contracted   with  the  receiver  or   as-  citing  Kaihoad  Co.  v.  Brown,  supra. 

signee  must  also  look   to  liiin.     He  was  The  Washington    Supreme    Court   has 


§  704.]  LIABILITIES   OP   COMPANY    AND   RECEIVER.  687 

§  704.  Liability  of  Company,  after  being  restored  to  Possession, 
for  Claims  arising  during  the  Receivership.  — All  order  discbargilif^ 
the  receiver,  restoring  the  property  to  the  company,  and  requiring 
all  claims  against  the  receiver  to  be  presented  to  tke  court  before 
a  certain  date,  in  default  whereof  they  are  to  be  barred,  docs  not 
preclude  a  plaintiff  whose  claim  is  not  presented  within  that  time 
from  recovering  a  personal  judgment  against  the  company,  on  the 
ground  that  the  earnings  of  the  receivership  out  of  which  the 
claim  should  have  been  paid  were  used  in  making  permanent  im- 
provements which  have  inured  to  the  company's  benefit.^ 

Although  the  receiver  thus  discharged  may  have  been  appointed 
by  a  federal  court,  the  action  on  the  claim  may  be  maintained  in 
a  State  court,  not  merely  because  the  proceeding  is  not  one  in  rem, 
but  because  the  property  is  no  longer  in  the  custody  of  the  fed- 
eral court  after  the  discharge  of  its  receiver.  There  is  no  prin- 
ciple by  virtue  of  which  a  court  can,  under  such  circumstances, 
be  held  to  have  parted  with  its  jurisdiction  over  property,  by  the 
complete  surrender  thereof  to  its  owner,  and  at  the  same  time  to 
have  constructively  retained  jurisdiction  over  the  property,  so  as 
in  that  respect  to  bind  those  who  would  otherwise  be  unaffected 
by  its  orders.2 

Such  a  claim  may  also  be  enforced  by  a  bill  in  equity  to  subject 
the  property  to  its  payment,  if  no  third  party's  rights  have  inter- 
vened, and  the  injured  person  was  given  no  opportunity  of  bring- 
ing an  action  against  the  receiver  prior  to  his  discharge.^ 

If  no  such  application  of  the  earnings  to  permanent  improve- 
ments is  shown,  the  claimant  will  apparently  have  no  remedy 

held  that  the  receivers  of  a  railroad  com-  Code  ;   and  such  receiver,  or   rather   the 

pany  could  not  be  held  liable  for  failing  to  property  in  his  hands,   is  liable  for   the 

carry  out  a  contract  of  the  company  for  claim  of  an  employee  for  injuries  received 

transportation  made  before  their  appoint-  through  the  negligence  of  co-employees, 

ment.     Casey    v.    Northern   Pac.    R.    Co.  Sloan  v.  Central  Iowa  Ry.  Co.  (1883),  62 

(Wash.,  1896),  48  Pac.  Rep.  53,  following  Iowa,  728  ;  s.  c.  16  N.  W.  Rep.  3S1  ;  11 

Scott  V.  Railway  Co.,  13  Wash.  108  ;  s.  c.  Am.  &  Eng.  R.  R.  Cas.  145. 
42  Pac.  Rep.  531.  Sec.  1309,  Code  Iowa,  provides  that  a 

1  Texas  R.  Co.  v.  Bloom  (1894),  60  judgment  against  any  railway  corporation 
Fed.  Rep.  979  ;  Texas  &  Pac.  Ry.  Co.  v.  for  any  injury  to  any  person  or  property 
Huffman  (1392),  83  Tex.  286  ;  s.  c.  18  S.  shall  be  a  lien  on  the  company's  property 
W.  Rep.  741.  prior  and  superior  to  the  lien  of  any  mort- 

2  Texas  &  Pac.  Ry.  Co.  v.  Johnson,  gage  or  trust  deed  executed  since  the  4th 
(1894),  151  U.  S.  81  ;  s.  c.  14  Sup.  Ct.  day  of  July,  1862,  held  constitutional. 
Rep.  250.  Central  Trust  Co.  et  al.  v.  Sloan  (1885),  65 

A  receiver  who  is  operating  a  railroad  Iowa,  655  ;  s.  c.  22  N.  W.  Rep.  916  ;  23 

under  the  appointment  and  direction   of  a  Am.  &  Eng.  R.  R.  Cas.  398. 

court  is  included  under  the  terms  "per-  ^  Davis  r.  Duncan  (1884),  19  Fed.  Rep. 

sons  owning   or   operating   railways,"   in  477,  481  ;  s.  c.  17  Am.  &  Eng.  R.  R.  Cas. 

contemplation   of  §§  1278,   1307,  of  the  295. 


688  RAILWAY   BONDS    AND   MORTGAGES.  [CHAP.  XXXI. 

against  the  company  on  the  property  after  the  receiver  is  finally 
discliarged ;  at  all  events,  after  the  end  of  the  term  in  which  the 
decree  discharging  him  was  entered.  The  question  presented  is 
then  one  merely  of  jurisdiction,  and  the  court  has  no  power  to 
resume  control  of  the  property  under  such  circumstances. 

A  shipper  of  stock  over  a  railroad  in  the  hands  of  a  receiver 
after  its  sale,  in  an  action  to  recover  damages  against  the  company 
or  purchaser,  must  show  that  the  receiver  received  funds  during 
his  management  and  turned  them  over  to  the  company  or  pur- 
chaser, or  permanently  improved  the  property  therewith.^ 

A  railroad  company  was  held  liable  for  damages  incurred  by 
negligence  of  employees  during  a  receivership,  its  property  having 
been  returned  to  it  without  sale,  and  the  receivers  having  ex- 
pended the  earnings  during  their  administration  in  betterments 
of  the  road.2 

Article  TI.  —  Liabilities  op  Receiver.^ 

§  705.  Liability  of  Receiver  that  of  Common  Carrier.  —  The  lia- 
bility of  a  receiver  operating  a  railroad  is  that  of  a  common  carrier 
in  regard  to  the  persons  with  whom  they  deal  in  their  official 
capacity.* 

§  706.  Liability  of  Receiver  not  usually  personal. — The  general 
rule  is  that  a  receiver  is  not  personally  liable,  either  in  contract 
or  tort,  for  anything  which  he  does  in  his  official  capacity.  Being 
the  officer  and  representative  of  the  court,  subject  to  its  orders, 
accountable  in  such  manner  and  to  such  persons  as  the  court 
may  direct,  the  receiver,  as  such,  has  no  personal  interest,  but 
that  arising  out  of  his  responsibility  for  the  correct  and  faithful 
discharge  of  his  duties.  It  is  of  no  consequence  to  him  how,  or 
when,  or  to  whom,  the  court  may  dispose  of  the  funds  in  his  hands, 
provided  the  order  or  decree  of  the  court  furnishes  to  him  a  suffi- 
cient protection.^ 

1  Holman  v.  Galv.,  H.  &  S.  A.  Ry.  Co.  Little  v.  Dusenberry  (1884),  46  N.  J.  L. 
(Tex.  Civ.  App.,  1896),  37  S.  W.  Rep.  464.  614  ;  Klein  v.  Jewett  (1875),  26  N.  J.  Eq. 

2  Texas  &  Pac.  Ry.  Co.  v.  Gaal  (Tex.  474  ;  Meara's  Admrs.  v.  Holbrook  (1870), 
Civ.  App.,  1896),  37  S.  W.  Rep.  462.  20  Ohio  St.  137  ;  Toledo,  Wabash,  &  West- 

8  Articles  on  this  subject  may  be  found  ern   Ry.  Co.  v.  Beggs   (1877),  8.t   111.  80  ; 

in  4  So.  L.  Rev.  N.  S.  18  ;  17  Am.  L.  Rev.  Kinney  v.  Crocker    (1864),    18  Wis.   74; 

833.  Douglass  v.  Cline  (1877),  12  Bush  (Ky.), 

*  Blununthal   v.   Brainerd   (1866),   38  673,  688. 

Vt.  402  ;  Morse  v.  Brainerd  (1869),  41  Vt.  ^  Beverley  v.  Brooke  (1847),  4  Gratt. 

550;    Cutts  V.  Brainerd    (1870),    42    Vt.  187. 

566;  Newell  f.  Smith  (1877),  49  Vt.  255  ;  A   receiver   appointed   by   the  trustees 

Paige   V.    Smith    (1868),   99   Mass.   395;  in  a  deed  of  trust  executed  by  a  trading 


70G.] 


LIABILITIES    OF    COMPANY    AND    RECEIVER. 


689 


A  receiver,  therefore,  is  not  personally  liable  for  the  torts  of 
liis  employees  committed  in  respect  to  any  property  which  he 
Iioitls  in  his  official  capacity.  It  is  only  when  he  himself  has 
cummilted  the  wrong  that  he  incurs  any  personal  liability.^ 

Thus,  if  they  wilfully  and  corruptly  exceed  their  powers,  they 
are  liable  for  the  actual  damage  sustained  by  their  misconduct.^ 

So,  also,  where  the  purchaser  of  receivers'  certificates  payable 
to  bearer,  which  have  false  representations  upon  their  face  as  to 
full  compliance  with  the  order  of  court  authorizing  their  issue, 
fails  in  a  suit  to  enforce  them  against  the  property  upon  which 
they  were  stated  to  be  a  lien,  he  has  a  cause  of  action  for  dam- 
ages against  the  receiver  personally,  and  can  recover  upon  prov- 
ing the  intent  to  defraud  by  executing  the  certificates  and  placing 
them  upon  the  market.  But  he  cannot  recover  upon  them  as 
warranties.^ 

The  Kansas  act  of  1874,  ch.  94,  entitled  "  An  Act  relating  to 
the  killing  or  wounding  of  stock  by  railroads,"  applies  to  receivers 
operating  a  railroad  under  an  appointment  of  a  court  of  competent 
jurisdiction.* 

But  a  receiver  is  not  exempt  from  personal  liability  for  negli- 
gence of  which  he  or  his  employees  may  be  guilty  in  respect  to 

company,  under  a  provision  authorizing  In  Turner  v.  Indianapolis,  B.  &  W.  R. 
them  to  make  such  appointment  as  if  they  Co.  (1879),  8  Biss.  527,  532,  this  freedom 
were  mortgagees,  such  receiver  to  be  of  the  receiver  from  personal  liability  was 
deemed  the  agent  of  the  company  and  be  referred  to  as  being  somewhat  doubtful, 
in  the  same  position  as  a  receiver  ap-  The  court  said  :  "  The  operation  of  a  rail- 
pointed  b}'  the  mortgagee  nnder  the  Eng-  road  by  a  court  through  a  receiver  is  some- 
lish  Conveyancing  Act  of  1881,  is  a  mere  thing  out  of  the  routine  duty  of  the  courts 
agent,  and  incurs  no  personal  liability  and  receivers.  There  must  be  exceptional 
in  carrying  on  the  business.  Owen  v.  rules  applicable  to  such  receivers.  The 
Cronk  (C.  A.,  1895),  L.  K.  1  Q.  B.  265.  receiver  holds  the  pro})erty  for  preserva- 
But  receivers  and  managers  appointed  by  tion,  and  it  may  be  questionable  whether 
the  court  at  suggestion  of  debenture-  the  receiver  should  be  himself  personally 
holders  are  court  officers,  not  agents  of  responsible  in  damages  for  the  negligence 
the  company  to  make  contracts  on  its  of  his  employees,  and  whether  public 
behalf,  nor  are  they  agents  of  bondholders,  policy  does  not  require  that  the  receiver, 


They  may  be  personally  liable.  See  De 
Grille,  Houdret,  &  Co.  v.  Bull  (1894), 
10  Reports  Q.  B.  98.  See  also  Burt, 
Boulton  V.  Bull  (1895),  L.  R.  1  Q.  B. 
276. 

1  Campr.  Barney  (1875),  4  Hun,  .373 ; 
Davis  V.  Duncan  (1884),  19  Fed.  Rep. 
477,  480  ;  Farmers'  Loan  &  Trust  Co.  v. 
Central  R.  Co.  of  Iowa  (1883),  17  Fed. 
Rep.  758;  McNulta  v.  Lockridge  (1891), 
141  U.  S.  327  ;  Erskinei;.  Mcllrath  (1895), 
60  Minn.  485  ;  s.  c.  62  N.  W.  Rep.  1130  ; 
Cardot  v.  Barney  (1875),  63  N.  Y.  281. 


as  the  organ  of  the  court  merely,  should 
be  answerable  under  his  contract  as  op- 
erator of  the  road."  But  the  doctrine 
stated  in  the  text  is  fully  established  by 
the  later  cases,  and  was  the  one  actually 
applied  by  the  learned  judge,  who  ex- 
pressed himself  with  so  much  hesitation. 

■•2  Stanton  v.  Alabama  &  Chattanooga 
R.  Co.  (1895),  2  Woods,  506. 

3  Bank  of  Montreal  v.  Thayer  (1881), 
7  Fed.  Rep.  622. 

*  Rouse  V.  Redinger  (Kans.  Ct.  of  App., 
1895),  41  Pac.  Rep.  433. 


44 


690 


RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  XXXI. 


property  which  he  is  administering  by  virtue  of  a  contract,  and 
not  by  virtue  of  the  order  of  appointment.  Such  is  the  position 
of  a  railroad  receiver  with  regard  to  that  part  of  the  system  which 
Hes  outside  the  State  in  which  he  is  appointed,  unless  he  is  ac- 
cepted in  the  foreign  jurisdictions  as  ancillary  receiver ;  for,  with- 
out such  acceptance,  his  acts  can  have  no  official  character.  ^ 

§  707.  Receiver  officially  liable  to  Third  Persons  for  the  Torts  of 
his  Employees. —  In  some  cases  the  courts  have  expressed  them- 
selves rather  hesitatingly  as  to  the  extent  and  nature  of  official 
liability  of  a  receiver  for  injuries  resulting  from  his  operation  of 
the  road.2 

But  it  is  in  accordance  with  sound  principle  and  reason  that  a 
receiver  exercising  the  franchise  of  a  railroad  should  be  amena- 
ble, in  his  official  capacity,  to  the  same  rules  of  liability  that  are 
applicable  to  the  company  while  it  exercises  the  same  powers  of 
operating  the  road,  and  the  great  preponderance  of  authority  is  in 
favor  of  this  doctrine.^ 

The  fact  that  a  receiver  is  an  officer  of  the  court  appointing 
him  does  not  make  him  a  "  public  officer,"  exempt,  as  such,  from 
liabilities  for  injuries  sustained  by  the  negligent  discharge  of  the 


1  Kain  v.  Smith  (1880),  80  N.  Y.  458; 
s.  c.  2  Am.  &  Eng.  R.  R.  Cas.  545,  dis- 
tinguishing Cardot  v.  Barney  (1875),  63 
N.  Y.  281. 

2  Cardot  v.  Barney  (1875),  63  N.  Y. 
281  (the  real  scope  of  this  decision  was 
explained  in  Kain  v.  Smith  (1880),  80 
N.  Y.  458)  ;  Smith  v.  Potter,  Receiver, 
etc.  (1881),  46  Mich.  258  ;  Davenport  v. 
Receivers  (1875),  2  Woods,  519;  Turner 
V.  Indianapolis,  B.  &  W.  R.  Co.  (1879),  8 
Biss.  527.  In  Davenport  v.  Receivers, 
supra,  it  was  denied  that  the  lien  of  a 
judgment  recovered  for  personal  injuries 
received  by  one  travelling  on  a  road  oper- 
ated by  receivers  was  paramount  to  that 
of  the  mortgage  bondholders,  either  as  re- 
gards the  earnings  of  the  business  or  the 
proceeds  of  the  foreclosure  sale,  unless  it 
is  so  provided  in  the  order  of  the  court 
placing  the  road  in  the  hands  of  the  re- 
ceivers. In  Turner  i;.  Indianapolis,  B.  & 
W.  R.  Co.,  supra,  the  court,  while  not  lay- 
ing down  any  general  principle,  held  tliat 
damages  to  engines  rented  to  a  receiver 
were  properly  paid  out  of  the  earnings  in 
his  1  lands. 

8  Sprague  v.  Smith  (1877),  49  Vt.  421; 
Little  V.  Dusenberiy  (1884),  46  N.  J.  L. 


614  ;  Klein  v.  Jewett  (1875),  26  N.  J.  L. 
474  ;  Kain  v.  Smith  (1880),  80  N.  Y.  458; 
Melendy  u.  Barbour  (1884),  78  Va.  544; 
s.  c.  25  Am.  &  Eng.  R.  R.  Cas.  622  (1884) ; 
Winboum's  Case  (1886),  30  Fed.  Rep. 
167,  and  the  cases  cited  in  the  note  to 
High  Rec,  §  395.  See  also  the  cases  col- 
lected in  the  notes  to  9  Am.  &  Eng.  R.  R. 
Cas.  723,  and  17  Am.  &  Eng.  R.  R.  Cas. 
308. 

In  Meara's  Admr.  v.  Holbrook  (1870), 
20  Ohio  St.  137,  the  court  said:  "The 
reasons  for  holding  a  receiver  answerable 
in  his  official  capacity  are  stronger  than 
those  for  holding  him  personally  liable 
only.  For  where  the  receiver  is  not  in 
default  himself,  there  is  a  hardship  in  mak- 
ing him  personally  liable  for  the  negligence 
of  those  he  employs,  not  for  his  own  bene- 
fit or  profit,  but  for  that  of  the  fund  he 
controls  ;  and  on  the  other  hand,  those 
having  grievances  growing  out  of  his 
official  business  may  be  practically  reme- 
diless, if  they  are  left  to  the  personal  re- 
sponsibility of  the  receiver  only,  and  are 
not  permitted  to  pursue  him  in  his  official 
capacity,  and  obtain  redress  from  the 
funds  in  his  hand  as  receiver." 


§  708.]  LIABILITIES    OF    COMPANY    AND    RECEIVER.  691 

duties  imposed  on  liim,  even  though  he  is  appointed  by  virtue 
of  a  statute  empowering  him  to  operate  the  railroad  for  the  use 
of  tlie  public.  His  position  is  rather  like  that  of  a  body  of  com- 
missioners or  trustees  incorporated  lor  the  ])ublic  benefit,  whose 
wrongful  acts  give  the  injured  person  a  right  to  be  compensated 
out  of  the  funds  which  they  have  under  their  control,  their  private 
means  being  exempt  from  liability.^ 

Nor  can  they  be  exempted  from  liability  to  third  persons  on 
the  ground  that  they  are  agents  or  trustees ;  for,  as  to  the  public 
and  their  employees,  there  is  no  tangible  principal  behind  them.'^ 

Proceedings  against  a  receiver,  as  such,  for  the  torts  of  his 
employees  are  in  the  nature  of  a  proceeding  in  rem,  and  render 
the  property  in  his  hands,  as  such,  liable  for  compensation  for 
such  injuries.^ 

The  degree  of  care  which  a  receiver  is  bound  to  exercise  in  oper- 
ating a  railroad  is  the  same  as  that  which  is  incumbent  upon  a 
railroad  company.* 

§  708.  Receiver,  whether  suable  on  Cause  of  Action  arising  prior 
to  Appointment.  —  Whether  the  receiver  can  be  made  a  defendant 
where  the  cause  of  action  arose  prior  to  his  appointment  depends, 
according  to  a  late  case  decided  by  the  New  York  Court  of  Ap- 
peals, upon  whether  he  is  a  statutory  receiver,  appointed  for  the 
purpose  of  winding  up  the  affairs  of  the  corporation,  or  a  receiver 
appointed  pendente  lite  to  preserve  the  subject-matter  of  the  liti- 
gation. In  the  latter  case,  since  the  company  is  still  liable  for  its 
acts,  after  as  before  the  appointment  of  the  receiver,  and  can  sue 
and  be  sued,  it  is  error  to  make  him  a  party  defendant  in  an  ac- 
tion to  recover  damages  for  a  tort  committed  while  the  company 
was  operating  the  road.^ 

In  the  former  case,  as  they  are  vested  with  all  the  real  and 
personal  estate  of  the  corporation,  and  the  corporation  ceases  to 
be  an  active  legal  entity,  the  mere  fact  that  the  cause  of  action 
arises  from  the  acts  of  the  company  will  not  constitute  any  reason 
why  a  court  in  which  leave  has  been  obtained  to  sue  the  receiver 
should  refuse  to  entertain  the  suit.     He  takes  the  trust  estate 

1  Little  V.  Dusenberry  (1884),   46  N.  *  Fullerton  v.  Fordyce  (1894),  121  Mo. 

J.    L.    614  ;    Meara's  Admr.  v.   Holbrook  1  ;  s.  c.  25  S.  W.  Eep.  587. 

(1870),  20  Ohio  St.  137.  ^  Decker  v.  Gardner  (1891),  124  N.  Y. 

'^  Meara's  Admr.  v.  Holbrook  (1870),  334  ;  s.  c.  26  N.   E.  Rep.  814  ;  9  Ry.  & 

20  Ohio  St.  137.  Corp.  L.  J.  308  distinguishing  the  Mis- 

3  Davis   V.    Duncan    (1884),    19    Fed.  souri  case  cited  below.      Compare  to  the 

Rep.  477,  480.    Compare  McNultav.  Lock-  same  effect  Finance  Co.  of  Pennsylvania  v. 

ridge  (1891),  141  U.  S.  327.  Charleston,  C.  &  C.  R.  Co.  (1891),  46  Fed. 

Rep.  508. 


692  RAILWAY   BONDS   AND    MORTGAGES.  [CHAP.  XXXI. 

subject  to  all  the  debts  and  liabilities  existing  against  it  at  the 
time  of  his  appointment,  whether  they  arise  from  contract  or  tort, 
and  no  court  except  the  one  appointing  him  has  anything  to  do 
with  the  general  question,  how  the  assets  are  to  be  applied  to  the 
claims  of  the  various  creditors.^ 

§  709.  Receiver's  Liability  for  Injuries  to  his  own  Employees.  — 
Apart  from  statute,  a  receiver  operating  and  controlling  a  rail- 
road in  the  usual  manner,  and  exercising  the  duties,  powers,  and 
rights  of  the  company,  is  liable  for  injuries  to  his  employees  in 
the  same  manner  and  to  the  same  extent  as  the  corporation  itself 
would  have  been  had  he  not  been  appointed. ^ 

His  liability  for  injuries  caused  by  a  defect  in  the  road  is  the 
same  whether  the  defect  existed  at  the  time  he  took  possession,  or 
was  incident  to  his  own  management.^ 

As  to  the  effect  of  the  various  statutes  extending  the  common- 
law  liability  of  an  employee  to  his  servants,  the  authorities  exhibit 
a  conflict  which  can  apparently  be  attributed  only  to  a  real  diver- 
gence of  views,  and  not  to  the  difference  in  the  wording  of  the 
enactments. 

In  Georgia,  where  the  common-law  rule  prevails  as  to  all  em- 
ployees except  railroad  companies  (Code,  sects.  2202,  2083,  3033, 
3036),  it  has  been  denied  that  a  servant  of  a  receiver  of  a  rail- 
road can  hold  such  receiver  liable  for  injuries  resulting  from  the 
negligence  of  a  fellow-servant.  The  ground  was  taken  that  the 
employees  of  receivers  were  not  within  tlie  words  of  the  Code, 
and  that  "  to  extend  those  words  by  construction,  so  as  to  subject 
the  company's  assets  to  pay  damages  for  the  carelessness  or  mis- 
conduct of  men  whom  neither  the  officers  nor  agents  of  the  com- 
pany had  any  part  in  selecting,  would  be  attended  with  difficulties 
both  technical  and  practical."  ^ 

1  Combs  V.  Smith,  Receiver  (1883),  78  481  ;  Thurman  v.  Cherokee  R.  Co.  (1876), 

Mo.  32;  s.  c.   20  Am.  &  Eng.  R.  R.  Cas.  56  Ga.  376.     These  cases  have  been  fol- 

209.     The  distinction  taken  by  the  New  lowed  by  a  federal  court  sitting  in  Georgia. 

York  court  was  not  noticed,  and  there  is  Central  Trust  Co.  v.  East  Tennessee,  Va.  & 

nothing  in  the  report  to  show  that  it  was  Ga.  Ry.  Co.  (1888),  69  Fed.  Rep.  353.    See 

recognized.     In   so   far  as   the  case   may  also  Central  Trust  Co.  v.  East  Tennessee, 

have    been    intended    to    lay   down    any  Va.  &  Ga.  Ry.  Co.  (Mitchell,  Intervener), 

wider  doctrine,  it  is  declared  in  the  New  (1895),   69  Fed.  Rep.  357,  and  Baltimore 

York  case  just  cited  to  be  opposed  to  the  Trust  &  Guaranty  Co.  v.  Atlanta  Traction 

general  current  of  the  authorities.  Co.  (Bennett,  Intervener),  (1895),  69  Fed. 

3  Graham  v.  Chapman  (1891),  33  N.  Y.  Rep.  358,  as  to  the  application  of  a  similar 

St.  Rep.  349;  .s.  c.  11  N.  Y.  Supp.  318  ;  statute    in   Ohio,    act    of  April    2,    1890 

58  Hun,  602.  (Laws   Ohio,    1890,    149).     In   an    action 

"  Texas  &  Pac.Ry.  Co.  r.  Geiger  (1890),  against    a    receiver,    see    Peirce    v.    Van 

79  Tex.  13  ;  .s.  c.  15  S.  W.  Rep.  214.  Duscn  (1897),  78  Fed.  Kep.  693. 

*  Henderson  v.  Walker  (1875),  55  Ga. 


§  710.]  LIABILITIES   OF   COMPANY   AND    RECEIVER.  693 

Upon  the  same  principle  of  strict  construction  of  a  statute  in 
derogation  of  the  common  law,  it  has  been  held  in  Texas  that  a 
statute  giving  a  right  of  recovery  for  death  caused  by  the  negli- 
gence of  the  "proprietor,  owner,  charterer,  or  hirer  of"  any  rail- 
road, or  their  servants,  no  recovery  can  be  had  for  a  death  caused 
by  the  negligence  of  a  receiver  or  his  employees.^ 

Where  the  statute  of  the  State  where  an  action  is  brought  in  a 
federal  court  entitles  an  employee  to  recover  from  the  receiver 
for  injuries  arising  from  the  negligence  of  a  co-employee,  such 
recovery  will  not  be  prevented  by  the  fact  that  the  courts  of  the 
State  in  which  the  corporation  was  organized  have  denied  that 
there  is  any  right  of  recovery  under  the  statute  of  that  State.^ 

In  Kansas  a  diametrically  opposite  construction  had  been 
placed  on  a  similar  statute,  applying  to  railroads  only  (Gen.  Stat. 
1889,  par.  1251),  the  court  taking  the  view  that  an  action  against 
a  receiver  is,  in  substance,  one  against  the  corporation,  and  that 
the  case  of  an  injury  to  the  servant  of  a  receiver  fell  within  the 
spirit,  if  not  the  letter,  of  the  law.^ 

§  710.  How  far  Receiver  is  bouud  by  Company's  Contracts  gen- 
erally. —  The  contracts  of  the  company  are  not  obligatory  on  the 
receiver  except  in  so  far  as  he  may  adopt  them.* 

Nor  is  he  bound  to  adopt  its  contracts,  or  otherwise  step  into 
its  shoes,  if  in  his  opinion  it  would  be  unprofitable  to  do  so  ;  and 
he  is  entitled  to  a  reasonable  time  to  elect  whether  to  adopt  or 
repudiate  any  such  contracts.^ 

1  Burke  v.  Dillingham  (C.  C.  A.,  1894),  common  law,  was  also  remedial,  and  that, 
60  Fed.  Eep.  729  ;  Allen  v.  Dillingham  as  it  was  of  that  nature,  the  plaintiff"  was 
(1894),  8  C.  C.  A.  544;  s.  c.  60  Fed.  Rep.  entitled  to  invoke  an  interpretation  which. 
176;  Dillingham  V.  Scales  (Tex.  Civ.  App.,  would  give  effect  to  the  intention  of  the 
1894),  24  S.  W.  Rep.  975  ;  Texas  &  Pac.  law-maker.  Considering  the  condition  of 
Ry.  Co.  V.  Bledsoe  (1893),  2  Tex.  Civ.  App.  affairs  which  resulted  from  the  appoint- 
88;  .s.  c.  20  S.  W.  Rep.  1135;  Texas,  etc.  ment  of  a  receiver,  there  could,  it  wa.s 
Ry.  Co.  ■».  Collins  (1892),  84  Tex.  121  ;  thought,  be  no  doubt  that  the  legislature 
s.  c.  19  S.  W.  Rep.  365  ;  Yoakum  v.  Selph  could  not  have  intended  to  make  any  dis- 
(1892),  83  Tex.  607;  s.  c.  19  S.  W.  Rep.  tinction  between  the  employees  of  the 
145.  These  cases  all  rest  upon  the  au-  railroad  and  the  employees  of  the  receiver, 
thority  of  Turner  v.  Cross  (1892),  83  Tex.  *  Kansas  Pac.  Ry.  Co.  v.  Bayles  (1894), 
218  ;  s.  c.  18  S.  W.  Rep.  578,  reported  in  19  Col.  348  ;  s.  c.  35  Pac.  Rep.  744  ;  Brown 
8  C.  C.  A.  548,  where  the  question  was  v.  Warner  (1891),  78  Tex.  543;  s.  c.  14 
elaborately  discussed.  S.  W.   Rep.   1032  ;  45  Am.  &  Eng.  R.  R. 

2  Texas  &  Pac.  Ry.  Co.  v.  Cox  (1892),  Cas.  95. 

145  U.  S.  593  ;  s.  c.  12  Sup.  Ct.  Rep.  905.  ^  Sunflower  Oil  Co.  v.  Wilson  (1892), 

8  Rouse  V.  Harry  (1895),  55  Kan.  589  ;  142  U.  S.  313  ;  48  Am.  &  Eng.  R.  R.Cas. 

s.  Cj  40  Pac.  Rep.  1007;  Hornsby  i>.  Eddv  664  ;  United  States  Trust  Co.  v.  Wabash 

(1893),  5  C.  C.  A.  560  ;  s.  c.  56  Fed.  Rep.  Western  Ry.  Co.  (1893),  150  U.  S.   287  ; 

461.    In  the  latter  case  it  was  pointed  out  Seney  v.  Wabash  Western  Ry.  Co.  (1893), 

that  the  statute,  if  in  derogation  of  the  150  U.  S.  310. 


694  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  XXXI. 

"  They  continue  the  operation  of  the  road  and  the  conduct  of 
its  business,  because  this  is  essential  to  its  proper  preservation. 
They  may  fulfil  the  contracts  of  the  corporation,  so  far  as  bene- 
ficial. They  may  not  pay  its  debts,  nor  fulfil  its  contracts  which 
are  burdensome,  or  tend  to  diminish  the  value  of  the  property  in 
their  control,  unless  such  contracts  are  charged  as  incumbrances 
on  the  property,  or  are  necessary  to  its  proper  preservation  and 
security."  ^ 

A  contract  entered  into  by  one  of  the  constituent  companies  of 
a  system  of  railways  for  an  allowance  to  it  by  the  others  on  inter- 
changed business  of  an  amount  sufficient  to  pay  its  operating  ex- 
penses, the  interest  on  its  bonds,  and  other  fixed  charges,  may  be 
renounced  by  the  receivers  of  the  company  representing  the  whole 
system,  under  direction  of  the  court ;  and  the  court  may  then  order 
the  earnings  to  be  divided  between  those  companies  upon  a  mileage 
basis,  as  it  may  deem  just ;  and  upon  its  being  shown  by  the  re- 
ceivers that  this  produces  a  deficit  in  the  operation  of  that  road, 
the  court  may  order  this  deficit  made  good  from  the  earnings  of 
the  property  of  the  different  contracting  parties  upon  the  basis 
of  the  original  contract.  But  in  case  then  the  trustees  of  the 
bondholder  of  the  latter  companies  proceed  to  foreclose  their  mort- 
gages, impounding  the  revenues  of  the  several  companies,  this  last 
order  would  no  longer  be  applicable,  and  will  not  be  enforced 
after  the  filing  of  the  bills  of  foreclosure  impounding  the  revenues 
of  those  companies.^ 

A  railroad  company  in  Virginia  sold  its  telegraph  line  to  a 
telegraph  company.     The  telegraph  company  agreed  to  do  tele- 

1  Ellis  V.  Boston,  Hartford,  &  Erie  R.  be  allowed  under  the  settled  rules  of  the 

Co.  (1871),  107  Mass.  1,  28,  per  Wells,  J.  law.    Trust  Co.  ■;;,  Riley,  70  Fed.  Rep.  32  ; 

As  to  receiver's  liability  to  account  for  s.  c.   16  C.   C.   A.   610,   614;  St.   Louis, 

and  apply  the  income  of  a  leased  road  in  A.  &  T.  H.  R.  Co.  v.  Cleveland,  C.  C,  & 

accordance  with  the  covenants  of  the  lease,  I.  Ry.  Co.,  125  U.  S.  658,  673,  678. 
see  Charlotte,  C.  &  A.  R.  Co.  v.  Chester  &  The  payment  to  connecting  lines  of  rail- 

L.  Narrow-Gauge  R.  Co.  (N.  C,  1896),  road  of  their  just  and  equitable  share  of 

24  S.  E.  Rep.  769.  the  earnings   from  interchanged  business 

'  Ames  et  al.  v.  Union  Pac.  Ry.  Co.  is  one  of  the  necessary  expenses  of  operat- 
ed al.  (1896),  73  Fed.  Rep.  49.  The  court,  ing  a  railroad.  The  result  is  that  the 
arguendo,  said,  on  p.  57  :  "  The  filing  of  revenues  from  business  interchanged  with 
a  {)roper  bill  of  foreclosure  of  a  mortgage  other  roads  derived  by  a  railroad  company 
covering  the  income  of  a  railroad  company  or  its  receiver  after  a  bill  for  the  fore- 
undoubtedly  impounds  the  revenues  of  closure  of  a  mortgage  upon  it  has  been 
tliat  company  for  the  benefit  of  its  mort-  filed  may  be,  and  ought  to  be,  justly  di- 
gagc  bondholders,  but  it  does  not  impound  vided  among  the  roads  interchanging  the 
its  gross  revenue.  It  impounds  only  the  business,  and  that  portion  of  it  which 
net  revenues  that  remain  after  the  ])ay-  c(iuitably  belongs  to  "  other  roads  or  their 
inent  of  the  operating  (^xj)ens('8  of  tlie  rail-  owners  is  not  impounded  by  the  fore- 
road,  and  such  preferential  claims  as  may  closure." 


§  710.]  LIABILITIES   OP   COMPANY   AND   KECEIVER.  695 

graph  service  for  the  railroad  company  for  a  specified  time  and  on 
specified  terms.  The  railroad  company  was  placed  in  the  hands 
of  a  receiver  in  foreclosure  proceedings,  which  the  federal  court 
treated  as  a  creditor's  bill.  The  receiver,  upon  presentation  to 
him  after  his  possession  of  a  bill  for  telegraph  tolls,  asked  the 
court  appointing  him  for  instructions.  The  court  directed  its 
receiver  to  pay  the  bill,  among  other  reasons  because  the  tele- 
graph company's  recorded  claim  was  a  valid  lien  in  favor  of 
laborers  in  the  law  of  Virginia,  having  priority  as  such  over  the 
claims  of  the  creditors  under  the  mortgage  deed.^ 

The  interests  of  the  creditors  are  controlling  in  the  determina- 
tion of  the  question  whether  or  not  a  receiver  shall  adopt  a  lease 
or  other  contract.^ 

A  receiver's  ratification  of  a  contract  may  be  implied  from  his 
conduct  with  respect  to  the  subject-matter.  Thus  he  becomes  the 
assignee  of  the  company  as  to  a  contract  made  by  it  for  the  lease 
of  rolling-stock,  and  is  bound  to  perform  the  covenants  therein  as 
to  the  care  and  return  of  the  cars,  if  he  has  the  use  and  benefit  of 
the  cars,  with  knowledge  of  the  terms  of  the  lease.^ 

Where  the  receiver  elects  to  return  equipment  used  under  a 
lease,  the  lessor  is  entitled  to  a  reasonable  notice  that  the  contract 
is  about  to  be  terminated,  so  that  he  may  have  an  opportunity  to 
inquire  as  to  the  most  advantageous  way  of  disposing  of  it  when 
it  is  thrown  on  his  hands.* 

Contractors  to  erect  a  building  for  a  railroad  company  which 
goes  into  the  hands  of  a  receiver  are  entitled  to  the  contract  price 
up  to  the  time  when  they  are  directed  by  the  receiver  to  cease 
work.^ 

A  claim  under  a  contract  with  a  receiver  of  a  railroad  company 
in  foreclosure  proceedings  for  the  complete  construction  of  a 
building  which  had  been  commenced  under  a  contract  with  the 
company  prior  to  the  receivership,  the  plans  of  which  were  sub- 
mitted to  the  court  and  approved,  and  which  by  the  findings  of 
the  trial  court  were  upon  land  not  covered  by  the  mortgage,  and 
were  for  the  advantage  of  the  railroad,  have  been  held  to  have 
been  properly  allowed  a  preference  over  the  bondholders  in  an 
order  for  payment  by  the  receivers.^ 

1  Western   Union   Tel.    Co.    v.    Thom  *  Farmers'  Loan  &  Trust  Co.  v.  Toledo, 

(1894),  72  Fed.  Rep.  712.  etc.  R.  Co.  (1894),  1  Toledo  Leg.  News,  321. 

"  New  York,   P.   &  0.   R.  Co.  v.  New  ^  Girard    Life    Insurance,  Annuity,  & 

York,  L.  E.  &  W.  R.  Co.  (1894),  58  Fed.  Trust  Co.  v.  Cooper  (1892),  51  Fed.  Rep. 

Rep.  268.  332  ;  s.  c.  2  C.  C.  A.  245. 

'  Easton  v.  Houston  &  Texas  Central  ^  Girard    Insurance    &    Trust    Co.   v. 

K.  Co.  (1889),  38  Fed.  Rep.  784.  Cooper,  162  U.  S.  529 ;  s,  c.  16  Sup.  Ct. 


696  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  XXXI. 

§  711.  Receiver  succeeds  to  Company's  Rights  as  to  Annulment 
of  Contracts. — No  lien  upon  the  accruing  fund  is  created  by  a 
contract  between  the  raih^oad  company  and  an  express  company, 
whereby  the  latter,  in  consideration  of  a  sum  of  money  loaned  to 
the  former,  is  to  be  allowed  exclusive  privileges  in  conducting  its 
business  over  the  road,  and  a  special  contract  rate  which  is  to  be 
applied  to  the  extinguishment  of  the  loan.  This  is  simply  a  con- 
tract for  the  transportation  of  property  and  persons  over  the  road, 
and  a  receiver  cannot  be  required  specifically  to  perform  it.^ 

To  fulfil  such  a  contract  would  be,  in  effect,  to  appropriate  the 
use  of  the  property  and  the  earnings  of  the  road  pro  tanto  to  the 
payment  of  the  claim  of  the  express  company  in  preference  to  all 
others.  This  a  receiver  may  properly  refuse  to  do  in  the  case  of 
any  contract  which  does  not  constitute  a  charge  upon  the  property 
itself.2 

On  the  authority  of  this  case  it  has  been  held  that  a  receiver  of 
a  street-railway  company  will  not  be  directed  to  pay  out  moneys 
in  his  hands  for  paving  the  street  between  and  along  the  tracks, 
where  no  lien  exists  therefor,  although  there  be  a  specific  contract 
by  the  company  to  make  such  payment." 

A  receiver  will  not  be  compelled  to  carry  out  a  lease  of  a  road 
which  can  only  be  operated  at  a  loss,  unless  he  had  retained  pos- 
session for  such  unreasonable  time  or  under  such  circumstances 
as  will  constitute  an  election  to  accept  the  lease.* 

The  right  of  a  railroad  company  to  terminate  a  license  given  to 
another  company  to  use  depot  grounds  and  terminal  facilities 
passes  to  a  receiver  of  the  former  company.^ 

§  712.  "What  Contracts  of  Company  should  be  carried  out  by 
Receiver.  —  Contracts    made  in  the  ordinary  course  of  business 

Rep.  879  (1896),  affirming  same   case,  4  covered   by  tlie  mortgage  renders  it  the 

U.  S.  App.  631  (1892).  more  equitable  that  the  proceeds  of  this 

Mr.     Justice     Brown,    rendering     the  sale  shall   be  applied  to  the  payment  of 

opinion,  said:   "  The  work  had  been  com-  the  cost  of  its  construction."     See  Van- 

menced  before  the   receivership,  and  was  derbilt  v.  Central   R.   Co.,  43  N.  J.  Eq. 

done  in  good  faith,  for  the  benefit  of  the  669. 

company  and  the  receivers.     The  building  i  Express  Co.  v.  Railroad  Co.    (1878), 

must   either   have    been    finished,  or  the  99  U.  S.  191. 

work  already  done  become  a  total  loss  to  2  yA\\5  v.  Boston,  Hartford,  &  Erie  R. 

the  coni[iany.      It  appears  to  have  been  Co.  (1871),  107  Mass.  1. 
constructed  for  the  accommodation  of  the  »  Union  Loan  &  Trust  Co.  v.  Southern 

officers  of  the  road,  and  in  other  respects  California  Motor  Road  Co.  (1892),  49  Fed. 

in  furtherance  of  the  interests  of  the  road  ;  Fep.  267. 

and  is  an  asset  in   tlie  hands  of  the  re-  «  i^.,,.]^  „_  j^p^  York,  L.   E.  &  W.   R. 

ceivers,  which  may  be  sold  and  the  money  Co.  (ISD."?),  57  Fed.  Rep.  799. 
realized  therefrom  applied  to  the  payment  ^  Comer  v.  Felton  (C.  C.  A.,  1894),  61 

of   the    claim.     The    fact   that   it   Is  not  Fed.  Rep.  731. 


§  712.]  LIABILITIES   OP   COMPANY    AND   RECEIVER.  697 

with  a  connecting  company  —  as,  for  example,  with  reference  to 
a  certain  mileage  to  be  paid  for  the  cars  of  one  passing  over  the 
lines  of  the  other  —  will,  in  the  absence  of  some  special  reason, 
be  kept  on  foot.^ 

So  the  receiver  should  usually  be  directed  to  continue  a  contract 
with  an  express  company,  giving  it  certain  transportation  privileges 
over  the  railroad  company's  lines,  though  he  will  not  be  allowed 
to  fulfil  such  a  contract  in  so  far  as  that  would  involve  giving  the 
express  company  a  preference  over  the  mortgagees  and  other 
creditors,  unless  it  actually  amounts  to  a  lien  on  the  property 
paramount  to  other  claims.^ 

So  the  payment  of  the  remaining  instalments  of  the  purchase 
price  of  rolling-stock  taken  under  a  contract  of  conditional  sale 
should  generally  be  continued  in  the  interest  of  all  the  parties 
concerned.^ 

But  for  the  purpose  of  fixing  the  sum  to  be  paid  for  the  rent  of 
the  rolling-stock  the  court  will  not  consider  the  terms  of  the  lease 
itself,  if  the  evidence  shows  that  the  lessor  company  and  the  rail- 
road company  are  both  dominated  by  the  same  persons.  To  use 
such  a  contract  as  the  basis  of  an  accounting  would  be  to  disre- 
gard the  elementary  rule  which  prohibits  an  agent  from  under- 
taking to  serve  in  the  same  business  two  principals  whose 
respective  interests  are  antagonistic* 

In  general  it  may  be  said  that,  whenever  the  contract  is  one 
which  good  faith  would  have  required  the  company  itself  to  carry 
out,  the  receiver  will  not  be  directed  to  repudiate  it,  even  if  it  is 
for  the  disadvantage  of  the  trust  estate.  Thus  a  receiver  has 
been  ordered  to  comply  with  a  contract,  made  by  the  company  for 
the  supply  of  rails  at  a  certain  price,  and  assumed  by  him,  al- 
though the  stipulated  price  was  higher  than  that  for  which  the 
rails  could  then  have  been  bought,  and  although  certain  profits 
from  the  transportation  of  ore  to  the  manufacturer,  which  had 
been  anticipated  when  the  contract  was  made,  had  not  been 
realized.^ 

1  Central  Trust  Co.  v.  Wabash,  St.  *  Thomas  v.  Peoria  &  R.  I.  R.  Co. 
Louis,  &  Pac.  R.  Co.  (1888),  34  Fed.  Rep.  (1888),  36  Fed.  Rep.  808 ;  s.  c.  36  Am.  & 
254.  Eng.  R.  R.  Cas.  381,  citing  for  the  general 

2  Ellis  V.  Boston,  Hartford,  &  Erie  R,  principle  Wardell  v.  Railroad  Co.,  103 
Co.  (1871),  107  Mass.  1.  U.  S.  658;  .s.  c.  1  Am.  &  Eng.  R.  R.  Cas. 

3  Fra7ik  v.  Denver  &  Rio  Grande   R.  427. 

Co.  (1885),  23  Fed.   Rep.   123,  127.     See  «  Wabash,  St.  L.    &   Pac.   R.   Co.   v. 

also  Eastern  Midlands  Railway,   66  Law     Central  Trust  Co.   (1884),   22  Fed.   Rep. 
Times,   154,  on  consolidation  by  receiver     269. 
and   manager   of    rolling-stock    contracts 
made  by  company. 


698  RAILWAY   BONDS    AND    MORTGAGES.  [CHAP.  XXXI. 

Similarly,  if  a  receiver  recognizes  and  acts  under  a  pooling  con- 
tract, in  the  exercise  of  the  discretion  allowed  him  by  the  court, 
good  faith  requires  that  the  proceeds  of  the  contract  which  ac- 
cumulate in  the  hands  of  the  receiver  should  be  handed  over  to 
the  other  party  to  the  agreement,  irrespective  of  whether  it  was 
originally  valid  or  not.^ 

§  713.  Contract  Liabilities  of  Receivers  in  Regard  to  Leased  Roads. 
—  A  receiver  cannot  abrogate  a  lease,  valid  as  between  the  lessor 
and  lessee.  Between  them  it  must  stand  until  it  is  abrogated  by 
a  resort  to  some  of  the  conditions  contained  in  it.^  But  as  re- 
ceivers take  by  order  of  the  court,  they  do  not,  by  the  mere  act  of 
assuming  possession,  become  assignees  of  the  term.^ 

The  fact  that  a  receiver  continues  to  work  a  leased  line  during 
the  period  taken  in  coming  to  a  determination  respecting  it,  does 
not  operate  as  an  adoption  of  the  lease,  when  the  lessor  has  never 
demanded  a  surrender  of  the  road,  though  entitled  do  so  because 
of  the  non-payment  of  rent.^ 

Nor  does  such  action  impose  on  them  the  obligation  to  perform, 
for  that  period,  the  company's  contract  guarantying  interest  on 
the  bonds  of  the  lessor.^ 

In  the  case  of  an  extensive  system  like  the  Union  Pacific,  a 
period  of  sixty-five  days  is  not  an  unreasonably  long  period  for  a 
receiver  to  spend  in  ascertaining  the  situation  of  affairs,  and  mak- 
ing up  his  mind  as  to  whether  he  will  accept  or  renounce  the 
lease.^ 

But  a  receiver  cannot  take  possession  of  the  property,  and  enjoy 
its  use  and  occupation,  without  incurring  a  liability  for  the  pay- 

1  Central  Trust  Co.  v.  New  York  &  &  0.  R.  Co.  v.  New  York,  L.  E.  &  W.  R. 
Ohio  Central  R.  Co.  (1885),  23  Fed.  Rep.  Co.,  58  Fed.  Rep.  268.  The  last  of  these 
306.  cases  disapproves  the  doctrine  of  Brown 

2  New  York,  P.  &  O.  R.  Co.  v.  New  v.  Toledo  &  W.  R.  Co.  (1888),  35  Fed. 
York,  L.  E.  &  W.  R.  Co.  (1894),  58  Fed.  Rep.  444,  as  being  in  conflict  with  the 
Rep.  268.  above-mentioned  decisions  of  the  Supreme 

8  Park  V.    New  York,   L.  E.  &  W.   R.  Court  of  the  United  States ;  but  it  may 

Co.  (1893),   57  Fed.   Rep.  799,   following  possibly  be  defended  on  the  ground  that 

Quincy,   M.   &  P.   R.  Co.   v.   Humjdireys  the  terms  of  the  order  were  such  as  to 

(1892),   145   U.  S.   82,  and  St.  Joseph  &  create  the  liability  of  an  assignee.     The 

St.  Louis  R.  Co.  (1892),   145  U.   S.   105.  report  of  the  case  is,  however,  not  specific 

To  the  same  effect  see  Central  Trust  Co.  on  this  point. 

V.  Wabash,  St.    L.  &  Pac.  R.  Co.  (1888),  <  New  York,  P.  &  0.  R.  Co.   v.  New 

34  Fed.  R.;p.  259  ;  Farmers'  Loan  &  Trust  York,  L.  E.  &  W.  R.  Co.  (1894),  58  Fed. 

Co.  V.  Nortlicrn   Pac.   R.   Co.  (1893),  58  Rep.  268  ;  Ames  v.  Union  Pac.   Ry.  Co. 

Fed.  Rep.  257;  United  States  Tru.st  Co.  (1894),  60  Fed.  Rep.  966. 
V.  Wabash  Western  Ry.  Co.   (1893),   150  6  Ames  v.  Union  Pac.  Ry.  Co.  (1893), 

U.  S.  287  ;  Seney  v.  Wal)ash  Western  Wy.  60  Fed.  Rep.  966. 
Co.  (1893),  150  U.  S.  310  ;  New  York,  P.  «  Ibid. 


§  713.]  LIABILITIES   OP   COMPANY   AND    RECEIVER.  699 

ment  of  rent  under  the  lease  by  which  his  predecessor  secured 
its  possession ;  and  while  it  is  competent  for  him  at  any  time  to 
negotiate  a  new  contract  and  secure  a  modification  of  its  terms, 
or  to  repudiate  it  and  surrender  the  property,  yet,  if  he  does  not 
do  this,  he  must  be  held  to  have  signified  his  acceptance  of  it 
under  the  terms  and  conditions  of  the  existing  lease  as  to  the 
payment  of  rent,^  especially  where  the  lessor,  immediately  after 
the  receiver's  appointment,  demands  either  an  adoption  of  the 
lease  or  a  surrender  of  the  road,  and,  against  his  protest,  a  deci- 
sion is  delayed  several  months. 

Where  a  receiver  recognizes  and  adopts  a  lease,  he  is  bound  to 
disburse  the  earnings  of  the  leased  road  in  accordance  with  the 
terms  of  the  instrument  which  is  the  source  of  his  title  to  the 
possession  of  the  property  which  produces  the  earnings.  If 
the  lease  provides  that  those  earnings  are  to  be  applied  first 
to  the  operating  expenses,  insurance,  and  taxes,  before  any  in- 
terest on  the  bonds  is  paid,  a  payment  of  interest  while  the  taxes 
are  in  default  is  a  diversion  of  the  earnings  which  the  court  will 
order  to  be  restored.^ 

If  the  lessor  makes  certain  improvements  in  the  property  the 
basis  of  a  demand  for  an  increased  rent,  and  upon  the  refusal  of 
the  receiver  to  accept  the  terms  proposed  the  parties  enter  into  a 
temporary  agreement,  by  which  the  question  of  the  proper  amount 
of  rent  is  to  be  submitted  to  the  arbitration  of  the  court  which 
appointed  the  receiver,  the  rent  to  be  paid  for  the  period  during 
which  the  court  is  considering  the  matter  is  not  that  demanded 
by  the  lessor,  but  that  which  the  evidence  shows  to  be  a  fair  com- 
pensation for  the  property. 

The  amount  which  other  companies  pay  for  the  same  facilities 
is  not  a  proper  test  of  what  is  a  reasonable  rent,  when  such  com- 
panies own  all  the  stock  of  the  lessor,  and  their  contract  with  the 
lessor  is,  therefore,  substantially  a  contract  with  themselves.® 

If  it  appears  that  more  than  the  net  earnings  of  the  leased 
property  for  the  period  the  receivers  have  held  it  have  been  paid 
to  the  lessors,  the  court  will  instruct  the  receivers  not  to  pay  any 
more  out  of  the  general  corpus  of  the  estate.* 

1  Woodruff  V.  Erie  Ry.  Co.  (1883),  93  Chicago,  Pekin,  &  S.  W.  R.  Co.  (1888), 
N.  Y.  609  ;  s.  c.  16  Am.  &  Eng.  R.  R.     127  U.  S.  200. 

Gas.  501.  *  Park  v.  New  York,  L.  E.  &  W.   R 

2  Clyde   V.   Richmond   &    D.    R.    Co.     Co.  (1893),  57  Fed.  Rep.  799. 

(1894),  63  Fed.  Rep.  21.  In  Carswell  v.  Farmers'  Loan  &  Trust 

3  Farmers'  Loan  &  Trust  Co.  v.  Chicago  Co.  of  New  York  et  al.  (1896),  74  Fed. 
R.  Co.  (1883),  18  Fed.  Rep.  484,  affirmed  Rep.  88,  the  receiver  in  foreclosure  pro- 
in   Peoria   &   Pekiu   Union    Ry.    Co.    v.  ceedings  of  a  railroad  company  was  held 


700  RAILWAY    BONDS    AND    MORTGAGES.  [CHAP.  XXXI. 

§  714.  Withdrawal  of  Consideration  of  Lease  a  Sufficient  Ground 
for  renouncing  it.  — -  Where  the  chief  consideration  moving  to  the 
lessee  company  is  that  the  road  of  the  lessor  shall  be  operated  in 
harmony  with,  and  practically  under  the  supervision  of  the  lessee, 
the  appointment  of  a  separate  receiver  for  the  lessor,  and  his  as- 
sumption of  independent  possession  and  control,  operate  as  a 
withdrawal  of  the  consideration,  and  are  sufficient,  without  more, 
to  justify  the  lessee  in  renouncing  the  lease  from  that  time.^ 

§  715.  Receiver  cannot  enjoy  Benefit  of  Contract  without  assum- 
ing Burdens.  —  The  principle  that  a  receiver  cannot  enjoy  the 
benefit  of  a  contract  without  assuming  its  burdens,  has  been 
applied  in  some  cases  where  the  vendor  of  land  to  the  company 
lias  required  the  performance  of  certain  acts  as  conditions  prece- 
dent to  the  passing  of  a  complete  title.  Thus  where  the  com- 
pany has  agreed,  in  consideration  of  a  grant  of  right  of  way,  to 
erect  and  maintain  a  water-tank  on  the  lands  of  the  proprietor,  to 
be  supplied  with  water  from  an  elevated  spring  thereon,  which  is 
to  be  used  by  the  company,  and  for  which  the  proprietor  is  to  be 
paid  the  compensation  usual  in  such  cases,  the  sum  payable  under 
the  contract  is  a  charge  on  the  earnings  in  the  hands  of  the 
receiver.2 

So  also  a  receiver  must  either  comply  with  a  judgment  against 
the  company,  requiring  the  establishment  of  a  farm-crossing  on 
land  taken  for  the  road,  or  deliver  up  the  land  so  taken.^ 

§  716.  When  Receiver's  Liability,  as  such,  ceases. — The  right 
of  action  against  receivers  necessarily  ceases  when  the  property 
passes  out  of  their  control,  whether  it  be  by  the  consummation  of 
the  foreclosure  sale,^  or  in  consequence  of  their  discharge.^ 

A  receiver,  after  his  discharge,  is  not  liable  in  an  action  for 


liable  only  for  a  reasonable  rental  under  a  Texas   Gen.   Laws,    1887,    p.   121,   §  15, 

contract  for  lease  of  a  depot,  made  with  declaring  that  "all  judgments,  claims,  or 

the  company  by  a  depot  company,  as  the  causes  of  action  when  determined,  existing 

receiver    had    not    elected   to   adopt    the  against  any  corporation  at  the  time  of  the 

lease,    and  for  the  time  he  had  retained  appointment  of  a  receiver,  shall  be  paid 

possession  of  the  depot,  impliedly  retained  out  of   the  earnings  of  such  corporation 

it  by  consent  of  the  lessor  on  terms  of  while   in   the   hands  of  a  receiver,  .  .  . 

payment  of  a  reasonable  rental.  and  the   same  shall  be  a  lien  upon  such 

1  Ames  V.  Union  Pac.  Ry.  Co.  (1893),  earnings." 

60  Fed.  Ri-p.  906.  8  Peckham  v.  Dutchess  County  R.  Co. 

2  Howe  V.  Harding  (1890),  76  Tex.  17;  (189.'')),    145   N.   Y.  385;    s.  c.  40  N.  E. 
8.  c.  13  S.  \V.  Rep.  41  ;  42  Am.  &  Eug.  Rep.    15. 

R.  R.   Cas.    1.     Tlie  ruling  of  the  court  *  Farmers' Loan  &  Trust  Co.  y.  Central 

was  iii:i(l(!   in<li'ipciirlcntly  of  statute,   but  R.  Co.  of  Iowa  (1880),   7  Fed.   Rep.  537. 
the  decision  was  also  inevitable,   as  was  ^  Kyan  v.  Hays  (1884),  62  Tex.  42. 

pointed  out,    under  a   provision    of    the 


§  TIG.]  LIABILITIES    OF    COMPANY    AND    RECEIVER.  701 

damages  for  injuries  received  during  the  time  lie  was  operating  a 
railroad.^ 

Otherwise,  as  a  raih-oad  company  is  not  responsible  for  dam- 
ages sustained  by  plaintill'  through  the  negligence  of  the  servants  of 
the  receiver,  further  than  they  can  be  paid  out  of  the  current  re- 
ceipts of  the  road  while  in  his  hands,  it  follows  that  the  purchasers 
will  incur  no  obligation  to  pay  such  damages  from  the  mere  fact 
that  they  purchased  the  {property  from  those  who  bought  it  at  the 
receiver's  sale.^ 

But  the  court  may,  and  frequently  does,  reserve  control  of  the 
property  to  such  an  extent  as  may  be  necessary  for  the  enforce- 
ment of  unsatisfied  claims,  and  the  purchasers  of  the  pro})erty 
will  then  take  it  subject  to  all  claims  that  may  be  established 
against  the  receiver.^ 

Where,  after  the  sale  in  foreclosure  suit,  the  receiver  continues 
in  possession  for  a  time  the  purchaser  will  be  liable  in  an  action 
for  damages  for  personal  injuries  incurred  while  the  road  was 
in  possession  of  the  receiver  between  the  date  of  the  sale  and 
the  taking  possession  by  the  purchaser,  to  the  extent  that  the 
receiver  may  have  applied  the  income  to  the  betterment  of  the 
property.  ^ 

1  Missouri,  K.  &  T.  Ry.  Co.  v.  Wylie  Co.  v.  Bloom  (1894),  60  Fed.  Rep.  979  ; 
(Tex.  Civ.  App.  1896),  33  S.  W.  Rep.  Tex.  &  Pac.  Ry.  Co.  v.  Johnson  (1894), 
771.  151  U.  S.  81  ;  Farmers'  Loan  &  Trust  Co. 

2  Ryan  v.  Hays,  Receiver  (1884),  62  v.  Central  R.  Co.  of  Iowa  (1880),  7  Fed. 
Tex.  42  ;  s.  c.  23  Am.  &  Eng.  R.  R.  Cas.  Rep.  537. 

501.  *  Crawford  v.  Houston  &  Texas  Central 

8  See,   for  example,  Tex.  &  Pac.    Ry.     R.  Co.  (Tex.,  1895),  33  S.  W.  Rep.  534. 


702 


RAILWAY  BONDS   AND   MORTGAGES.         [CHAP.  XXXII. 


CHAPTER   XXXII. 

COMPENSATION    OF    TRUSTEES,    RECEIVERS,    AND   OTHERS,    AND    ATTOR- 
NEYS,   IN    SUITS    RELATING   TO    MORTGAGED    PROPERTY. 


Art.  I.  —  Persoxal    Compensation   of 
Trustees,  Receivers,  etc., 
FOR  their  Services. 
§  717.   Introductory. 

718.  Personal  Compensation  of  Trus- 

tees. 

719.  Amount    allowed    for    Personal 

Compensation    of  Trustee. 

720.  Apportionment  of  Compensation 

between  several  Trustees. 

721.  Compensation      of     Discharged 

Trustee. 

722.  Compensation    of    Successor    of 

Deceased   Trustee. 

723.  Compensation  of  Representative 

Bondliolders. 

724.  Compensation  of  Receivers. 

725.  Method   of   determining   a   Re- 

ceiver's Compensation. 
Art.  II.  —  Expenses  of  Trustees,   Re- 
ceivers, AND  OTHERS. 
§  726.  Expenses  of  Trustees. 

727.  Expenses       of      Representative 

Bondholders. 

728.  Expenses  of  Pledgees  of  Bonds. 

729.  Expenses  of  Receivers  in  Con- 

duct of  Litigation. 

730.  Expenses  of  Mortgagor  in  Con- 

duct of  Litigation. 

731.  Costs  as  between  Different  Mort- 

gagees. 

732.  Costs    of    Unsecured    Creditors 

seeking     to     enforce     Claims 
against   Receivers. 


§  733.  Sheriffs  Fees. 
734.  Amount  of  Attorney  and  Coun- 
sel Fees  allowed  in  Foreclos- 
ure Suit  is  in  Discretion  of 
Court. 
Art.  III.  —  Out  of  what  Funds  Com- 
pensation AND  Expenses 
IN  Foreclosure  Suits  are 

PAID. 

§  735.  Mortgaged  Property  must  in 
general  bear  Expenses  of  its 
Administration  in  Court  of 
Equity. 

736.  Necessary     Charges     Lien     on 

Mortgaged   Property. 

737.  Lien  for  Counsel  Fees. 

738.  General  Fund,  when  chargeable 

and  when  not. 

739.  Liability  of  Prior  Mortgagee  for 

Expenses   of  Suit   by  Junior 
Mortgagees. 
Art.  IV.  —  Practice. 

§  740.  Proper  Time  to  settle  Compen- 
sation and  Expenses. 

741.  Trastee's  Claim  for  Compensa- 

tion and  Expenses,  how  as- 
serted after  Redemption  of 
Property. 

742.  Rehearing  after  Remand  by  Ap- 

pellate Court. 

743.  Exceptions  to  Amounts  allowed 

by  the  Master,  etc. 


Article  I.  —  Personal  Compensation  of  Trustees,  Receivers, 

ETC.,    FOR   THEIR    SERVICES. 

§  717.    Introductory.  —  Most  of  the  decisions  on  the  subjects 
of  tliis  chapter  deal  with  questions  which  were,  and  must  neces- 


§  718.]  COMPENSATION    OF   TRUSTEES    AND    OTHERS.  703 

sarily  have  been,  determined  so  largely  by  the  special  circum- 
stances of  each  case,  and  the  individual  opinion  of  the  judge, 
that  it  is  not  possible  to  extract  definite  rules  applicable  to  all 
cases.  ^ 

Receiver's  certificates  issued  under  decretal  orders  will  be 
given  priority  to  claims  for  compensation  of  trustees  in  fore- 
closure proceedings  and  their  solicitors. ^ 

But  allowances  to  railroad  receivers  and  their  solicitors  are 
chargeable  as  costs  of  the  proceedings,  and  will  be  paid  in 
preference  to  the  certificates  of  the  receiver. ^ 

§  718.  Compensation  of  Trustees.  —  Nothing  is  better  estab- 
lished in  England,  says  Perry,  than  that  a  trustee  can  have  no 
allowance  or  compensation  for  his  time  or  trouble  in  the  execu- 
tion of  a  trust;  but  a  different  principle  prevails  generally  in  all 
the  States  of  this  country.* 

This  innovation  upon  the  practice  in  England  has  been  due 
partly  to  the  fact  that  the  different  social  conditions  prevailing 
here  have  induced  the  different  State  legislatures  to  make 
statutory  provisions  for  remuneration  to  executors  and  guar- 
dians, the  equity  of  such  statutes  being  by  construction  generally 
extended  to  conventional  trustees  where  the  agreement  is  silent,^ 
and  partly  to  a  feeling  that,  in  the  words  of  Judge  Story,  "  the 
policy  of  the  law  ought  to  be  such  as  to  induce  honorable  men, 
without  a  sacrifice  of  their  private  interests,  to  accept  the  office, 
and  to  take  away  the  temptation  to  abuse  the  trust  for  mere 
selfish  purposes,  as  the  only  indemnity  for  services  of  an  impor- 
tant and  anxious  character. " 

The  latter  of  these  considerations  is  especially  applicable  to 
the  trustees  of  railroad  mortgages,  who  may  at  any  time,  owing 
to  the  occurrence  of  the  contingencies  specified  in  the  mort- 
gage, be  required  to  undertake  the  performance  of  delicate  and 
burdensome  duties.  The  allowances  made  to  them,  whether 
expressly  stipulated  for  in  the  trust  instrument,  or  provided  for 
by  the  statute,  or  granted  by  the  court  in  deference  to  usage,  are 
made  with  a  view  to  securing  greater  activity  and  intelligence 

1  See  on  this  subject  the  remarks  of  ^  Petersburg  Sav.  &  Ins.  Co.  v.  Delia- 
Justice  Miller  in  Hinckley  v.  Railroad  Co.  torre  et  al.  (1895),  70  Fed.  Rep.  643  ;  s.  0. 
(1879),   100  IJ.  S.   153,  "cited  below;  of  17  C.  C.  A.  310. 
Justices  Bradley  and  Miller  in  Trustees  v.  ^  Ibid. 

Greenough  (1881),  105  U.S.  527,  535;  and  *  Perry  on  Trusts,  §§  904,  918. 

of  Brewer,  J.,  in  Central  Trust  Co.  v.  Wa-  ^  Northern  Central  R.  Co.  v.  Keighler 

bash,  St.  Louis,  &  Pac.  E.  Co.  (1887),  32  et  al.  (1868),  29  Md.  572. 
Fed.  Rep.   187  ;  s.  c.  2  Ry.  Corp.  L.  J. 
492  (see  also  post). 


704 


RAILWAY    BONDS    AND    MORTGAGES.  [CHAP.  XXXIl. 


in  the  performance  of  the  trust,  and  to  inducing  persons  of 
reliable  character  and  business  capacity  to  accept  the  office.^ 

Commissions,  therefore,  will  ordinarily  be  allowed  to  such 
trustees  where  they  have  performed  their  duty,  unless  its  per- 
formance has  imposed  no  labor  or  trouble  which  justly  entitles 
them  to  compensation,  or  there  is  something  in  the  nature  of  the 
trust  itself,  or  in  the  terms  of  the  trust  instrument,  to  show  that 
no  commissions  were  intended  to  be  allowed  or  charged. ^ 

Compensation  can  be  recovered,  in  any  event,  only  for  such 
services  and  expenditures  as  are  within  the  line  of  duties 
imposed  upon  the  trustee  by  the  instrument  creating  the  trust. 

A  trustee  who  institutes  a  suit  for  the  benefit  of  the  bond- 
holders does  not  lose  his  right  to  be  compensated  for  his  services 
merely  because  the  object  of  that  suit  is  to  compel  a  lessee  com- 
pany to  pay  a  rental  for  which  he  is  liable  as  surety,  when  the 
evidence  shows  that  he  assumed  this  liability  without  any  con- 
sideration, and  without  the  prospect  of  any  personal  benefit,  and 


1  story  Eq.  Jnrisp.,  1268  71.  ;  Trustees 
V.  Greeuough  (1881),  105  U.  S.  527 ;  s.  c. 
12  Am.  &  Eng.  R.  R.  Cas.  345.  There  it 
was  said  :  "In  the  vast  amount  of  litiga- 
tion which  has  arisen  in  this  country 
upon  railroad  mortgages,  where  various 
parties  have  intervened  for  the  protection 
of  their  rights,  the  fund  has  been  sub- 
jected to  the  control  of  the  court  and 
placed  in  the  hands  of  receivers  or  trus- 
tees. It  has  been  the  common  practice, 
as  well  in  the  courts  of  the  United  States 
as  in  those  of  the  States,  to  make  fair  and 
just  allowances  of  expenses  and  counsel 
fees  to  the  trustees,  or  other  parties  pro- 
moting the  litigation  and  securing  the 
proper  application  of  the  property  to  the 
trusts  and  charges  to  which  it  was  subject. 
Sometimes,  no  doubt,  the  allowances  have 
been  excessive,  and  perhaps  illegal  ;  and 
we  would  be  very  far  from  expressing  our 
approval  of  such  large  allowances  to  trus- 
tees, receivers,  and  counsel  as  sometimes 
have  been  made,  and  which  have  justly 
excited  severe  criticism.  Still,  a  just  re- 
spect for  the  eminent  judges  under  whose 
direction  many  of  these  cases  have  been 
administered  would  lead  to  the  conclusion 
that  allowances  of  this  kind,  if  made  with 
moderation  and  a  jealous  regard  to  the 
rights  of  those  who  are  interested  in 
the  fund,  are  not  only  admissible,  but 
agreeable  to  the  jirinciples  of  equity  and 
justice." 


2  Northern  Central  R.  Co.  v.  Keighler 
et  al.  (1868),  29  Md.  572.  In  this  case 
the  trustees  were  authorized,  in  the  event 
of  a  sale,  to  apply  the  proceeds  in  the  first 
place  "to  the  payment  of  all  necessary 
expenses  and  reasonable  commissions  at- 
tending such  sale."  Before  any  default 
had  taken  place,  the  trustees  brought  suit 
to  recover  compensation  for  the  adminis- 
tration of  the  trust,  alleging  that  the  cus- 
tody and  care  of  the  bonds,  the  collection 
and  reinvestment  of  the  money,  the  keep- 
ing of  accounts,  and  the  various  other 
duties  connected  with  the  office,  involved 
much  labor,  as  well  as  care  and  responsi- 
bility. It  was  held  that  it  was  not  the 
intention  that  any  commissions  should  be 
allowed  for  such  services,  both  because  the 
trust  was,  in  its  nature,  somewhat  of  a 
public  character,  and  in  its  execution  the 
complainants  were  engaged  in  subserving 
great  and  important  public  interests,  and 
because  the  deed,  by  providing  for  com- 
])ensation  in  the  event  of  the  sale,  nega- 
tived the  idea  that  commissions  were  to 
be  allowed  in  any  other  contingency.  "If 
it  were  supposed,"  said  the  court,  "that 
the  trust  was  accepted  with  the  motive  of 
receiving  pecuniary  reward,  it  is  doing  no 
violence  to  the  terms  of  the  deed  to  say 
that  the  prospect  of  receiving  the  large 
commissions  in  the  event  of  a  sale  was 
regarded  as  a  sufficient  consideration  for 
the  acceptance  of  the  trust." 


§  719.]  COMPENSATION    OP    TRUSTEES    AND    OTHERS.  705 

ill  tlie  interest  of  and  for  the  protection  of  the  bondholders. 
Under  such  circumsUmces  it  dues  not  lie  in  the  mouth  of 
bondholders  who  partake  of  the  fruits  of  his  action  to  argue  that 
he  was  not  acting  as  their  trustee,  because  he  himself  was  per- 
sonally liable  for  the  i)ayincnt  of  the  rentals.  ^ 

§  719.  Amount  allowed  for  Personal  Compensation  of  Trustee.  — 
The  amount  allowed  for  the  personal  services  of  a  trustee 
is  sometimes  determined  by  the  provisions  of  the  mortgage.^ 
Thus  where  the  trustees,  for  their  services  in  selling  and 
conveying  lands  covered  by  the  mortgage,  and  applying  the 
proceeds  to  a  sinking  fund  for  the  discharge  of  the  bonds,  are 
entitled  to  the  sum  of  two  per  cent  on  the  par  amount  of  the 
bunds  cancelled  in  that  manner,  and  bondholders  avail  them- 
selves of  the  privilege  given  them  by  the  trust  deed  to  buy  those 
lands,  and  pay  for  them  in  bonds  at  their  par  value,  which,  when 
received  by  the  trustees,  are  to  be  cancelled  by  them,  the  latter 
transaction  will,  for  the  purpose  of  determining  the  compensa- 
tion of  the  trustees,  be  regarded  as  a  sale  for  cash,  and  they 
will,  therefore,  be  entitled  to  two  per  cent  of  the  par  value  of  the 
bonds  which  are  thus  used  in  payment  of  the  purchase  price  of 
the  land  sold  to  the  bondholders.^ 

The  amount  of  the  remuneration,  where  it  is  not  fixed  by  the 
trust  instrument,  has,  in  some  States,  been  provided  for  by  the 
express  statutory  provisions,  while  in  others  the  courts  are 
guided  by  enactments  which,  being  ap])licable  to  persons  hold- 
ing certain  fiduciary  offices  of  similar  character,  are  extended 
by  a  sort  of  equitable  construction  to  trustees,* 

J  Wondrnff??.  New  York,   L.   E.  &  W.  3  Oilman    &    Cowdrey  v.    Des  Moines 

R.  Co.  (]891),  129  N.  Y.  27  ;  s.  c.  29  N.  Valley  R.  Co.  (1875),  41  Iowa,  22. 

E.  Rep.  251  ;  51  Am.  &  Eng.  R.  R.   Cas.  *  For  a  review  of  various  statutes  con- 

89,  the  court  saying  that  the  case  came  trolling  the  question  in  either  of  the  ways 

within  the  meaning  and  spirit  of  decision  mentioned  in  the  text,  see  Perry  on  Trusts. 

in  Trustees  v.  Greenough,  referred  to  be-  If  the  trustees  are  compensated  by  receiv- 

low.     The  two  cases  are  scarcely  parallel,  ing  a   certain  statutory  percentage  of  the 

for  the  latter  is  a  distinct  authority  that  gross  amount  of  the  proceeds  of  the  sale 

one   not   a   trustee   cannot,   even   though  of  the  property,  the  sum  may  be  charged 

performing  a  trustee's  duties,  claim  a  trus-  with    the   expenses    of    the    master   who 

tee's  compensation.     The  question  in  the  makes  the  sale.     Duncan  v.  Atlantic,  Miss. 

New  York  ease  was  merely  whether  the  &  Ohio  R.  Co.  (1882),  4  Hughes,  125. 

plaintiff  was  acting  as  trustee  or  in  a  non-  A  recent  example  of  the  ap[ilication  of 

official  capacity.     The  court  decided  that  the  second  method  of  computing  the  proper 

he  was  a  trustee,  and  the  view  thus  adopted  allowance,  in  the  case  of  a  railroad  trustee, 

at  once  took  the  case  out  of  the  category  will  be  found  in  Woodruff  v.  New  York, 

to  which  Trustees  v   Greenough  belongs. "  L.  E.  &  W.  R.  Co.  (1891),  129  N.  Y.  27  ; 

2  An  instance  will  be  found  in  Guignon  s.  c.  51  Am.  &  Eng.   R.  R.  Cas.   89;  29 

V.  Union  Trust  Co.  (1895),  156  111.   135;  N.  E.  Rep.  251,  where  a  trustee,  suing  in 

s.  c.  40  N.  E.  Rep.  556.  his  individual  name,   but  really,  as  was 

45 


706  RAILWAY    BONDS    AND    MORTGAGES.  [CHAP.  XXXII. 

Even  where  the  allowance  is  left  by  the  trust  instrument  to 
the  discretion  of  the  court,  as  where  the  mortgage  states  that 
the  trustees  shall  receive  a  reasonable  compensation,  thus  indi- 
cating the  desire  of  the  parties  that  it  shall  be  adjusted  largely 
as  an  equivalent  for  the  responsibility  which  they  have  been 
obliged  to  assume,  the  statutory  scale  of  remuneration  is  not 
unlikely  to  be  adopted,  if  it  seems,  under  all  the  circumstances 
of  the  case,  to  yield  a  proper  amount.^ 

But  the  adoption  of  such  a  standard  is  only  a  matter  of  con- 
venience, and  the  court,  in  all  cases  in  which  it  is  free  to  settle 
the  amount,  will  do  so  in  view  of  all  the  facts  presented.^ 

Thus  where  the  services  performed  in  a  foreclosure  suit  by 
the  trustees  do  not  require  all,  or  nearly  all,  their  time,  nor 
interfere  with  their  own  business,  and  they  incur  no  great 
responsibility,  and  it  appears  that,  up  to  the  time  of  the  litiga- 
tion, they  have  been  in  the  receipt  of  $1,500  per  annum,  and 
that  since  then  they  have,  as  receivers  and  trustees,  been  paid 
$4,500  per  annum,  an  extra  allowance  is  improper.  ^ 

So  also,  upon  the  foreclosure  of  several  mortgages  in  the 
same  suit,  the  trustee  of  one  of  them,  whose  services  were 
merely  nominal,  going  no  further  than  the  mere  use  of  his 
name,  and  who  represented  the  holder  of  a  single  bond  of  $500, 
the  rest  having  been  paid,  has  been  deemed  amply  compensated 
by  an  allowance  of  $500.* 

decided,  for  the  benefit  of  the  bondholders,  their  expenses,  was,  under  the  circum- 
was  awarded  the  same  percentage  of  the  stances,  a  fair  allowance,  that  being  the 
fund  which  he  had  recovered  as  was  ap-  usual  commission  which  trustees  in  the 
pointed  by  statute  for  executors  and-guar-  State  of  New  York  received.  A  summary 
dians,  the  rule  in  that  State  being,  in  the  of  a  master's  report  recommending  various 
absence  of  exceptional  circumstances,  that  specified  sums  to  be  paid  to  trustees  and 
this  percentage  is  deemed  to  be  a  full  others  in  the  Wabash  litigation  will  be 
equivalent  for  the  services  performed  by  found  in  1  Ry.  &  Corp.  L.  J.  598. 
persons  holding  such  fiduciary  positions.  2  -phe  fee  bill  of  the  federal  courts  is 
1  Dow  V.  Memphis  &  Little  Rock  R.  intended  to  regulate  only  those  fees  and 
Co.  (1885),  32  Fed.  Rep.  185.  In  this  costs  which  are  strictly  chargeable  as  be- 
case  the  trustee  defeated  an  attempt  to  set  tween  party  and  party,  and  not  to  regulate 
aside  the  mortgage.  The  court,  in  discuss-  the  fees  of  counsel  and  other  expenses  and 
ing  the  proper  amount  of  compensation,  charges,  as  between  attorney  and  client, 
said  :  "  If  the  result  of  the  suit  had  been  nor  the  power  of  a  court  of  equity,  in  cases 
adverse,  tliey  would  doubtless  have  been  of  administration  of  funds  under  its  con- 
subjected  to  criticism,  although  there  trol,  to  make  such  allowances  to  the  parties 
would  have  been  no  reason  for  it.  Tlie  out  of  the  fund  as  justice  and  equity  may 
amount  involved  was  very  large,  and  the  require.  Trustees  v.  Greenough  (1881), 
trustees  should  not  be  exposed  to  con-  105  U.  S.  527,  535  ;  s.  c.  12  Am.  &  Eng. 
tingencies,  in  which  their  discretion  and  R.  R.  Cas.  345. 

fidelity  might  come  in  question,  without  ^  Easton   v.  Houston  k  Texas  Central 

an  adequate  remuneration."     The  conclu-  R   Co.  (1889),  40  Fed.  Rep.  189. 
sion  arrived  at  was  that  one  per  cent  on  *  Ibid, 

the  wliole  amount  at  stake,  in  nibliiinn  to 


§  720. J  COMPENSATION    OP    TRUSTEES    AND    OTHERS.  707 

So  also  $10,000  per  annum  fur  a  non-resident  trustee  who 
attended  to  the  financiering  part  of  the  duties  in  New  York,  and 
115,000  to  a  resident  trustee  who  ojjerated  the  road,  and  received 
a  liberal  salary  for  doing  so,  has  been  held  to  be  an  excessive 
allowance,  although  it  was  admitted  that  there  had  been  a  vast 
amount  of  labor  and  litigation  in  connection  with  the  trustee- 
ship, and  that  the  trustees  had  "really  lifted  the  road  out  of 
the  mire,  and  kept  the  concern  going  until  it  could  walk  alone." 
The  total  amount  was,  therefore,  reduced  rather  more  than  one- 
third,  i 

Where  the  trial  courts  of  a  State  have  established  rules  fixing 
the  rates  of  connnissiuns  to  be  allowed  to  trustees  making  sales 
under  the  orders  of  such  courts,  those  rules  are  imperative  both 
upon  the  courts  themselves  and  all  persons  accepting  trusts  at 
their  hands. ^ 

§  720.  Apportionment  of  Compensation  between  several  Trustees. 
—  In  apportioning  compensation  between  several  trustees, 
reference  should  be  had  to  the  services  rendered  by  each.^ 

For  example,  where  trustees  had  defended  a  suit  to  set 
aside  the  trust  deed,  one  trustee  had  been  "  active  and  zealous 
in  consultations  with  the  bondholders  and  with  counsel,"  the 
second  "especially  active  in  the  preparation  of  evidence"  and 
"unremitting  in  his  efforts  from  the  beginning  of  the  litigation." 
The  third  had  not  "taken  an  active  part  in  the  defence  of  the 
suit."  Under  these  circumstances  the  first  was  allowed  $8,500, 
the  second,  $11,500,  the  third,  $6,000.4 

So,  also,  where  one  trustee  during  pendency  of  foreclosure 
suit  was  active  manager  of  road  one  hundred  and  thirty-four 
miles  long,  and  controlled  business  amounting  to  $160,000, 
while  the  other  trustee  resided  in  a  different  State,  and  merely 
made  examination  of  monthly  reports  of  his  colleague,  an  allow- 
ance of  $5,000  to  the  former  and  $1,500  to  the  latter  was  held 
"eminently  proper."^ 

Where  a  person  in  first  place  consents  to  act  as  trustee  with 

'       1  Williamsv.Morcran  (1884),  111,  U.  S.  Am.  &  Eng.   E.   E.   Cas.  217,   the  lower 

684  ;  s.  c.  17  Am.  &  Eng.  E.  R.  Cas.  217.  court  had  made  allowances  to  two  trustees 

-  Tome  V.  King  (1885),  64  Md.  166;  in  possession,  giving  resident  trustee  fifty 

s.  c.  21  Atl.  Eep.  279.  per  cent,  more  than  his  non-resident  col- 

3  Dow  V.  Memphis  &  Little  Rock  R.  league,  who  financiered  the  road  through 

Co.  (188.5),  32  Fed.  Rep.  18.5.  its   ernharrassments,    and   in    other   ways 

*  Ibid.  promoted    its   interests.       This    ratio   was 

5  Walker  v.   Qnincy,  M.  &  P.  R.   Co.  not  disapproved  of  by  the  Supreme  Court, 

(1886),   28  Fed.  Rep.  734.     In  Williams  bat  the  total  of  the  allowances  was  re- 

V.  Morgan  (1884),  111  U.  S.  684  ;  s.  c.  17  duced.     (See  above.) 


708  RAILWAY    BONDS    AND    MORTGAGES.  [CHAP.  XXXII. 

a  certain  number  of  colleagues  for  a  specific  compensation,  and 
afterwards  accepts  the  office  with  the  knowledge  that  the  mort- 
gage, as  actually  executed,  provides  for  a  larger  numljer,  he  can 
claim  only  proportionate  share  of  compensation  which  is  due  to 
him  as  one  of  the  increased  number.  ^ 

§  721.  Compensation  of  Discharged  Trustee.  —  In  the  casC  cited, 
a  trustee  who  was  discharged  without  his  knowledge,  after  hav- 
ing accepted  a  trust  under  a  deed  which  expressly  provided 
for  a  specific  compensation,  did  not  lose  his  right  to  that 
compensation.  2 

§  722.  Compensation  of  Successor  of  Deceased  Trustee.  —  Such 
successor  is  properly  allowed  the  compensation  provided  for  in 
the  mortgage.^ 

§  72-3.  Compensation  of  Representative  Bondholders.  —  A  bond- 
holder suing  in  behalf  of  himself  and  other  bondholders  does 
not,  in  regard  to  compensation,  occupy  the  same  position  as  a 
trustee,  even  though  litigation  has  been  rendered  necessary 
because  the  trustees  have  neglected  their  duties,  and  the  result 
of  the  bondholder's  labors  is  the  rescue  and  reclamation  of  the 
trust  fund  from  waste  and  destruction.  "Where  an  allowance," 
said  Mr.  Justice  Bradley,  "is  made  to  trustees  for  their  per- 
sonal services,  it  is  made  to  secure  greater  activity  and  dili- 
gence in  the  performance  of  the  trust,  and  to  induce  persons 
of  reliable  character  and  business  capacity  to  accept  the  office 
of  trustee.  These  considerations  have  no  application  to  case  of 
creditor  seeking  his  rights  in  a  judicial  proceeding.  It  would 
present  too  great  temptation  to  parties  to  intermeddle  in 
management  of  valuable  property  or  funds  in  which  they  have 
only  the  interest  of  creditors,  and  that  perhaps  only  to  a  small 
amount,  if  they  could  calculate  upon  the  allowance  of  a  salary 
for  their  time  and  having  all  their  private  expenses  paid."'* 

§  724.  Compensation  of  Receivers.  —  The  amount  of  compen- 
sation which  is  to  be  awarded  to  receivers  is  left  to  the  discre- 
tion of  the  court,  but  the  amount  is  discretionary  only  in  the 

1  MauiT  V.  Chesapeake  &  Ohio  R.   Co.  their  own  security,  or  suits  in  behalf  of 

(1876),  27  Gratt.  698.  themselves  and  other  dehenture-holilers, 

'^  ihid.  see  Foril  v.  Earl  of  Chesterfield,  21  Beav. 

8  Newport  k  Cincinnati  Bridge  Co.  v.  426  ;  Thomas  v.  Jones,  1  Dr.  &  Sm.  134  ; 

Douglass    (1877),    12    Bush    (Ky.),     673;  7?<;  Richardson,  14  Ch.  Div.  611  ;  Wright 

8.  c.  18  Am.  Ry.  Rep.  221.  ;-.  Kirby,  23  Beav.   463;  Batten  v.  Dart- 

*  Trnsteeg  v.   Greenough    (1881),    105  mouth    Harbour   Conimrs.,    45  Ch.    Div. 

U.  S.  527,  535  ;  s.  c.  12  Am.  &  Kug.  1!.  R.  612  ;  Re  Ormerod,  Griersou.  &  Co.  (1890), 

Cas.  345.  \V.  N.  217  ;  Cariick  v.  Wigan  Tramways 

For  rules  as  to  costs  in  English  courts  Co.  (1893),  W.  N.  98. 
in  actions  of  debenture-holders  to  enforce 


§  724.]  COMPENSATION    OF    TliUSTEES    AND    OTHERS.  709 

sense  that  there  are  no  fixed  rules  to  detcriuiue  the  allowance 
applicable  in  every  case,  and  the  courts  are  not  at  liberty  to 
give  more  than  fair  and  reasonable  compensation.  Tlie  policy 
of  the  courts  is  to  see  its  officers  and  agents  well  paid,  in  order 
that  men  of  character  and  ability  may  be  willing  to  accept  the 
burdens  and  responsibilities  of  these  trusts;  but  at  the  same 
time  it  is  nut  to  be  forgotten  that  the  property  to  be  charged 
with  these  allowances  is  not  the  property  of  the  court,  and  that 
there  are  many  thousands  scattered  all  over  the  land  who  are 
the  owners,  whose  property,  by  the  strong  hand  of  the  law,  has 
been  taken  out  of  their  custody,  and  who  look  to  the  court  to  see 
that  no  unjust  or  excessive  burden  is  cast  upon  them.  The 
court  may  not  exercise  the  generosity  of  the  owners,  but  is 
closely  limited  by  the  justice  of  a  judge.  ^ 

In  arriving  at  a  conclusion,  the  court  will  consider  the 
magnitude  of  the  trust,  the  care  and  responsibility,  the  time 
occupied,  the  skill  and  ability  displayed,  and  the  success 
attained.  2 

If  there  is  nothing  in  the  administration  of  the  trust  to  con- 
vict the  receivers  of  want  of  integrity  or  good  faith,  a  lack 
of  foresight  in  regard  to  future  developments  of  the  business 
is  no  reason  for  denying  compensation,  or  reducing  amount, 
especially  where  the  management  has,  on  the  whole,  been 
attended  with  reasonable  success.^ 


1  Central  Trust  Co.  v.  Wabash,  St.  of  corporations,  including  the  second  sec- 
Louis,  &  Pac.  R.  Co.  (1887),  32  Fed.  Rep.  tion  thereof,  in  reference  to  receiver's  fees, 
187  ;  2  Ry.  &  Corp.  L.J.  492,  per  Brewer,  applies  only  to  receivers  of  coiporations 
J.  \n  this  case,  two  receivers,  who  man-  appointed  in  jjroceedings  of  bankruptcy 
aged  the  vast  Wabash  property  for  three  or  insolvent  corporations,  and  a  receiver 
and  a  half  years,  were  each  awarded  appointed  in  an  action  to  foreclose  a  mort- 
$112,500  by  the  master.  The  court,  gage  executed  by  a  corporation  is  not 
while  admitting  that  the  receivership  of  entitled  to  the  fees  specified  in  said  sec- 
such  a  coniplicated  system  cast  an  im-  tion.  The  allowance  of  commissions  to 
mense  burden  of  care  and  responsibility  such  a  receiver  is  governed  by  the  pro- 
on  the  receivers,  and  required  on  their  vision  of  the  Code  of  Civil  Procedure, 
part  the  exercise  of  the  highest  skill  and  §  3320,  providing  for  the  allowance  by 
ability,  and  conceding  that  their  adminis-  the  court  or  judge  where  not  otherwise 
tratiou  had  been  perfectly  successful,  con-  specially  prescribed  by  statute.  United 
sidered  that  this  sum  was  rather  too  large,  States  Trust  Co.  v.  New  York,  West 
and  r-'duced  the  amount  to  $70,000.  A  Shore,  &  Buffivlo  R.  Co.  (1886),  101  N.  Y. 
large  number  of  diverse  opinions  as  to  478  ;  s.  c.  5  N.  E.  Rep.  316  ;  25  Am.  & 
proiier  comjiensation  were  given  by  rail-  Eng.  R.  R.  Cas.  601. 

road     mauaeers     and    others,     and     this  ^  Central   Trust   Co.   v.    Wabash,    St. 

amount  was  fixed  upon  as  being  interme-  Louis,    &    Pac.    R.   Co.    (1887),    32  Fed. 

diate  between  the  extreme  estimates.  Rep.  187  ;  s.  c.  2  Ry.  &  Corp.    L.  .1.  492. 

The   Tew  York  act  of  1883  (ch.  378,  »  Cowdrey  v.    Railroad  Co.   (1870),  1 

Laws  of   1883),  in  relation   to  receivers  Woods,  331. 


710  RAILWAY   BONDS   AND    MORTGAGES.         [CHAP.  XXXII. 

A  receiver  who  resides  at  a  distance  from  the  property,  and 
takes  no  part  in  active  management  of  road,  cannot  claim  same 
compensation  that  is  usually  paid  to  railroad  presidents  and 
receivers  who  are  active  executive  heads. ^ 

An  order  making  an  allowance  to  a  receiver  should  be  defi- 
nite, showing  not  only  for  what  services  made,  but  also  upon 
what  basis,  whether  by  analogy  to  rate  of  commissions  allowed 
trustees,  or  on  ground  that  peculiar  circumstances  of  case  justify 
higher  rate.^ 

Compensation  of  receiver  who  retains  office  after  duties  and 
responsibilities  of  practical  management  of  property  have  ceased 
should  be  less  than  during  the  period  when  he  was  in  full  con- 
trol of  business.^ 

The  Maryland  Court  of  Appeals,  while  conceding  that  the 
rule  for  compensating  a  receiver  is  not  of  the  same  invariable 
character  as  that  which  restricts  the  compensation  of  a  trust  to 
the  rate  established  by  general  rules  of  court,  considered  that, 
in  the  absence  of  special  circumstances,  the  allowance  of  a 
receiver  should  conform  as  nearly  as  possible  to  rate  of  commis- 
sions given  to  guardians  and  trustees  for  performance  of  like  or 
kindred  services.* 

In  the  federal  courts,  however,  and  perhaps  most  of  the 
States,  the  rule  prevailing  in  Maryland,  that  the  compensation 
of  a  receiver  should,  in  the  absence  of  some  special  reason,  be 
the  same  as  that  of  a  trustee,  apparently  is  not  observed,  the 
amount  being  left  to  the  discretion  of  the  judge. ^ 

Allowance  of  Additional  Compensation  to  Receiver.  — The  fixing 
of  rate  of  compensation  in  order  of  appointment,  and  assent  of 
receiver  thereto,  does  not  preclude  him  from  subsequently  claim- 
ing an  additional  amount,  where  he  performs  duties  outside 
those  imposed  by  acceptance  of  office.  A  case  for  allowing 
extra  compensation  arises  where  receiver  acts  as  superintendent 
of  road,  and,  by  serving  as  attorney,  saves  the  per  diem  fees  due 

1  Central  Trust  Co.  ^\  Cincinnati,  J.  special  receiver  of  same  road,  considered 
&  M.  H.  Co.  (1892),  58  Fed.  Rep.  .500.  as    brnnch   of   extensive   system,    and   as 

2  Tome  y.  King  (1885),  64  Md.  166;  special  master  to  sell  the  road.  The  court 
s.  c.  21  All.  Rep.  279.  held  that  $1,750  was  sufficient  compensa- 

^  Boston  Safe  Deposit  &  Trust  Co.  v.  tion  for  seven  months'  services,  while  he 

Chaniberlain   (1895),   66    Fed.   Rep.    847.  was   winding   up   the    receivership,    after 

In  this  case  receiver  had  received  .$6,000  road  had  passed  into  hands  of  purchasers 

a  year  for  managing  road  170  miles  long,  at  foreclosure  sale. 

which    produced    only    gross   revenue   of  *  Tome  w.   King  (1885),   64  Md.  166; 

.?200,n00,     while    there    was    an    annual  .s.  c.  21  Atl.  Kep.  279. 
deficit    of    S50,000.       He    had    also,    by  ^  Si>e  cases  already  cited  in  this  section. 

apjiointment  of  another   court,  acted   as 


I 


§  725.]  COMPENSATION    OP   TRUSTEES    AND    OTHERS.  711 

under  a  regular  contract  with  another  attorney,^  and  •where  the 
condition  of  the  road,  and  litigation  respecting  it,  are  such  as  to 
necessitate  work  and  travel  at  night  and  outside  usual  hours  of 
business.'-^  But  no  allowance  will  be  made  to  him  for  saving 
salaries  of  employees,  efl'ected  by  abolishing  one  office  and 
imposing  duties  on  another.  Nor  can  he  claim  commission  on 
amount  paid  out  in  connection  with  administration  of  road  by 
predecessor.  In  neither  case  has  he  done  more  than  was  required 
by  his  contract  to  discharge  duties  of  his  office  with  fidelity  and 
economy.  3 

§  725.  Method  of  determining  Amount  of  a  Receiver's  Compen- 
sation.—  In  (ixing  amount  of  compensation,  it  is  irrelevant  to 
inquire  what  another  competent  person  would  have  been  willing 
to  do  the  work  for.* 

Expert  evidence  is  usually  taken  by  court;  but  the  wide 
differences  of  opinion  which  such  evidence  is  sure  to  elicit  show 
no  fixed  standard  or  rule  to  guide  the  court,  which  must,  there- 
fore, fall  back  upon  its  own  judgment  of  what,  under  the  cir- 
cumstances, will  be  fair  and  reasonable  compensation  for 
services.^ 

Nor  should  too  much  weight  be  attached  to  testimony  of  other 
receivers  who  believe  that  sums  which  they  are  paid  for  their 
services  on  other  roads,  and  which  happened  to  be  about  the 
same  as  that  claimed  by  the  petitioner,  are  a  just  and  fair  com- 
pensation for  the  discharge  of  their  duties.^ 

1  Farmers'  Loan  &  Trust  Co.  v.  Central  *  Cowdrey  v.  Railroad  Co.  (1870),  1 
Railroad  Co.  of  Iowa  (1881),  8  Fed.  Rep.     Woods,  331. 

60.  ^  Central   Trust   Co.    v.    Wabash,    St. 

2  Ibid.  Louis,  &  Pac.  R.  Co.  (1887),  32  Fed.  Rep. 
8  Ibid.  187  ;  s.  0.  2  Ry.  &  Corp.  L.  J.  492.  In 
A  receiver  of  a  street-railway  company  tliis  case  the  highest  estimate  was  about 

was  appointed  in  March,  1891,   and  oper-  $36,000  a  year,    the  lowest  was  $fi,000, 

ated  the  road.      In  September,    1892,    a  witli  numerous  amounts  intermediate  be- 

decree    of   foreclosure    was    entered.      In  tween  these. 

January,  1893,  a  decree  was  entered  ujion  *^  Hinckley  v.  Railroad  Co.  (1879),  100 
a  report  of  thn  master  that  the  receiver  be  U.  S.  153.  Mr.  Justice  Miller  remarked  : 
allowed  $5,000  for  his  services  and  $2,500  "Perhaps  they  were  the  best  judges  of 
for  the  services  of  his  attorney.  In  July,  the  value  of  their  own  services  ;  but  sucli 
1894,  another  decree  was  rendered,  a  is  not  always  the  case,  and  as  this  is  the 
reference  made  to  the  master,  and  report  first  time  we  have  been  called  on  to  review 
made  that  he  be  allowed  $2,400  more,  and  the  allowance  made  to  receivers  in  the 
his  attorneys  $1,500  additional.  The  Circuit  Courts,  we  do  not  see  that  the 
Judge  disallowed  these  last  amounts.  U.  economical  administration  of  insolvent 
S.  Circuit  Court  of  Appeals  affirmed  this  companies  will  be  promoted,  or  that  jus- 
disallowance.  Montgomery  v.  Petersburg  tice  requires  a  higher  standard  of  compen- 
Sav.  &  Ins.  Co.  et  al.  (1895),  70  Fed.  sation  than  these  courts  generally  give,  to 
Rep.   746.  whose    discretion    the    subject    must    be 


712  RAILWAY    BONDS   AND   MORTGAGES.         [CHAP.  XXXII. 


Article  II.  —  Expenses  of  Trustees,  Receivers,  and  others. 

S  7ii6.  Expenses  of  Trustees,  including  Expenses  for  Attorneys 
and  CounseL  — ''  Trustees,"  says  Pen-y,  "  have  an  inherent  right 
to  be  reimbursed  all  expenses  which  they  reasonably  and  prop- 
erly incur  in  the  execution  of  the  trust,  and  it  is  immaterial  that 
there  are  no  provisions  for  such  expenses  in  the  instrument  of 
trust.  If  a  person  undertakes  an  office  for  another  in  relation  to 
property,  he  has  a  natural  right  to  be  reimbursed  all  the  money 
necessarily  expended  in  the  performance  of  the  duty."  ^ 

Among  such  expenses  are  the  fees  of  counsel  employed  to  de- 
fend a  suit  in  which  the  validity  of  the  mortgage  is  attacked,  and 
the  various  disbursements  made  in  procuring  necessary  evidence, 
and  in  other  ways  protecting  the  interests  of  the  cestuis  que  trust 
during  the  progress  of  the  litigation.^ 

The  same  rule  as  to  counsel  fees  prevails  when  a  bill  is  filed  by 
the  trustee  to  preserve  the  estate  from  waste  or  destruction,*^  or  to 
foreclose  the  trust  mortgage.*  But  a  trust  company,  which  has 
been  compelled  to  come  into  court  in  order  to  collect  from  the 
receiver  of  a  railroad  company  certain  rentals  justly  due,  cannot 
claim  compensation  for  the  services  of  its  solicitors  in  procuring 
the  order  for  payment  when  such  services  were  entirely  for  its 
own  benefit,  and  not  for  the  purpose  of  adding  to  the  fund  which 
is  to  be  distributed  to  the  creditors  in  general.^ 

largelj'     remitted.       There    the    receiver  &  T.  R.  Co.  (1889),  41  Fed.  Rep.  8  ;  s.  c. 

claimed  $1,000  a  month,  and  was  allowed  7  Ry.  &  Corp.  L.  J.  30. 
only  $10,000  for  services  for  nearly  two  The  costs  which  by  Acts  23d  General 

years.  Assembly   of  Iowa,    ch.    48,    relating  to 

1  Cited  with  approval  in  Rennselaer  &  laborers'    claims   against   corporations    in 
Saratoga  R.  Co.  v.  Alillur  (1874),   47  Vt.  the  hands  of  receivers,  are  to  be  paid  be- 
146.  fore  such  claims,  include  fees  of  the  re- 
Trustees  of  a  trust  deed  are  entitled  to  ceiver  of  the  corporation  and  his  attorney, 

indemnity  for  their  disbursements  in  pref-  but  not  compensation  to  a  trustee  and  his 

erence   to   debenture-holders.     See   Li   re  attorney  for  services  in  a  suit  to  foreclose 

Exhall  Coal  Co.,  Jie  Bleckley,  35  Beavan,  a   mortgage   on    the   corporate    property. 

449.     In  a  winding  up  of  a  company  such  St.  Paul  Title  Ins.,  etc.   Co.   v.  Diagonal 

charges  were  ordered  by  the  court  to  be  Coal  Co.    (Iowa,    1895),   64   N.   W.   Rep. 

paid  alter  the  costs  of  sale  and  the  costs  606. 

and  remuneration  of  the  receiver.     Batten  As  to  allowances  to  a  receiver,  as  com- 

V.  Wedgwood  Coal  &  Iron  Co.  (1881),    L.  pensation  for  services,  expenses  of  adminis- 

R.  28  Ch.  Div.  318.  tration  of  the  trust,  and  counsel  fees,  see 

2  Downs  r.  Memphis  &  Little  Rock  R.  Cake  w.  Woodbury  (1894),  3  App.  Cas. 
Co.  (188.5),  32  Fed.  Rep.  18.5.  (I).  C.)  60. 

'  .Morton    r.   New  Orleans  &  Selina  R.  ^  Central  Trust  Co.  v.  Valley  Ry.  Co. 

Co.  (1885),  79  Ala.  590.  (18:»3),    55    Fed.    Rep.    903;    Trustees  v. 

*  ilercantile  Trust  Co.  v.  Missouri,  K.     Greenough  (1881),  105  U.  S.  527  ;  Invest- 


I 


§  727.]  COMPENSATION    OF    TRUSTEES    AND    OTHERS.  713 

A  solicitor  wlio  contracts  with  a  trustee  for  a  retainer  fee  to  be 
paid  for  services  in  a  foreclosure  suit,  and  thereafter  commences 
and  prosecutes  a  suit  for  some  time,  does  not  lose  his  right  to 
compensation  for  the  reason  that  the  proceedings  are  interrupted 
by  a  civil  war,  at  the  end  of  which  all  the  trustees  arc  dead,  and 
the  foreclosure  is  ultimately  effected  at  the  instance,  not  of  the 
solicitor  who  resumes  the  former  suit,  but  of  certain  bondholders 
with  whom  he  has  no  dealings.  But  he  cannot,  under  such  cir- 
cumstances, claim  the  whole  amount  contracted  for.^ 

A  clause  by  which  the  mortgagor  agrees  to  pay  all  the  fees  and 
charges  of  the  trustees  in  executing  the  trust  justifies  an  allowance 
of  reasonable  counsel  fees  for  foreclosing  the  mortgage.^  But  to 
make  such  a  provision  effectual  as  against  the  mortgagor,  it  must 
be  shown  to  have  been  inserted  under  proper  authority .^ 

A  vote  of  the  directors,  empowering  the  president  and  secre- 
tary to  execute  a  mortgage,  does  not  authorize  the  insertion  of  a 
contract  therein  obligating  the  corporation  to  pay  the  mortgagee's 
counsel  fee  in  case  legal  proceedings  are  taken  to  enforce  the  lien. 
Nor  will  the  ratification  of  a  mortgage,  invalid  because  authorized 
by  a  meeting  of  which  some  of  the  board  had  no  notice,  be  deemed 
to  include  such  a  provision,  where  the  directors  have  no  knowl- 
edge of  its  contents,  except  as  indicated  by  the  order  made  for  its 
execution  at  the  first  meeting.* 

§  727.  Expenses  of  Representative  Bondholders.  —  A  bondholder, 
suing  in  behalf  of  himself  and  other  bondholders,  for  the  purpose 

ment  Co.  of  Philadelphia  v.  Ohio  &  N.  W.  able  liahilities  contracted  in  the  execution 
R.  Co.  (1891),  46  Fed.  Rep.  696;  and  of  their  trust  from  the  time  of  the  employ- 
Easton  v.  Houston  &  Texas  Central  R.  Co.  ment  of  the  intervener.  The  funds  de- 
(1889),  40  Fed.  Rep.  189;  in  all  of  which  rived  from  the  mortgaged  property  were 
the  allowance  of  counsel  fees  was  made  in  chargeable  with  the  liability  consequent 
favor  of  parties  suing  for  the  benefit  of  a  upon  the  retainer  ;  and  it  matters  not 
class  of  creditors.  whether  those  funds  were  obtained  by  the 
1  Cowdrey  v.  Galveston,  H.  &  H.  R.  trustees,  or,  in  consequence  of  their  death, 
Co.  (1876),  93  U.  S.  352.  Mr.  Justice  or  of  the  action  of  the  court,  by  other  par- 
Field  said:  "The  fact  that  the  retainer  ties  ha^ng  charge  of  the  property."  The 
was  by  the  trustees  in  the  mortgage  who  lower  court  reduced  the  claim  one-half, 
have  since  died,  and  that  the  present  suit  and  no  objection  was  made  in  the  appel- 
was  presented  by  the  bondholders,  the  late  court  to  the  reduction. 
cestuis  qu,e  trust,  does  not  affect  the  posi-  ^  Guignon  v.  Union  Trust  Co.  (1S9.5), 
tion  of  the  claim.  The  trustees,  had  they  156  111.  135  ;  s.  c.  40  N.  E.  Rep.  .056. 
lived,  would  have  been  entitled  to  retain  ^  Schallard  v.  Eel  River  Steam  Nav. 
out  of  the  funds  received  by  them  suffi-  Co.  (1886),  70  Cal.  144;  s.  c.  11  Pac. 
cient   to   meet   the   claims.     They  would  Rep.   590. 

have  had  an  equitable  right  not  me-rely  to  *  Pacific  Rolling  Mill  v.  Dayton,  Sheri- 

be  reimbursed  from  such  fuiids  all  reason-  dan,  &  Grande  Ronde  Ry.   Co.  (1881),  5 

able  expenses  incurred,  but  also  to  retain  Fed.  Rep.  852. 
from  the  funds  sufScient  to  meet  all  reason- 


714  EAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  XXXII. 

of  protecting  the  security,  is  entitled  to  be  allowed  his  counsel 
fees  and  other  legitimate  expenses  out  of  the  trust  fund.  Such  a 
bondholder  does  not  stand  merely  in  the  position  of  a  creditor 
seeking  satisfaction  of  his  debt,  and  therefore  having  no  right  to 
allowances  for  any  expenses  beyond  taxed  costs  as  between  [)arty 
and  party.  In  Trustees  v.  Grecnough,^  the  leading  case  on  this 
point,  the  court  said  :  "  In  a  case  like  the  present,  where  the  bill 
was  filed  not  only  in  behalf  of  the  complainant  himself,  but  in 
behalf  of  the  other  bondholders  having  an  equal  interest  in  the 
fund,  and  where  the  bill  sought  to  rescue  that  fund  from  waste  and 
destruction  arising  from  the  neglect  and  misconduct  of  the  trus- 
tees, and  to  bring  it  into  court  for  administration  according  to 
the  purposes  of  the  trust ;  and  where  all  this  has  been  done,  and 
done  at  great  expense  and  trouble  on  the  part  of  the  complainant, 
and  the  other  bondholders  have  come  in  and  participated  in  the 
benefits  resulting  from  his  proceedings,  —  if  the  complainant  is  not 
a  trustee,  he  has  at  least  acted  the  part  of  a  trustee  in  relation  to 
the  common  interest.  He  may  be  said  to  have  saved  the  fund 
for  the  cestuis  que  trust,  and  to  have  secured  its  proper  applica- 
tion to  their  use.  There  is  no  doubt,  from  the  evidence,  that, 
besides  the  bestowment  of  his  time  for  years  almost  exclusively 
to  the  pursuit  of  this  subject,  he  has  expended  a  large  amount  of 
money  for  which  no  allowance  has  been  made,  nor  can  properly 
be  made.  It  would  be  very  hard  on  him  to  turn  him  away  with- 
out any  allowance  except  the  paltry  sum  which  could  be  taxed 
under  the  fee  bill.  It  would  not  only  be  unjust  to  him,  but  it 
would  give  to  the  other  parties  entitled  to  participate  in  the  ben- 
efits of  the  fund  an  unfair  advantage.  He  has  worked  for  them 
as  well  as  for  himself ;  and  if  he  cannot  be  reimbursed  out  of  the 
fund  itself,  they  ought  to  contribute  their  due,  a  portion  of  the 
expenses  which  he  has  fairly  incurred.  To  make  them  a  charge 
upon  the  fund  is  the  most  equitable  way  of  securing  such  contri- 
bution." It  is  clearly  inequitable  for  one  bondholder  alone  to 
bear  the  burden  of  such  litigation,  and  allow  others  to  come  in 
and  reap  its  fruits,  when  tlie  result  inures  equally  to  the  benefit 
of  the  whole  class.  The  attorneys  for  the  original  complainant 
are  also  the  attorneys  for  all  who  unite  with  him  in  the  suit,  or 
who  are  afterwards  permitted  by  the  court  to  come  in  and  partici- 
pate in  the  proceed ings.^ 

Upon  analogous  principles,  where  the  result  of  a  bondholder's 
suit,  filed  in  behalf  of  the  whole  class,  was  not  the  actual  appoint- 

»  10.-,  U.  S.  527,  535  ;  s.  c.  12  Am.  &  2  Morton  v.  New  Orleans  &  Selma  R. 

Yav^.  R.  It.  Cas.  345  (1881).  Co.  (1885),  79  Ala.  590. 


§§  728,  729.]       COMPENSATION    OF    TRUSTEES    AND    OTHERS.  715 

moiit  of  a  receiver,  but  the  rendition  of  a  decree  directing  the 
company's  olhcers  themselves  to  make  returns  of  the  earnings  to 
the  court  for  the  information  and  protection  of  the  bondholders, 
it  was  declared  to  be  inequitable  that  such  bondholders  as  refused 
to  unite  in  the  suit  should  be  allowed  to  reap  the  benefit  of  com-' 
plainant's  action,  and  bear  no  proportion  of  the  costs. ^ 

"The  underlying  principle,"  it  has  been  said,  "in  all  the  cases 
in  which  one  has  been  allowed  compensation  out  of  a  common 
fund  belonging  to  others  for  expenses  incurred  and  services  ren- 
dered in  behalf  of  the  common  interest  is  the  principle  of  agency. 
Such  charges  are  allowed,  not  simply  because  services  have  been 
rendered  which  have  been  beneficial  to  the  common  interest,  l)ut 
upon  the  ground  that  they  were  rendered  by  the  authority  of 
those  having  the  common  interest  exercised  by  the  representative, 
the  compensation  for  which  was  to  be  chargeable  to  the  fund 
protected  or  recovered."  ^ 

For  this  reason,  where  a  representative  bondholder  is  made 
defendant  in  a  suit  to  determine  the  priority  of  the  bonds  held 
by  his  co-bondholders,  as  against  those  held  by  the  bondholders 
for  whom  the  suit  is  instituted,  it  is  only  the  fees  of  the  counsel 
retained  by  the  defendant  representative  that  are  chargeable 
on  the  common  fund,  though  other  counsel  employed  by  other 
bondholders  of  the  same  class  render  valuable  services  in  bring- 
ing about  a  successful  issue  of  the  suit.^ 

§  728.  Expenses  of  Pledgees  of  Bonds.  —  Pledgees  of  bonds, 
who  are  holders  for  value  only  to  the  extent  of  the  advances  on 
the  bonds  and  interest,  have  no  lien  on  the  bonds  for  counsel 
fees  in  a  foreclosure  suit  to  wdiich  they  are  made  parties  defend- 
ant for  the  purpose  of  determining  the  validity  of  these  bonds.* 

§  729.  Expenses  of  Receivers  in  Conduct  of  Litigation. °  — 
Receivers   are    entitled    in   the    settlement    of    their    accounts 

1  Stewart  v.  Chesapeake  &  Ohio  Canal  Co.  (1883),  21  S.  C.  162.  See  also  §  732, 
Co.    (1881),    5    Fed.    Rep.    149,  158.     In     below. 

this  case  the  court  directed    the  clerk  to  *  Morton  v.  New  Orleans  &  Selma  R. 

tax  as  part  of  the  costs  of  complainant  the  Co.  (1885),  79  Ala.  590.     "  Counsel  fees," 

expenses  of  ]irinting  the  various  pleadings,  said  the  court  (p.  623),  "can  form  no  pait 

exhibits,  and  briefs  of  the  respective  par-  of  the  debt,  because  they  accrued  as  an  in- 

ties.    On  the  other  hand,  no  exjienses  will  dependent  obligation,  and  after  the  pledge 

be  allowed  in  a  case  of  this  kind,  uidess  was  made,  and  the  bonds  were  never  trans- 

those  which  the  representative  himself  has  ferred  with  any  intention  of  securing  such 

express  or  implied  authority  to  incur.  a  claim." 

2  Hand  v.  Savannah  &  Charleston  R.  ^  See  further,  post,  as  to  the  more  gen- 
Co.  (1883),  21  S.  C.  162,  per  Simpson,  eral  question  of  what  a  court  will  allow  in 
C.  -T.  passing  a  receiver's  accounts. 

3  Hand  v.  Savannah  &  Charleston  R. 


716  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  XXXII. 

to  payments  made  on  account  of  legal  services  and  comisel 
fees.  ^ 

The  professional  services  of  a  counsel  are  deemed  to  be  cov- 
.ered  by  an  order  appointing  a  receiver  and  directing  him  to  pay 
debts  "  owing  to  the  laborers  and  employees  "  of  the  company  for 
"labor  and  services  actually  done"  in  connection  with  the 
company's  railways.^ 

§  730.  Expenses  of  Mortgagors  iu  Conduct  of  Litigation,  includ- 
ing Expenses  for  Counsel.  —  A  lawyer  in  the  employ  of  the 
company,  which  is  placed  in  the  hands  of  a  receiver,  is  not 
entitled  to  receive  payment  of  his  salary  out  of  the  proceeds  of 
the  sale,  prior  to  the  satisfaction  of  the  mortgage  bonds,"  and 
the  various  liens,  demands,  and  expenses  in  the  foreclosure 
suit.* 

No  allowance,  therefore,  can  be  made  to  the  mortgagor's 
counsel,  where  the  sale  of  the  property  will  not  realize  enough 
to  satisfy  the  mortgage.^ 

Counsel  fees  for  services  rendered  to  a  railroad  company,  in 
a  suit  in  which  a  construction  contract  is  declared  invalid,  but 
the  contractor  is  awarded  compensation  for  the  work  actually 
performed  by  him,  are  not  entitled  to  priority  over  a  lien  which 
a  statute  creates  in  favor  of  a  contractor  who  does  work  for  a 
railroad.^ 

§  731.  AlloTvance  of  Costs  as  between  Different  Mortgagees.  — 
The  English  rule  as  to  costs  where  there  are  several  mortgages 
has  been  stated  as  follows  by  Daniell  (Chancery  Pleading  and 
Practice,  *  1390) :  "The  mortgagee  is  entitled  to  the  payment 
of  his  costs  before  the  subsequent  mortgagees  receive  any  part 
of  their  principal,  interest  and  costs,  the  practice  of  the  court 
being  to  direct  each  mortgagee  to  be  paid  his  principal,  interest 
and  costs  according  to  his  priority.      But  it  has  been  held  that, 

1  High  on  Kc'C,  §  805  ;  McLane  v.  Pla-  ceiver,  as  such  a  contract  on  his  part  in- 
cerville&  Sacramento  Valley  R.  Co.  (1885),  ured  only  to  the  advantage  of  the  trust. 
66  Cal.  606 ;  s.  c.  26  Am.  &  Eng.   R.  R.  8  Finance     Co.     of     Pennsylvania     v. 
Cas.  404.  Charleston,   C.    &    C.    R.  Co.   (1893),  52 

2  Gurney  v.  Atlantic  &  Great  Western  Fed.   Rep.  526. 

Ry.  Co.  (1874),  58  N.  Y.  358.     In  Ham-  *  Blair  v.  St.   Louis,  H.  &  K.  R.  Co. 

mond   V.   Atlee   (Tex.    Civ.    App.,   1897),  (188 1),  '20  Fed.  Rep.  351. 

39  S.  W.  Rep.  600,  a  receiver,  who  was  an  ^  Jlercantile  Trust  Co.  v.  Missouri,  K. 

attorney,  whose  compensation  was  fi.xed  at  &  T.  R.  Co.  (1889),  41   Fed.  Rep.  8  ;  s.  c. 

$100  a  month,  made  a  contract  with  an-  43  Am.  &  Eng.  R.  R.  Cas.  469. 

other  attorney  to  divide  a  ten  per  cent  fee,  «  New  Castle  N.  Ry.   Co.  v.  Simpson 

recoverahle  on  certain  claims  of  the  insol-  (1886),  26   Fed.    Rep.   1.33,   decided   with 

vent  company,  pipially  V)etween  them.    The  reference  to  the  Pennsylvania  Resolution 

court  held   that  the   portion  reserved  for  of  1843. 

himself  could  not  be  allowed  to  the  re- 


§  732.]  COMPENSATION   OP   TRUSTEES   AND    OTHERS.  717 

where  a  mortgagee  commences  or  adopts  a  suit  for  the  adminis- 
tration and  sale  of  the  mortgagor's  estate,  he  does  not  rest  ex- 
clusively on  his  contract,  but  seeks  something  beyond  it,  and  the 
costs  of  his  suit  are  the  first  charge  if  the  estate  proves  deficient." 

So  where  a  mortgagee  sets  up  an  unfounded  claim  or  an 
unjust  defence,  he  will  be  deprived  of  his  costs.  Where,  how- 
ever, the  contest  is  chiefly  between  a  first  and  a  third  mortgagee, 
the  position  of  the  latter  being  that  the  former  had  no  lien,  it  is 
not  equitable  to  charge  the  gross  proceeds  with  the  costs  and 
expenses  of  the  suit,  and  so  prejudice  a  second  mortgagee  who 
did  not  institute  the  litigation,  and  has  a  lien  upon  only  a  por- 
tion of  the  road.  In  such  a  case  it  was  ordered  that  one  half 
of  the  costs  should  be  paid  out  of  the  funds  which  were  going 
to  the  first  mortgagee,  and  the  other  half  out  of  the  funds  which 
were  going  to  the  second,  unless  the  property  proved  to  be  suffi- 
cient to  pay  all  the  mortgage  creditors  and  their  costs,  in  which 
event  the  costs,  etc.,  were  to  be  paid  at  the  expense  of  the 
defendant  company.^ 

§  732.  Costs  of  Unsecured  Creditors  seeking  to  enforce  Claims 
against  Receivers.  —  It  has  been  stated  above  that  a  bondholder 
suing  in  behalf  of  all  secured  creditors  is  entitled  to  have  his 
counsel  fees  charged  upon  the  fund  reclaimed  by  him,  A 
similar  principle  governs  the  case  in  which  the  establishment 
of  the  claim  of  an  unsecured  creditor  inures  to  the  benefit  of 
the  whole  class  in  which  he  belongs.  The  solicitor  to  whose 
exertions  this  result  is  due  has  a  lien  upon  the  property  for 
fees,  the  amount  of  which  is  computed  with  reference,  not  to  the 
claims  of  his  actual  clients,  but  to  the  aggregate  of  all  the 
claims  of  the  creditors  of  the  same  class. ^ 

1  'Meyer  v.  Johnston  (1875),  53  Ala.  becoming  worth  all,  or  nearly  all,  that 
237  ;  s.  c.  15  Am.  Ry.  Rep.  467.  they  called  for.     The  creditors  who  were 

2  Central  Railroad  &  Bkg.  Co.  of  Georgia  entitled  to  the  benefit  of  the  decree  had 
i\  Pettus  (1885),  113  U.  S.  116,  125.  The  only  to  await  its  execution  in  order  to 
raili-oad  companies  in  possession  of  the  receive  the  full  amount  of  their  claims  ; 
property  argued  that  the  utmost  the  court  and  that  result  was  due  to  the  skill  and 
could  do  was  to  charge  upon  it  such  ex-  vigilance  of  these  solicitors,  so  far  as  the 
penses  as  the  solicitor's  clients  themselves  result  of  litigation  may,  in  any  case,  be 
incurred,  and  that  the  compensation  referred  to  the  labor  of  counsel.  When 
claimed  in  respect  to  claims  filed  by  other  creditors  filed  their  claims,  they  had  notice 
holders  of  unsecured  bonds  should  not  by  the  bill  that  the  suit  was  brought,  not 
be  allowed.  The  Supreme  Court  of  the  exclusively  for  the  benefit  of  the  complain- 
United  States  disacroed  with  this  con-  ants  therein,  but  equally  for  those  of  the 
tention,  saying:  "  When  the  litigation  same  class  who  should  come  in  and  con- 
was  commenced,  these  unsecured  bonds  tribute  to  the  expenses  of  the  liti'^ntion. 
were  without  any  value  in  the  financial  Those  expenses  necessarilv  included  rea- 
market.     That  litigation  resulted  in  their  sonable  counsel  fees,   which,   upon  every 


718 


RAILWAY    BONDS    AND    MORTGAGES.  [CHAP.  XXXII. 


Petitions  by  interveners  in  foreclosure  suits  which  are  in  the 
nature  of  claims  against  receivers,  and  ask  for  order  of  the  court 
that  the  receivers  pay  them,  are  mere  interlocutory  applications, 
and  the  order  thereon,  whether  granting  or  refusing  the  power 
of  the  application,  are  not  final  hearings  or  decrees  within  the 
meaning  of  section  824  of  the  United  States  Revised  Statutes; 
and  no  docket  fee  for  final  hearing  should  be  taxed  thereon.^ 

§  733.  Sheriff's  Fees.  —  Where  a  code  provides  certain  fees  for 
a  sheriff  conducting  a  foreclosure  sale  in  which  the  execution 
plaintiff  becomes  the  purchaser,  he  is  entitled  to  the  same  fees 
if  one  not  a  party  to  the  suit  becomes  the  bidder  and  then 
transfers  his  bid  to  the  trustee. ^ 

§  734.  Amount  of  Attorney  and  Counsel  Fees  allowed  in  Fore- 
closure in  Discretion  of  Court.^  —  These  amounts  will,  of  course, 
depend  upon  whether  it  goes  through  simply  by  default,  or  is 
defended,  giving  rise  to  questions  of  considerable  importance, 
in  the  settlement  of  which  a  large  amount  of  time  and  labor  is 
expended.* 

In  a  case  in  which  "  the  services  were  rendered  under  the  eye 
of  the  court,  and,  in  the  foreclosure  proceedings  proper,  there 
was  no  substantial  contest,  the  whole  matter  being  practically 


ground  of  justice,  sliould  be  estimated 
with  reference  as  well  to  the  claims  of  the 
complainants  who  undertook  to  protect 
the  ricrhts  of  all  the  unsecured  creditors 
as  of  the  claims  of  those  who  accepted  the 
fruits  of  the  labors  of  complainants  and 
their  solicitors.  This  compensation  of  the 
solicitors  should  be  made  with  reference  to 
the  amount  of  all  claims  filed  in  the  cause, 
although  the  evidence  thereof  may  have 
been  retained  in  the  custody  of  the  respec- 
tive creditors  ;  excepting  from  such  esti- 
mate or  calculation  not  only  the  claims  of 
the  comi)lrtinants  named  in  the  bill,  and 
of  the  unsecured  creditors  who  may  have 
had  special  contracts  with  these  solicitors 
or  settled  witli  them,  but  also  such  claims 
purchased  by  the  companies  holding  the 
]iroperty,  as  were  not  filed  for  allowance 
under  the  decree."  The  court  reduced  the 
allowance  made  by  the  trial  judge  one-half, 
thus  giving  the  solicitor  the  same  percent- 
age of  the  claims  of  the  creditors  wlio 
were  not  jiarti<-s  as  lie  had  contracted  for 
with  his  immi'diatc  clients. 

1   Missouri    Puc  P,.  Co.  v.  Tex.   &  Pac. 
II.  Co.  (1889),  38  Fed.  Rep.  775. 


2  Gilman  v.  Des  Moines  Valley  R.  Co. 
(1876),  42  Iowa,  495. 

3  Bronson  v.  La  Crosse  &  Milwaukee 
R.  Co.  (1884),  2  WalL  283. 

*  Walker  v.  Quincy,  M.  &  P.  R.  Co. 
(1886),  28  Fed.  Rep.  734.  In  this  case 
two  counsel  were  awarded  $5,000  and 
one  $2,000  for  a  litigated  suit. 

An  assistant  employed  by  the  counsel 
appointed  by  the  court  to  act  as  legal 
adviser  to  the  receivers  in  the  \Vaba.sh 
litigation  was  awarded  by  the  AVestern 
master  $7,500  for  services  extending  over 
about  four  years  and  a  half,  the  report 
stating  that  his  special  duties  brought 
him  more  frequently  before  the  court 
than  any  other  solicitor  in  tlie  cause.  In 
the  same  report  it  was  recommended  that 
the  solicitor  of  the  Wabash  Railway  Com- 
pany, at  whose  instance  the  receivers  were 
a])pointed,  should  receive  the  same  amount. 
These  allowances  seem  not  to  have  been 
excepted  to  by  the  purchasing  committee. 
The  master's  report  is  summarized  in  1 
i;y.  &  Corp.  L.  J.  598. 


§  735. j  COMPENSATION    OF    TRUSTEES    AND    OTHERS.  719 

carried  out  in  pursuance  of  a  plan  of  reorganization,"  the  court 
was  of  opinion  that  8100,000  was  an  ample  compensation  for 
the  solicitors  representing  the  trustees  of  the  several  mortgages 
in  suit. ^ 

Large  allowances  pending  a  receivership  are  to  be  deprecated. 
The  })roper  time  to  examine  and  settle  such  matters  as  counsel 
fees  is  at  the  end  of  the  litigation.  All  allowances  made  in  the 
meantime  for  professional  S(irvi(;cs  should  be  small. ^ 

For  services  of  counsel  relating  solely  to  the  receivershij),  a 
fair  and  just  method  of  compensation  is  by  annual  allowance 
rather  than  by  attempting  to  value  each  item  of  service.^ 


Article   III.  —  Out  of  what  Funds   Compensation  and   Ex- 
penses IN  Foreclosure  Suits  are  paid. 

§  735.  Mortgaged  Property  must  in  general  bear  Expenses  of  its 
Administration  in  Court  of  Equity.  —  It  is  by  this  fundamental 
principle  that  allowances  to  trustees  for  counsel  fees  and  other 
expenses  are  justified.* 

This  principle  is,  of  course,  equally  applicable  whether  the 
estate  is  in  the  hands  of  a  trustee  properly  so  called,  or  of  a 
receiver,  and,  by  analogy,  where  a  receiver  is  asked  for,  and 
the  court,  instead  of  appointing  an  officer  of  its  own  to  conduct 
the  business,  leaves  it  in  charge  of  the  company's  agents,  direct- 
ing them  to  report  the  amount  of  the  earnings  for  the  informa- 
tion and  protection  of  the  mortgagees.^ 

^  Easton  v.  Houston  &  Texas  Central  come  before  the  court  in  the  character  of 

R.  Co.  (18S9),  40  Fed.  Rep.  189.  trustees  of  any  property   or  fund  which 

2  Central    Trust    Co.    v.    Wabash,    St.  would  authorize  the  court  to  chai-ge  upon 

Louis,  &  Pac.  R.  Co.  (1885),  2.3  Fed.  Rep.  that    property   or    fund    their    expenses. 

67.0,   per  Brewer,   J.,   who  reduced  a  fee  "They  have  not,"  it  was  reasoned,   "and 

allowed    by   the   master   from   $6,000    to  have   never   been,    in    possession   of    the 

$2,000.  property.     They    hold    a    legal    title    as 

8  P)Oston  Safe  Deposit  &  Trust  Co.  v.  security  for  certain  creditors  of  the  com- 

Chaniberlain    (C.   C.  A.,    1895),   66   Fed.  paiiy,   and,   in  substance,   it  is  the  same 

Rep.  847.  thing,  for  the  purposes  of  this  action,  as 

^  Trustees   v.   Greenough    (1882),    105  if  the  title  had  been  conveyed  directly  to 

U".   S.    52",    535  ;    s.  c.    12  Am.   &   Eng.  the  creditors.     There  was  a  convenience 

R.  R.  Cas.  345  ;  Morton  v.  New  Orleans  &  in  selecting  some  person  to  take  the  title 

Selma  R.  Co.  (1885),  79  Ala.  590.  for  the  benefit  of  those  to  whom  the  bonds 

'  Stewart  ;,'.  Chesapeake  &  Ohio  Canal  might  be  negotiated.     The  mortgagees  in 

Co.  (1881),  5  Fed.  Rep.  149,  158.  this  case,  who  assumed  that  office,  might 

In  Coe  V.  Columbus,  Piqua,  &  Indian-  veiy   properly  have   stijailated    with   the 

apolis  R.  Co.  (18.")9),  10  Ohio  St.  372,   it  company  for  a  compensation,  and  perhajis 

was  considered  that  the  trustees  who  file  a  did    so.      But    we  cannot  now  recognize 

bill  for  foreclosure  of  the  mortgage  do  not  them  in  any  other  character  than  as  ordi- 


720  RAILWAY   BONDS   AND    MORTGAGES.         [CHAP.  XXXII. 

Most  of  the  cases  within  the  scope  of  this  treatise  which 
ilhistrate  this  principle  are  cases  where  the  mortgage  is  being 
foreclosed  and  a  receiver  is  appointed,  or  the  trustees  have 
entered  into  possession ;  but  the  same  principle  is  operative 
whatever  the  nature  of  the  suit  may  be  by  which  the  trust  is 
being  enforced.  Thus  it  has  been  adjudged  that  costs  should 
follow  a  bill  to  redeem  filed  by  a  junior  mortgagee  whose  rights 
were  held  not  to  have  been  cut  off  by  the  decree,  and  that  those 
costs  should  be  charged  upon  the  property.^ 

If  a  suit  is  pending  against  a  railroad  company  when  the 
receiver  is  appointed,  and  the  receiver,  being  ordered  to  defend 
the  suit,  engages  the  services  of  the  counsel  retained  by  the 
company,  the  trust  fund  is  chargeable  with  the  fees  earned  by 
services  during  the  receivership,  but  not  those  earned  prior  to 
the  time  when  the  court  assumed  control  of  the  property.  As 
to  the  latter  his  claim  is  against  the  company,  and  can  l)e 
paid  only  from  the  surplus  in  hand  after  the  satisfaction 
of  the  various  liens,  demands,  and  expenses  of  the  foreclosure 
suit.  2 

§  736.  Necessary  Charges  Lien  on  Mortgaged  Property.  —  The 
manner  in  which  the  above  principle  is  worked  out  by  the  courts 
is  to  make  the  necessary  charges  of  managing  the  trust  estate  a 
first  lien  upon  it.^  Thus  a  claim  of  a  trustee  for  his  personal 
services  constitutes  a  lien  upon  the  trust  estate,  and  he  will  not 
be  compelled  to  part  with  the  legal  title  of  the  property  until 
the  claim  is  satisfied.* 

The  operation  of  this  rule  cannot  be  evaded  by  an  arrange- 
ment under  which  the  bondholders  secured  by  a  mortgage 
subsequent  to  that  foreclosed  pay  the  amount  of  the  redemption 
money  fixed  by  the  decree  directly  to  the  parties  represented  by 
the   trustee    who    controlled    the    suit.     Since   he   could   have 


nary   mortgagees,    and    feel    no   more   at  of  the  foreclosure  sale,  though  the  decree 

liberty  to  pay  them  for  their  trouble,  or  may  be  set  aside  and  he  released  from  his 

to  pay  them  their  counsel  fees,  out  of  the  bid,  will  be  allowed  ordinary  taxable  costs, 

proceeds  of  a  sale  of  the  property,  than  but  not    his   counsel    fees   and    expenses, 

we   would  in    any   ordinary    case."     This  out  of  the  trust  fund.      Farmers'  Loan  & 

view  of  the  position  of  a  mortgage  trustee  Trust  Co.  v.  Green  (1897),   79  Fed.   Rep. 

seems   to   be   altogether  opposed    to  that  222. 

which    is   held    by    the   majority   of    the  Salary,    expenses,    and   costs  of   a    re- 
courts,  ceiver    are   payable    from    the    funil    r<"al- 

1  Simmons  v.   Taylor  (ISS.")),   23   Fed.  ized.     Batten  v.   Wedgwood  Coal  &  Iron 
Rep.  819.  Co.,  28  Ch.  Div.  317. 

2  i'.lair  V.  .St.    Louis,    II.    &   K.   R.  Co.  »  Perry  on  Trusts,  907. 

(18H4),  20  Fed.  Hep.  3.51.  ■•   Hensselaei    &    .Saratoga    R.     Co.    v. 

A  purchaser  opposing  the  confirmation  Miller  (1874),  47  Vt.  146. 


§  737.]  COMPENSATION   OF   TRUSTEES   AND   OTHERS.  721 

retained  enough  of  that  money,  if  it  had  come  to  his  hands,  to 
satisfy  his  reasonable  charges  for  services  and  disbursements,  a 
court  of  equity  will  not  accede  to  an  application  to  compel  him 
to  convey  the  legal  title  thus  left  outstanding  in  him,  unless  the 
petitioners  consent  to  do  what  he  could  have  done  for  himself, 
if  the  arrangement  which  prevented  his  having  control  of  the 
money  had  not  been  made.  ^ 

So  also  receivers  and  trustees  are  entitled  to  repayment  of 
their  reasonable  expenses  and  charges,  in  preference  to  all  other 
claims  upon  the  property  of  whatever  nature. ^ 

The  general  principle  also  avails  in  favor  of  one  who,  by  his 
professional  services  in  behalf  of  the  unsecured  creditors,  estab- 
lishes their  right  to  be  paid  a  portion  of  the  money  in  the 
receiver's  hands.  The  fee  thus  earned  is  a  lien  upon  the  fund 
reclaimed,^ 

A  solicitor  who  is  employed  by  the  receiver  to  sue  for  a  tract 
of  land  held  adversely,  agreeing  to  accept  as  his  fee  one-half 
the  recovery,  is  entitled,  after  the  sale  of  the  entire  property  of 
the  company,  to  pursue  the  proceeds  and  establish  his  claim 
against  the  fund  instead  of  the  land.** 

Where  a  large  body  of  land  is  conveyed  to  trustees  to  secure 
the  payment  of  the  principal  and  interest  of  a  great  number  of 
railroad  bonds  which  have  a  long  time  to  run  before  maturity, 
and  the  grantor,  the  railroad  company,  in  the  trust  deed  reserves 
the  right  to  sell  the  lands  and  pay  the  proceeds  of  the  sales 
thereof  to  the  trustee,  after  deducting  expenses  incurred  in 
executing  the  trust,  it  may  retain  the  proper  amount  for  expenses 
in  making  the  sales,  and  may  also  pay  the  taxes  out  of  the 
proceeds  thereof.^ 

§  737.  Lien  for  Counsel  Fees.  —  The  lien  for  counsel  fees  will 
not  be  lost  by  reason  of  death  of  the  trustee  who  employed  the 
counsel  subsequent  to  the  commencement  of  the  foreclosure 
proceedings,  and  the  litigation  being  subsequently  carried 
through  by  a  bondholder.  From  the  time  of  the  retainer  the 
funds  to  be  derived  from  the  mortgaged  property  are  chargeable 
with  the  liability  consequent  upon  the  retainer,  and  it  matters 
not  whether  those  funds  are  obtained  by  the  trustee,  or  in  con- 

1  Rciissplaer  &  Saratoga  R.  Co.  v.  (1885),  113  LT.  S.  116.  For  a  more  extended 
Miller  (1874),   47  Vt.  146.  statement  of  this  case,  see  above. 

2  Ellis  V.  Boston,  Hartford,  &  Erie  R.  *  Hand  v.  Savannah  &  Charleston  II. 
Co.     (1871),     107    Mass.    1;    McLnne    v.  Co.  (1883),  21  S.  C.  162. 

riacerville  &  Sacramento  Valley  R.   Co.  *  Nickerson    v.    Atchison,    Topeka,    & 

(1885),  60  Cal.  606.  Santa  Fe  R.  Co.  (1881),  17  Fed.  Rep.  408. 

3  Central  Railroad  &  Bkg.  Co.  v.  Pettus 

46 


722  BAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  XXXII. 

sequence  of  his  death,  or  of  the  action  of  the  court,  by  other 
parties  having  charge  of  the  property/ 

§  738.  General  Fund,  -when  Chargeable  and  "when  not.  —  Ordi- 
narily the  allowances  considered  in  the  present  chapter  are 
payable  out  of  the  general  fund  involved  in  the  litigation. ^ 

A  trustee  in  a  divisional  mortgage  who  is  made  party  to  a 
suit  brought  to  foreclose  a  general  mortgage  junior  to  his,  and 
incurs  expenses  in  employing  counsel  to  defend  his  interests,  is 
entitled  to  have  those  expenses  allowed  out  of  the  fund,  in  the 
hands  of  the  receiver,  even  where  he  has  withdrawn  from  the 
litigation  and  taken  proceedings  to  enforce  his  own  mortgage. ^ 
But  this  rule  is  qualified  wherever  its  operation  would  be  inequi- 
table, as  in  a  case  in  which  a  judgment  creditor  of  an  insolvent 
corporation  seeks  to  set  aside  an  assignment  of  the  property  in 
trust  for  the  benefit  of  certain  bondholders,  who  are  eventually 
declared  to  have  a  prior  claim  upon  the  proceeds  of  the 
property. 

Under  such  circumstances  the  creditor  is  suing  in  antagonism 
to  the  preferred  bondholders,  and,  as  the  efforts  of  the  counsel 
are  valuable  to  him  precisely  in  the  same  proportion  as  they  are 
detrimental  to  his  adversaries,  it  would  clearly  be  unjust  to 
charge  the  fees  of  such  counsel  upon  the  trust  fund  in  such  a 
manner  as  to  diminish  the  amount  payable  to  the  bondholders. 
Reasonable  counsel  fees,  however,  may  properly  be  allowed  out 
of  any  fund  that  may  remain  after  paying  costs  of  the  suit,  and 
discharging  the  preferred  claims.* 

Similarly  an  attorney  who  appears  by  the  direction  of  the 
trustee  of  one  class  of  bonds,  in  a  suit  in  which  the  liability  of 
a  railroad  company  to  taxation  is  successfully  resisted,  is  not 
entitled  to  be  paid  out  of  the  common  fund,  when  another  class 
of  bondholders,  whose  claim  that  fund  is  insufficient  to  satisfy, 
are  declared  to  have  a  prior  right  to  it.  As  none  of  the  class 
whom  the  attorney  represented  can  participate  in  the  distribu- 
tion of  the  fund,  it  follows,  of  necessity,  that  their  attorney, 
who  can  claim  only  through  them,  is  in  like  manner  excluded. 
The  mere  fact  of  his  services  having  inured  to  the  ultimate 
advantage  of  the  prevailing  class  of  bondholders  does  not 
strengthen  his  claim,  as  this  result  is  merely  one  of  the  inci- 

1  Cowdrey  v.  Galveston,  IT.  &  11.  R.  8  Central  Trust  Co.  v.  Wabash,  St. 
Co.  (1877),  93  U.  S.  352.                                  Louis,  &  Pac.  R.  Co.  (1888),  36  Fed.  Rep. 

2  Manil  V.  Savannah  &  Charleston  R.     622. 

Co.  (18S2),  17  S.  C.  219  ;  s.  c.  12  Am.  &  *  Morton  v.  New  Orleans  &  Selraa  R, 

Eng.  R.  R.  Crts.  495,  and  the  cases  cited     Co.  (1885),  79  Ala.  590. 
in  the  preceding  sections  of  this  chaj)ter. 


§  739.]  COMPENSATION   OF   TRUSTEES   AND   OTHERS.  723 

dental  advantages  which  sometimes  go  beyond  the  immediate 
object  of  the  employment.  For  such  benefits  the  law  gi^v^es  no 
compensation.  ^ 

So,  also,  where  the  mortgage  provides  that  the  trustees  shall 
be  "entitled  to  receive  proper  compensation  for  every  labor  or 
service  performed  in  the  discharge  of  such  trust  in  case  they 
shall  be  compelled  to  take  possession  of  said  premises,  or  any 
part  thereof,  and  manage  the  same,"  they  should  not,  in  a  suit 
brought  by  the  company  to  redeem  the  estate,  after  the  trustees 
have  gone  into  possession,  be  allowed  the  fees  of  counsel 
employed  in  the  suit,  nor  the  amount  of  an  insurance  procured 
without  the  permission  of  the  mortgagor.  Such  expenditures 
are  in  the  interest  of  the  bondholders,  and  must  be  met  by 
them.  2 

Costs  awarded  in  favor  of  the  party  who  is  finally  decided 
to  have  a  legal  title  to  certain  rolling-stock  which  he  has 
released  to  a  receiver  under  an  agreement  that  he  shall,  upon 
the  determination  of  the  controversy  in  his  favor,  be  paid  a 
specified  sum  as  the  price,  are  not  a  lien  on  the  general  fund, 
even  though  the  sum  itself  which  is  to  be  paid  under  the  agree- 
ment is  expressly  made  chargeable  as  a  first  lien  on  the  property 
by  virtue  of  the  authority  conferred  on  the  receiver  by  the 
court.  ^ 

§  739.  Liability  of  Prior  Mortgagee  for  Expenses  of  Suit  by  Junior 
Mortgagees.  — Where  a  receiver  is  appointed  at  the  instance  of 
the  trustee  of  a  second  mortgage,  the  trustee  of  the  first  mort- 
gage not  being  made  a  party  to  the  suit,  and  taking  no  part  in 
the  proceedings  except  to  intervene  by  petition  and  join  in  two 
unsuccessful  efforts  to  make  a  sale,  and  the  property  is  finally 
decreed  to  be  sold  subject  to  the  first  mortgage,  the  bondholders 
secured  by  that  mortgage  are  not  liable  for  any  costs  or  any 
expenses  except  those  incurred  through  the  intervention  of  their 
trustee,  and  his  participation  in  the  two  unsuccessful  attempts 
to  effect  a  sale.  They  cannot  be  assessed  for  the  commissions 
of  the  trustee  of  the  second  mortgage  or  of  the  receiver.  If 
the  proceeds  of  the  sale  are  insufficient  to  afford  adequate 
security  and  indemnity  to  the  trustees  and  receivers,  the  parties 
at  whose  instance  the  proceedings  were  instituted  will  be 
required  to  provide  the  means  of  payment.* 

1  Hand  v.  Savannah  &  Charleston  R,  3  yilas  v.  Page  (1887),  106  N.  Y,  439  ; 
Co.  (1883),  21  S.  C.  162.  s.  c.  13  N.  E.  Rep.  743. 

2  Boston  &  Worcester  Railroad  Cor-  *  Tome  v.  King  (1891),  64  Md.  166  ; 
poration  v.  Haven  (1864),  8  Allen  (Mass.),,  s.  G.  21  Atl   Rep  279. 

359. 


724  RAILWAY   BONDS   AND   MORTGAGES.         [CHAP.  XXXII, 


Article  IV.  —  Practice. 

§  740.  Proper  Time  to  settle  Compensation  and  Expenses.  — 
The  proper  time  to  settle  allowances  is  at  the  end  of  the  litiga- 
tion. Thus  receivers  will  not  be  allowed  to  pay  more  than  a 
part  of  the  fees  of  their  counsel  pending  a  foreclosure  suit.  The 
balance  must  stand  until  the  close  of  the  proceedings,  when  the 
court  will  decide  what  final  allowance  is  to  be  made,^ 

The  ordinary  course  is  to  allow,  out  of  the  funds  produced  by 
the  sale  or  use  of  the  mortgaged  property,  the  amount  due  to  the 
trustees  for  personal  services  and  expenses  incurred  in  the 
execution  of  the  trust,  before  paying  anything  to  the  bond- 
holders.^ 

The  decree  of  foreclosure  may  direct  the  Master  in  Chancery 
to  inquire  as  to  the  proper  compensation  for  the  trustees  and 
their  counsel,  and  this  inquiry  may  be  proceeded  with  after  the 
confirmation  of  the  sale  under  the  decree.^ 

§  741.  Trustee's  Claim  for  Compensation  and  Expenses,  how- 
asserted  after  Redemption  of  Property.  —  Where  the  trustees  in  a 
first  mortgage  have  foreclosed  it,  and  junior  mortgagees  redeem 
the  property  by  payment  of  the  amount  fixed  in  the  decree,  the 
trustees  may  file  a  cross-bill  to  assert  their  lien  for  services 
and  expenses,  and  have  the  proper  amount  fixed  in  that 
manner.^ 

§  742.  Rehearing  after  Remand  by  Appellate  Court. —  Where  the 
lower  court  has  determined  the  amount  of  the  fund  to  be  dis- 
tributed, and  awarded  the  claimant  a  certain  percentage  for  the 
personal  services,  which,  for  reasons  assigned,  exceeds  that  pre- 
scribed by  statute,  and  an  appeal  is  thereafter  taken  upon  the 
question  whether  anything  is  really  due  on  account  of  those 
services,  the  appellate  court  will  not,  if  the  question  is  decided 
in  the  claimant's  favor,  but  the  statutory  amount  deemed  to  be 
adequate,  order  a  rehearing  for  the  purpose  of  settling  the  sum 
to  be  paid.     The  commission  being  thus  referred  to,  a  definite 

1  Central  Trust  Co.  r.  Wabash,  St.  221  ;  Bronson  v.  La  Crosse  &  Milwaukee 
Louis,  k  Pac.  K.  Co.  (1885),  23  Fed.  K.  Co.  (1864),  2  Wall.  283 ;  Mercantile 
Rep.   675.  Trust  Co.   v.   Missouri,  K.   &  T.  R.   Co. 

2  Smith's  Execrs.  v.  Washington  City,  (1889),  41  Fed.  Rep.  8 ;  s.  c.  43  Am.  & 
Va.    Midi.    &    Great    Southern    K.    Co.  Eug.  R.  U.  Cas.  469. 

(1880),  33  Gratt.  (Va.)  617  ;  8.  c.  1  Am.  »  Walkers.  Quincy,   M.  &  P.  R.   Co. 

k  Erifr.  R.  R.  Cas.   493  ;  Newport  &  Cin-  (1886),  28  Fed.  R.'p.  734. 

ciniKili  I'.ridf,'e  Co.  v.  Douglass  (1877),   12  *  Rensselaer   &    Saratoga    R.    Co.    v. 

P,iisli  (Ky.),  C73  ;  h.  c.  18  Am.   Ry.  Rep.  Miller  (1874),  47  Vt.  146. 


§  743.]  COMPENSATION   OP  TRUSTEES   AND   OTHERS.  725 

standard  can  be  accurately  computed  without  the  necessity  of 
further  proceedings.^ 

§  743.  Exceptions  to  Amounts  allovred  by  the  Master,  etc.  — 
Exceptions  to  the  amounts  allowed  by  the  master  for  the  salaries 
of  the  various  officers  employed  by  a  receiver  should  be  precise 
and  raise  well-defined  issues.  A  vague  exception  launched  at 
the  compensation  generally  of  all  the  officers  indiscriminately, 
and  not  stating  what  compensation  was  allowed  to  any  one  of 
them,   will  be  overruled. ^ 

1  WoodruflF  V.  New  York,  L.  E.  &  W.  ^  Stanton  v.  Alabama  &   Chattanooga 

R.  Co.  (1891),  129  N.  Y.  27  ;  s.  c.  29  N.     R.  Co.  (1875),  2  Woods,  506. 
E.  Rep.  251  ;  5  Am.  &  Eng.  R.  R.  Cas.  89. 


726 


RAILWAY   BONDS   AND   MORTGAGES.       [CHAP.  XXXIII. 


CHAPTER    XXXIII. 


FORECLOSURE  DECREES. 


Art.  L  - 

-Provisions  of  Decree. 

§754. 

Decree   may  find  Amount   due 

§744. 

Conformity  of  Decree  to  Provi- 

on  Bonds,    before    Proof    of 

sions  of  Mortgage. 

same. 

745. 

Conformity  of  Decree  to  Bill. 

755. 

Decree  nisi  may  be  rendered  be- 

746. 

Conformity  of  Decree  to  Man- 

fore Production  of  Bonds. 

date  of  Appellate  Court. 

756. 

Allowance  of  Time  for  Payment 

747. 

Provisions  of  Ordinary  Foreclos- 

of Amount  found  due. 

ure  Decree. 

757. 

Provision    of    Decree   reserving 

748. 

Deficiency  Judgments. 

Control  of  the  Property. 

749. 

Provisions  of  Decree  foreclosing 

758. 

Modifications    of    Decree,    and 

Mortgage  on  Road  in  Posses- 

what is  Final  Decree, 

sion  of  Junior  Mortgagee. 

Art.  IL  - 

—  Effect  of  Decree. 

750. 

Provisions  of  Decrees  directing 

§  759. 

Effect    of    Foreclosure    Decree 

Sale  subject  to  Liens. 

generally. 

751. 

Provisions  of   Decree   directing 

760. 

Conclusiveness  of  Decree. 

Sale  before  Settlement  of  Con- 

76L 

Federal  Courts  bound  by  Deci- 

troversies regarding  Final  Dis- 

sion of  State  Courts  respect- 

position of  Assets. 

ing  State  Statutes. 

752. 

Decree  preserving  Lien  of  Un- 

762. 

Estoppel  by  Decree. 

matured  Part  of  Debt. 

763. 

Decree  pro  confesso. 

753. 

Decree  ordering  Trustee  to  sell 

764. 

Decree  by  Consent. 

before    Maturity    of    Bonds, 

765. 

Estoppel  by  Acquiescence  in  De- 

though   not    authorized     by 

cree. 

Trust  Deed. 

766. 

Estoppel  of  Junior  Lienor. 

Article  I.  —  Provisions  of  Decree. 

§  744.  Conformity  of  Decree  to  Provisious  of  Mortgage.  —  Since 
the  parties  to  the  mortgage  are  at  liberty  to  regulate,  by  express 
agreement  therein,  the  manner  in  which  the  property  subjected 
to  the  lien  shall  be  disposed  of  in  case  of  default,  the  power  of 
the  court  may  sometimes  be  limited  by  the  contents  of  the 
instrument.  But  the  precise  method  by  which  effect  is  to  be 
given  to  stipulations  of  this  sort  is  necessarily  a  matter  within 
the  control  of  the  court.  Thus  where  the  mortgage  stipulates 
that  there  shall  be  no  judicial  sale  for  cash  unless  the  amount 
bid  at  the  sale  shall  equal  the  sum  due  to  the  bondholders,  and 
as  an  alternative  a))points  a  method  by  which  a  reorganization 
of  the  debtor  company  is  to  be  effected  in  accordance  with  the 


§  745.]  FORECLOSURE  DECREES.  727 

wishes  of  the  majority  of  such  bondholders,  it  is  not  error  to 
decree  that  the  mortgaged  property  shall  be  sold  to  the  highest 
and  best  bidder,  and  that  the  trustee  shall  be  authorized  and 
directed  to  bid  at  the  sale,  as  trustees  for  the  lirst-mortgage 
bondholders,  at  least,  the  amount  of  principle  and  interest  of 
the  bonds.  ^ 

Nor  can  a  stipulation  as  to  terms  of  a  sale  under  the  power 
in  the  mortgage  —  as  that  the  bonds  should  in  such  a  case  be 
received  as  part  of  the  price,  at  a  rate  to  be  fixed  in  a  certain 
manner  —  be  construed  so  as  to  bind  the  court  in  regard  to  a 
sale  in  foreclosure  proceedings. ^ 

§  745.  Conformity  of  Decree  to  Bill.  —  The  general  rule,  that  a 
complainant  cannot  be  awarded  by  a  decree  more  than  he  claims 
in  his  bill,  is  applicable  to  a  decree  pro  confesso  as  well  as 
others.  Thus  it  is  erroneous,  where  such  a  decree  has  been 
entered  in  a  suit  to  foreclose  for  default  in  the  interest  only, 
and  the  sale  consummated  and  confirmed,  to  make  a  further 
decree  that  the  complainant  recover  of  the  company  the  balance 
of  the  principal  of  the  bonds,  left  after  applying  the  proceeds  of 
the  sale  to  their  payment,  there  being  no  provision  in  the  bonds 
or  mortgage  whereby  such  principal  can  be  declared  due  before 
the  date  of  their  maturity.^ 

1  Sage  V.  Central  Railroad  Co.  (1878),  chaser  of  bonds  to  apply  to  his  bid,  or  the 
99  U.  S.  334,  341.  proportion  in  which  bonds  should  be  so 

2  Farmers'  Loan  &  Trust  Co.  v.  Green  received,  or  the  manner  in  which  their 
Bay  &  Minnesota  R.  Co.  (1881),  10  Biss.  value  should  be  ascertained,  than  it  would 
207  ;  s.  c.  6  Fed.  Rep.  100.  In  the  be  to  adopt  the  directions  to  the  trustees 
course  of  his  opinion.  Judge  Dyer  said  :  contained  in  the  mortgage  as  to  the 
"  The  sale  authorized  in  the  mortgage  was  advertisement  of  the  property  for  sale. 
one  to  be  made  in  certain  contingencies  Undoubtedly  the  court  might  adopt,  so 
by  the  trustee.  It  was  a  sale  to  be  made  far  as  practicable,  the  method  of  proced- 
in  accordance  with  the  stipulations  of  the  ure  pointed  out  in  the  mortgages  ;  but  it 
parties.  The  course  of  procedure  there  pre-  would  not  be  error  affecting  the  validity 
scribed  was  one  to  be  pursued  in  case  of  a  of  the  decree  not  to  do  so,  unless  wrong 
sale  without  foreclosure,  and  it  was  com-  and  injustice  were  apparent  in  the  decree, 
petent  and  proper  for  the  parties  to  place  and  I  am  unable  to  perceive  wherein  the 
upon  the  trustee  certain  restrictions,  and  decree  in  the  particular  under  considera- 
to  define  the  limits  within  which  he  must  tion  fails  to  recognize  the  rights  of  all 
act   in   making  such  a  sale.     But   those  parties." 

provisions   could   not   bind   the   court   if  ^  Ohio    Central    Ry.     Co.    v.    Central 

foreclosure   proceedings   should   be   insti-  Trust  Co.  of  New  York  (1890),  133  U.  S. 

tuted,  and  a  sale  should  be  made  under  83  ;  s.  c.  10  Sup.   Ct.  Rep.  235.      "The 

its   directions.       In    such    case   the    sale  fact  that  a  bill  was  taken  as  confessed," 

would  have  to  be  made  according  to  the  said   Chief   Justice  Fuller,    "did   not  of 

usual  course  of   practice  in  judicial  pro-  itself   justify    giving    complainant    more 

ceedings,  and  the  court  would  be  no  more  than   it   claimed.     Under   the   rules   and 

bound    to   adopt    the   provisions   of    the  practice  of  this  court  in  equity,  a  decree 

mortgage  as  to  the  acceptance  from  a  pur-  2^^^  confesso  is  not  a  decree  as  of  course, 


728 


RAILWAY   BONDS   AND    MORTGAGES.       [CHAP.  XXXIII. 


But  a  decree  is  not  open  to  objection  merely  because  it  deter- 
mines matters  not  specifically  presented  by  the  bill.     Thus,  as 


according  to  the  prayer  of  the  bill,  uor 
merely  such  as  the  complainant  chooses 
to  take  it,  but  that  it  is  made,  or  should 
be  made,  by  the  court  according  to  what  is 
proper  to  be  decreed  upon  the  statements 
of  the  bill  assumed  to  be  true.  If  the 
allegations  are  distinct  and  positive,  they 
may  be  tak  n  as  true  without  proof;  but 
if  they  are  indefinite,  or  the  demand  of 
the  complainant  is  in  its  nature  uncertain, 
the  requisite  certainty  must  be  afforded 
b}'  proof.  But  in  either  event,  although 
the  defendant  may  not  be  allowed  on 
appeal  to  question  the  want  of  testimony 
or  the  insufficiency  or  amount  of  the  evi- 
dence, he  is  not  precluded  from  contesting 
the  sufficiency  of  the  bill,  or  from  insist- 
ing that  the  averments  contained  in  it  do 
not  justify  the  decree. 

"  Under  the  18th  rule  in  equity,  where 
the  bill  is  taken  pro  confesso,  the  cause  is 
'  jiroceeded  in  ex  imrte,^  and  the  matter  of 
the  bill  may  be  decreed  by  the  court ; 
and  hence,  if  a  decree  be  passed  not  con- 
fined to  the  matter  of  the  bill,  it  may  be 
attacked  on  appeal  for  that  reason.  By 
the  92d  rule  it  is  provided  that  in  suits 
in  equity  for  the  foreclosure  of  mortgages 
'a  decree  may  be  rendered  for  any  balance 
that  may  be  found  due  to  the  complain- 
ants over  and  above  the  proceeds  of  the 
sale  or  sales.'  Assuming  that  a  deficiency 
decree  might  be  rendered  in  the  absence 
of  a  specific  prayer  for  that  relief,  never- 
theless the  case  made  by  the  bill  must 
show  that  the  amount  is  due  ;  for  other- 
wise it  cannot  properly  be  found  so.  This 
rule  does  not  authorize  the  Circuit  Courts 
to  find  a  balance  due  because  partial  ex- 
tinguishment has  been  effected  by  a  sale, 
if,  as  a  matter  of  fact,  the  indebtedness  is 
not  then  payable. 

"  The  bill  here  did  not  seek  relief  as  to 
the  second  mortgage,  which  is  only  re- 
ferred to  as  a  subordinate  lien,  nor  did  it 
claim  that  anything  except  interest  was 
due  upon  the  first  mortgage.  It  sought 
the  establishment  and  enforcement  of  the 
first-niortgfige  lien  aii<l  the  forecdosuie  of 
the  eipiity  of  redeni])tioii.  The  amount 
realized  paid  the  outstanding  interest  and 


a  j^art  of  the  principal.  Under  such  cir- 
cumstances and  upon  these  pleadings  the 
deficiency  decree,  which  is  a  judgment  for 
the  recovery  of  so  much  money  with  exe- 
cution, was  improvidently  entered.  With- 
out discussing  the  extent  of  the  franchises 
authorized  to  be  sold  under  the  mortgage, 
we  are  of  opinion  that  the  appeal  was 
properly  taken  in  the  name  of  the  defend- 
ant company." 

The  provision  of  the  New  York  Code 
of  Civil  Procedure,  §  1207,  providing  that, 
"  where  there  is  no  answer,  the  judgment 
shall  not  be  more  favorable  to  the  plaintiff 
than  that  demanded  in  the  complaint," 
was  intended  for  protection  of  defendants 
who  suffer  default :  it  cannot  be  invoked 
in  an  attack  upon  the  judgment  by  one 
not  interested  in  the  action.  Where, 
therefore,  an  action  is  brought  by  a  trus- 
tee for  bondholders  to  foreclose  a  railroad 
mortgage,  the  amount  of  outstanding 
bonds  is  stated  at  a  less  amount  than 
that  found  by  the  referee  to  whom  it  was 
referred  to  compute  the  amount  due,  that 
provision  is  not  available  to  a  bondholder 
moving  to  set  aside  the  judgment  entered 
or  the  report  and  a  sale  thereunder.  Peck 
V.  New  York  &  New  Jersey  R.  Co.  (18S1), 
85  N.  Y.  246  ;  s.  c.  7  Am.  &  Eng.  R.  K. 
Cas.  422. 

A  committee  of  bondholders,  represent- 
ing the  proper  amount  in  value  of  the 
bonds  by  the  terms  of  a  railroad  mortgage, 
requested  their  trustee  to  institute  a  suit 
for  foreclosure  for  the  unpaid  and  past-due 
interest.  They  further  declared  they  did 
not  wish  the  principal  declared  due.  The 
trustee  filed  such  a  bill.  Months  after- 
wards there  were  further  defaults  at  inter- 
est periods,  and  under  the  mortgage  pro- 
visions the  trustee  amended  his  bill  and 
elected  to  declare  the  principal  of  the 
bonds  due,  and  in  the  amended  bill 
prayed  foreclosure  for  the  whole  amount. 
The  election  of  the  trustee  to  declare  the 
whole  sum  due  was  never  objected  to  by 
anv  one,  and  the  company  answered  the 
bill. 

The  court,  wliile  stating  that  this  last 
proceeding  would  have  been  properly  by 


§  745,]  FORECLOSURE  DECREES.  729 

a  chancellor  must,  in  passing  upon  the  claims  of  the  bond- 
holders of  various  classes,  necessarily  decide  in  what  order 
those  claims  shall  be  paid,  the  validity  of  the  decree  cannot  be 
questioned  on  the  ground  that  the  holders  of  the  bonds  of  one  of 
those  classes  asserted  their  right  of  priority  in  ex  parte  proceed- 
ings, and  that  the  chancellor  acted  upon  the  application  without 
notice  to  the  other  bondholders.^ 

The  prayer  for  "such  other  and  further  relief"  is  quite 
liberally  construed  in  this  connection.  For  example,  although 
the  remedy  asked  for  specifically  is  strict  foreclosure,  the  court 
is  justified  by  such  a  prayer  in  entering  a  decree  which  goes  to 
the  length  of  a  complete  execution  of  the  trust,  and  provides  for 
a  reorganization  of  the  company.^ 

The  right  to  object  to  a  decree  on  the  ground  of  its  want  of 
conformity  to  the  bill  may  be  lost  by  a  want  of  promptitude  in 
excepting  to  the  propriety  of  the  court's  action  in  the  proceed- 
ings leading  up  to  the  decree.  Thus  the  owner  of  second  con- 
solidated bonds  filed  a  bill  for  foreclosure  and  the  appointment 
of  a  receiver.  The  court  appointed  a  receiver,  required  all  lien- 
holders  to  come  into  the  cause,  and  enjoined  them  from  asserting 
their  claims  in  any  other  case.  All  the  lien-claimants  filed 
cross-bills,  asking  affirmative  relief  and  the  sale  of  the  property. 
For  nearly  three  years  the  court  dealt  with  the  suit  as  a  consoli- 
dated case,  and  finally  decreed  a  sale  free  from  all  liens.  It  was 
held  to  be  then  too  late  to  object  to  the  decree,  on  the  ground 
that  it  was  not  in  conformity  with  the  bill,  or  that,  because  the 

a  supplemental  bill,  still,  under  various  "  It  is  true,"  the  court  said,  "  the  bill 
circumstances  here,  and  conduct  of  the  contained  no  specific  prayer  for  such  direc- 
parties,  it  was  proper  under  this  amended  tions  ;  but  beyond  the  relief  specifically 
bill  to  decree  the  whole  amount  due,  and  asked,  the  complainants  prayed  for  such 
also  that  a  decree  for  a  deficiency  judg-  other  and  further  relief  as  the  nature  of 
ment  was  proper  under  the  92d  rule  of  the  case  should  require,  and  as  might 
equity  of  the  equity  courts  of  the  United  seem  meet  to  the  court.  The  specific 
States,  though  there  was  no  special  prayer  relief  sought  was  a  strict  foreclosure  ;  but 
for  it.  There  was  also  a  stipulation  in  under  the  prayer  for  general  relief  it  is 
this  case  as  to  what  the  mortgage  covered,  not  questioned  that  the  decree  for  a  sale 
It  was  held  that,  after  such  stipulation,  was  appropriate.  And  as  the  deed  of 
there  could  be  made  no  objection  to  the  trust  was  made  a  part  of  the  bill,  and 
inclusion  of  any  of  the  property  men-  provided  what  should  be  done  in  case  the 
tioned  in  the  stipulation  being  included  trustee  became  the  purchaser  at  the  sale, 
in  the  decree  of  foreclosure.  Seattle,  it  does  not  appear  to  be  going  outside  of 
Lake  Shore,  &  Eastern  Ry.  Co.  v.  Union  the  case  to  enforce  the  agreement  con- 
Trust  Co.  (1897),  79  Fed.  Rep.  179.  tained    in    the  deed  into  which  the  rail- 

1  Colt  r.  Barnes  (1879),  64  Ala.   108;  road  company,   the  trustee,  and,  through 

s.  c.  7  Am.  &  Eng.  R.  R.  Cas.  129.  the    trustee,    all    the    bondholders,    had 

■^  Sage  V.  Central  Railroad  Co.   (1878),  entered." 
99  U,  S.  334,  341. 


730  RAILWAY   BONDS   AND   MORTGAGES.       [CHAP.  XXXIII. 

lienors  had  filed  cross-bills,  instead  of  obtaining  leave  to  file 
original  bills,   the  proceedings  were  irregular.  ^ 

§  746.  Conformity  of  Decree  to  Mandate  of  Appellate  Court.  —  A 
mandate  from  the  federal  Supreme  Court  to  a  Circuit  Court, 
which  in  substance  dii^ects  the  latter  to  ascertain  the  amount  of 
moneys  in  the  hands  of  the  receiver,  and  apply  it  to  the  payment 
of  the  interest,  and  also,  in  the  event  of  there  being  a  deficiency 
after  such  application,  to  fix  a  date  at  which  it  must  be  paid  or 
the  property  sold  to  satisfy  it,  does  not  mean  that  the  rendition 
of  the  decree  shall  be  postponed  until  the  receiver's  accounts 
are  settled.  Such  a  mandate  has  reference  to  the  sum  actually 
in  the  receiver's  hands,  which  is  properly  applicable  to  the 
payment  of  the  complainants'  debt,  and  not  to  what,  as  it  might 
appear  upon  a  full  investigation,  ought  to  be  available  for  that 
purpose.  2 

§  747.  Provisions  of  Ordinary  Decree  of  Foreclosure.  —  A  decree 
of  foreclosure  and  sale  must  declare  the  fact,  nature,  and  extent 
of  the  default  which  constituted  the  breach  of  the  condition  of 
the  mortgage,  and  which  justified  the  complainant  in  filing  the 
bill  for  foreclosure;  also  the  amount  due  on  account  of  the 
default,  which,  with  any  further  sums  subsequently  accruing  and 
becoming  due  according  to  the  terms  of  the  security,  the  mort- 
gagor is  required  to  pay  within  a  reasonable  time,  to  be  fixed  by 
the  court,  and  a  direction  that  the  property  be  sold  if  the  sum 
thus  fixed  is  not  paid  within  the  appointed  time.^ 

1  Bound  V.  South  Carolina  Ry.  Co.  order  a  sale  of  the  mortgaged  property, 
(1893),  58  Fed.  Rep.  473  ;  s.  c.  7  C.  C.  A.  with  a  foreclosure  of  all  rights  subordi- 
322.  nate  to  the  mortgage,  with  directions  to 

2  Milwaukee  &  Minnesota  R.  Co.  v.  bring  the  purchase-money  into  court.  If 
Souttur  (1875),   2  Wall.  510.  the  case  proceeds  thus  far,    the  plaintiff 

3  Chicago,  Vincennes,  &  Danville  R.  will  have  a  lien  on  the  money  thus  paid 
Co.  V.  Fosdick  (1883),  106  U.  S.  47,  70  ;  into  court,  not  only  for  his  overdue  cou- 
s.  c.  12  Am.  &  Eng.  R.  R.  Cas.  367,  refer-  pons,  but  for  his  principal  debt,  and  it 
ring  to  the  following  passage  from  the  must  be  provided  for  in  the  order  dis- 
opinion  in  Howell  v.  Western  Railroad  tributing  the  proceeds  of  the  sale.  If, 
Co.  (1876),  94  U.  S.  463,  as  containing  an  however,  the  company  shall  pay  the  sum 
authoritative  statement  of  the  practice  to  found  due  in  the  decree  nini,  no  further 
be  followed  in  cases  where  a  bondholder  is  proceeding  can  be  had  until  another  de- 
foreclosing  for  unpaid  interest.  fault  of  interest  or  of  the  principal." 

"The  plaintiff  is  entitled  to  a  decree  Under  the  English  practice  a  declara- 

nisi  for  the  amount  overdue  and  unpaid,  —  tion    of    charge   of    mortgage   debentures 

a  decree  which  will  ascertain  the  sum  so  issued  by  a  corporation  upon  the  cor])orate 

due,  and  give  the  company  a  reasonable  pro])erty  is  a  proper  jireface  to  a  judgment 

time   to    pay  it,   say  ninety  days   or  six  for  sale  of  the  assets  at  the  instance  of  a 

months,   or  until    the   next   term   of  the  debenture-holder  :  Parkinson  v.  Wainright 

court,  at  the  discretion  of  tliat  court.     If  (1895).  64  L.  J.  Ch.  N.  S.  493  ;  but  court 

this  sum  is  not  i)aiil,  the  court  must  them  cannot  declare  i)riorities  :  Brinsley  u.  Lyn- 


§  747.]  FORECLOSURE   DECREES.  731 

The  rule  that  the  amount  unpaid  should  be  stated  is  applicable 
whether  the  principal  is  due  or  not.^ 

In  a  suit  on  a  general  mortgage,  the  decree  can  only  be 
framed  with  reference  to  the  interest  unpaid  thereon,  where  the 
divisional  mortgagees  are  not  parties  to  the  proceedings. ^ 

A  provision  that  the  purchaser  shall  be  put  in  possession  of 
the  property,  though  not  usual,  does  not  vitiate  a  foreclosure 
decree.  It  simply  anticipates  what  must  be  done  after  the 
sale.*'^ 

A  decree  which  includes  the  amount  of  the  principal,  when  it 
is  not  due  according  to  the  terms  of  the  mortgage,  is  erroneous, 
and  will  be  opened,* 

To  give  a  trustee  judgment  for  the  money  found  to  be  due  in 
a  foreclosure  suit  has  been  held  to  be  erroneous,  the  proper 
course  being  for  the  court  to  retain  control  over  it  for  the  benefit 
of  those  who  are  entitled  to  it.^ 

The  decree  can  embrace  only  those  who  are  parties  to  the 
suit.  Hence  the  decree  foreclosing  a  general  mortgage  cannot 
include  any  provisions  as  to  the  unpaid  interest  on  the  divisional 
bonds,  where  the  holders  are  not  before  the  court.  ^ 

Where  a  corporate  mortgage  has  been  foreclosed  in  a  court  of 
equity,  and  a  sale  of  the  property  decreed  and  made,  if  upon 
an  appeal  the  decree  of  sale  is  declared  null,  on  a  motion  to 
have  the  purchaser  restore  the  property  to  the  defendants,  it  is 
in  the  power  of  the  court  to  impose  a  condition  upon  the  parties 
that  they  pay  into  court  the  amount  which  had  been  paid  in  cash 
by  the  purchasers  under  the  decree  of  sale,  to  be  disbursed  for 
costs,  etc.,  before  the  property  be  restored  to  them.  And,  if 
they  fail  to  make  the  payment,  the  court  may  decree  a  resale  of 
the  property,  and  reserve  the  adjudication  of  the  conflicting 
rights  until  the  sale  has  been  made.'^ 

ton,  etc.  Co.  (1895),  13  Eep.  369.     See  also  »  Vicksburg  &  Meridian  R.  Co.  v.  Mc- 

Marwick  v.  Thurlow  (1895),  13  Rep.  481.  Cutchen  (1876),  52  Miss.  645. 

On  judgment  directing  moneys  in   court  *  Ohio  Central  R.  Co.  v.  Central  Trust 

or  hands  of  receiver  to  be  applied  on  ac-  Co.   of  New  York  (1890),  133  U.  S.  83  ; 

count  of  amount  due,  see  Cummingr.  Met-  s.  c.  10  Sup.  Ct.  Rep.  235. 

calfe's  London  Hydro,  Limited  (1895),  13  ^  Bardstown    &   Louisville   R.    Co.    v. 

Rep.  501.  Metcalfe  (1862),  4  Met.  (Ky.)  199. 

1  Grape  Creek  Coal  Co.  v.  Farmers'  ^  Union  Trust  Co.  v.  St.  Louis,  Iron 
Loan  &  Trust  Co.  (1894),  63  Fed.  Rep.  Mountain,  &  Southern  R.  Co.  (1878),  5 
891  ;  s.  c.  12  C.  C.  A.  350.  Dill-  1- 

2  Union  Trust  Co.  v.  St.  Louis,  Iron  "^  Alabama  &  Ga.  Manuf.  Co.  et  ah  v. 
Mountain,  &  Southern  R.  Co.  (1878),  5  Robinson,  72  Fed.  Rep.  708;  s.  c.  19  C.  C. 
j)ill^  1^  A.  152  (1896),  affirming  Same  v.  Same,  67 

Fed.  Rep.  190. 


732  RAILWAY   BONDS   AND   MORTGAGES.       [CHAP.  XXXIII. 

§  748.  Judgment  for  Deficiency.  —  In  the  absence  of  some 
provision  in  the  mortgage  accelerating  the  maturity  of  the 
bonds,  in  the  event  of  a  default  in  the  payment  of  interest,  a 
personal  judgment  for  the  balance  of  the  principal  of  the  mort- 
gage debt  remaining  after  the  proceeds  of  a  sale  in  foreclosure 
proceedings  instituted  on  the  ground  of  such  a  default  cannot  be 
made ;  for  this  would  be  equivalent  to  ordering  the  defendant  to 
pay  an  indebtedness  which  is  not  yet  due.^ 

§  749.  Provisions  of  Decree  foreclosing  Mortgage  on  Road  in 
Possession  of  Junior  Mortgagee.  —  Where  a  first  mortgage  is  being 
foreclosed  on  a  railroad  in  possession  of  a  second  mortgagee, 
whom  it  is  proposed  to  hold  to  account  for  the  earnings  of  the 
property  managed  by  him,  the  decree  should  be  that  the  account 
be  first  taken  and  stated;  that  a  reasonable  time  should  be  given 
for  the  redemption  from  the  sale  under  the  second  mortgage,  and 
for  the  payment  of  such  balance  as  should  be  found  due  on  the 
first-mortgage  debt,  after  deducting  the  net  earnings  of  the 
property;  and  that,  in  default  of  such  redemption  and  pay- 
ment, the  property  be  sold  in  satisfaction  of  the  first-mortgage 
debt.  2 

8  750.  Provision  of  Decree  directing  Sale  subject  to  Liens.  —  In 
the  common  case  of  the  foreclosure  of  a  junior  mortgage,  it  must 


1  Ohio  Central  Ry.  Co.  v.  Central  Trust  ficiency  was  held  allowable  under  the  92d 

Co.  of  New  York  (1890),  133  U.  S.  83 ;  rule  in  equity  of  the  courts  of  equity  of 

s.   c.  10  Sup.    Ct.   Rep.  235   (see  the  ex-  the  United  States.     The  owners  of  a  cer- 

tract  from  the  opinion  quoted  in  the  note  to  tain    amount  of   a  fixed  issue  of  debent- 

§  745,  above),    s.  p.  Fanners'  Loan  &  Trust  ures  of  a  company  brought  an  action  in 

Co.  V.  Grape  Creek  Coal  Co.    (1894),   65  behalf  of  himself  and  the  other  holders  of 

Fed.  Rep.  717  ;  s.  c.  13  C.  C.  A.  87.  that  issue,  and  asked  a  personal  judgment 

In  Jesupy.  City  Bank  of  Racine  (1861),  that  might  reach  other  property  of  the 
14  Wis.  331,  it  was  held,  that,  after  the  company  not  embraced  in  the  security, 
repeal  of  the  statute  authorizing  the  join-  The  court  declined  to  do  this,  but  de- 
der  of  the  legal  cause  of  action  on  the  clared  that  the  holders  of  the  whole  issue 
bond  or  note,  such  a  joinder  was  not  per-  of  debentures  were  entitled  to  stand  in  the 
missible,  unless  both  causes  of  action  position  of  judgment  creditors  for  the 
affected  all  tlie  parties,  according  to  the  amount,  and  appointed  a  receiver  for  the 
provisions  of  the  Code  on  that  subject ;  property  seizable  by  a  judgment  creditor, 
and  that,  as  a  result  of  this  doctrine,  no  Hope  v.  Croydon  &  Norwood  Tramways 
personal  judgment  for  tlie  deficiency  could  Co.  (1887),  34  Ch.  Div.  730.  Compare 
be  taken  in  a  suit  in  which  some  of  the  par-  Bowen  v.  Breem  Ry.  Co.,  3  Eq.  541  ;  Fur- 
ties  are  brought  in  as  subsequent  incum-  ness  v.  Caterham  Ry.  Co.,  27  Beav.  358; 
brancers  merely,  and  therefore  cannot  be  In  re  Uruguay  Central  &  Hyguersitas  Ry. 
affected  by  that  cause  of  action  which  Co.  of  Monte  Video  (1879),  11  Ch.  Div. 
seeks  for  a  personal  judgment  against  the  372. 

mortgagor.  See  Seattle,  Lake  Shore,  &  ^  Racine  &  Mississippi  R.  Co.  v.  Farm- 
Eastern  Ry.  Co.  »^  Union  Trust  Co.  (1897),  ers'  Loan  &  Trust  Co.  (1868),  49  lU. 
79  Fed.  Rep.  179,  where  a  decree  for  de-  331. 


§  751.]  FORECLOSURE  DECREES.  733 

direct  the  sale  to  be  made  subject  to  the  burden  of  the  prior 
incumbrances.^ 

And  as  a  prior  incumbrancer  ought  not  to  be  deprived  of  the 
right  of  bidding  for  the  property  up  to  the  amount  of  his  claim, 
his  right  of  priority,  if  in  dispute,  ought  to  be  settled  before  the 
sale.^ 

Where  the  railroad  is  ordered  to  be  sold  subject  to  the  burden 
of  the  undei'lying  mortgages,  the  decree  may  properly  state  that 
all  the  parties  to  such  mortgages  may  proceed  to  foreclose  them 
in  the  proper  tribunals,  if  they  so  desire.  Under  such  circum- 
stances the  amounts  due  on  such  mortgages  may  be  given,  but  it 
is  usual  and  proper  to  include  in  the  decree  some  proviso  to  the 
effect  that  the  "  statements  therein  of  the  amount  of  bonds  out- 
standing, or  of  interest  or  rental,  paid  or  unpaid,  on  any  of  the 
mortgages  shall  not  be  taken  as  adjudicating  or  determining  the 
matters  so  stated,  and  that  the  amounts  are  stated  only  for 
the  purpose  of  enabling  the  parties  who  may  desire  to  purchase 
the  property  to  determine  approximately  the  amount  of  prior 
lien-s  or  other  charges  upon  that  property  and  each  part 
thereof."  ^ 

If  the  property  has  been  placed  in  the  hands  of  a  receiver 
pending  the  litigation,  and  certificates  issued  by  him,  the  decree 
may  properly  provide  that  the  purchasers  shall  take  the  property 
subject  to  the  duty  of  paying  off  the  debts  evidenced  by  such  cir- 
tificates,  as  well  as  any  other  debts  which  may  have  been  created 
by  the  court,  and  that  the  receivers  shall  remain  in  possession  of 
the  property  until  such  time  as  a  payment  shall  be  made  of  these 
obligations,  or  adequate  security  furnished  for  such  payment.^ 

In  such  a  case  the  receiver  may  also  be  required  to  file  a  de- 
tailed statement  of  his  outstanding  obligations,  so  that  their 
amount  may  be  known  with  sufficient  certainty  to  enable  pur- 
chasers to  bid  with  confidence." 

§  751.  Provision  of  Decree  directing  Sale  before  Settlement  of  Con- 
troversies regarding  the  Final  Disposition  of  Assets.  —  The  common 

1  Central  Trust  Co.  v.  Wabash,  St.  3  Central  Trust  Co.  v.  Wabash,  St. 
Louis,  &  Pac.  R.  Co.  (1886),  29  Fed.  Rep.  Louis,  &  Pac.  R.  Co.  (1887),  30  Ped.  Rep. 
618,  621.  332,  336. 

2  Campbell  v.  Texas  &  New  Orleans  R.  *  Central  Trust  Co.  v.  Wabash,  St. 
Co.  (1872),  2  Woods,  263.  Louis,  &  Pac.  R.  Co.  (1886),  29  Fed.  Rep. 

For  a  discussion  by  a  divided  court  as  618,  621. 

to  tht!  proper  remed}'  by  which  to  enforce  ^  Bound    v.    South    Carolina    R.    Co. 

a  lien  upon  a  portion  of  a  railroad  reserved  (1893),  58  Fed.  Rep.  473  ;  s.  c.  7  C.  C. 

in  a  savincr  clause  of  a  decree,  see  Compton  A.  322. 
V.  Jesup  (1895),  68  Fed.  Rep.  263.     Also 
(1897),  167  U.  S.  1. 


734  RAILWAY   BONDS   AND   MORTGAGES.        [CHAP,  XXXIII. 

practice  of  the  courts  in  regard  to  sales  under  trust  mortgages  is 
to  require  that,  if  there  are  prior  liens,  either  contested  or  doubt- 
ful, or  not  precisely  ascertained,  such  liens  shall  be  ascertained, 
so  that  they  may  be  made  known  to  the  purchaser,  for  otherwise 
he  can  have  no  knowledge  of  what  he  is  buying.^ 

If  some  of  tiie  liens  are  alleged  to  be  prior,  and  others  subse- 
quent, to  the  trust  deed,  this  same  necessity  of  making  known  to 
the  purchasers  which  of  them  are  prior,  and  which  are  subse- 
quent, demands  that  their  relative  rank  shall  ordinarily  be  ascer- 
tain 3d  before  the  sale.^ 

An  interlocutory  order  for  an  immediate  sale  upon  terms  dis- 
charging the  lien  of  a  mortgage  not  yet  due  will  never  be  made, 
unless  it  clearly  appears  that  in  the  end  there  must  not  only  be  a 
sale,  but  a  sale  on  those  terms.^ 

But  although  the  courts  will  usually  proceed  on  the  principle 
that  all  disputed  questions  should  be  settled  before  the  sale,  so  as 
to  obviate  the  danger  of  deterring  bidders,  and  thus  sacrificing 
the  property,  this  rule  is  subject  to  the  reasonable  qualification 
that  wherever  it  is  apparently  in  the  interest  of  the  parties  that 
there  should  be  a  speedy  sale  of  the  property,  the  court  may 
properly  decree  that  the  whole  property  be  sold  free  from  all 
incumbrances,  whether  mortgages,  receiver's  certificates,  costs, 
expenses,  etc.,  and  that  all  disputes  and  controversies  between 
the  trustees  of  the  various  mortgages,  and  all  questions  regarding 
the  amount  due  to  the  bondholders,  be  reserved  for  future  con- 
sideration and  determination,  unaffected  by  anything  in  the 
decree.* 

1  Washington,  Alexandria,  &  George-  In  Middleton  v.  New  Jersey  West  Line 
town  R.  Co.  V.  Alexandria  &  Washington  R.  Co.  (1874),  25  N.  J.  Eq.  306,  a  sale 
R.  Co.  (1870),  19  Gratt.  (Va. )  592.                free  from  incumbrances,  ordered  by  virtue 

2  Ibid.  of  a  statute,  was  objected  to  by  the  mort- 
8  Pennsylvania  R.  Co.  u.  Allegheny  Val-     gagees  in  a  mortgage  on  one  part  of  the 

ley  R.   Co.  (1890),  42  Fed.   Kep.  82,  dis-  property,  on  the  ground  that  they  were 

tinguishing  First  Nat.  Bank  of  Cleveland  unable  to  protect  their  interest  thereunder, 

V.  Sliedd  (1886),  121  U,  S.  74.  and  by  the  mortgagees  in  a  mortgage  on 

*  First    Nat.     Bank    of    Cleveland    v.  another  part  of  the  property  on  the  ground 

Shedd  (1886),  121  U.  S.  74.  that  it  would  deprive  tliem  of  a  portion  of 

In  Tome  v.    King  (1891),  64  Md.  166;  their  remedy  for  the  security  and  collection 

8.  c.   21   Atl.    Rep.  279,  it  is  stated  that  of  their  debt,  and  was  therefore  iiTiconsti- 

among  the  orders  made  by  the  lower  court  tutional.     The  Chancellor,  in  view  of  the 

was  one  directing  the  sale,  free  of  all  in-  Aict  that  an  appeal  would,  in  any  case,  be 

cmnbrancfs,  at  the  instance  of  the  trustee  taken,  declined  to  express  an  opinion  on 

of  a  second  mortgage,  upon  a  representa-  those  points,  and  made  an  order  joro/onna, 

tion  that  the  state   of  the  property  was  based  on  the  theory  that  the  objection  of 

such  as  to  render  it  wholly  unproductive,  the  former  mortgagees  was  well  founded, 

ami  tliat  a  sale  thereof  was  called  for  in  and  that  the  objections  of  the  latter  were 

the  interest  of  ull  jtarties.  not  sustainable.   The  first  part  of  this  order 


§  751.] 


FORECLOSURE   DECREES. 


735 


The  mere  fact  that  some  of  the  creditors  might,  by  acquiring  a 
knowledge  of  the  precise  interest  they  have  in  the  proceeds,  be 
placed  in  a  more  advantageous  position  for  partici})ating  as  bid- 
ders in  the  sale  will  not  justify  a  delay  which  will  prejudice  the 
estate.! 

The  result  of  a  sale  free  from  incumbrances  is  that  the  pur- 
chasers, as  a  condition  of  receiving  a  complete  title,  are  only 
required  to  pay  the  amount  bid.^ 

A  decree  ordering  a  sale  free  from  incumbrances,  and  reserv- 
ing to  the  parties  the  right  to  redeem  in  the  ordinary  manner, 
upon  paying  the  several  amounts  found  due  on  the  various  claims 
against  the  defendant,  will  not  be  raised  at  the  instance  of  a  por- 
tion of  the  lienors,  who  seek  to  have  the  sale  made  subject  to  all 
incumbrances  prior  to  the  mortgage  foreclosed,  and  all  arrears  of 
interest  on  those  incumbrances  paid  from  the  proceeds,  where 
the  petitioners  make  no  offer  to  bid  an  amount  sufficient  to  pay 
those  arrears,  or  any  of  the  costs  and  expenses  of  the  suit.^ 

When  the  threatened  delay  in  the  determination  of  validity  of 
claims  affects  only  a  portion  of  them,  the  court  will  sometimes 
order  the  purchaser  to  pay  enough  to  meet  all  claims  then  defi- 
nitely ascertained,  and  that  the  property  be  subject  to  those  after- 
wards settled.^ 


does  not  seem  to  have  been  appealed 
against,  and  the  validity  of  the  scheme 
was  tested  in  the  higher  court,  not  with 
reference  to  its  constitutionality,  but  to 
the  first  question,  whether  the  statute  au- 
thorized a  sale  free  from  incuinbrances  in 
the  given  case.  This  statute  allowed  such 
a  sale,  provided  (1)  "the  legality  of  the 
mortgage  or  other  lien  was  brought  into 
question,"  and  (2)  "the  property  was  of 
a  character  to  deterioriate  materially  pend- 
ing the  litigation."  The  counsel  for  the 
mortgagees  sought  to  confine  the  operation 
of  the  first  clause  to  cases  in  which  legal 
objections  were  raised  as  to  the  validity  of 
the  mortgage  itself;  but  the  court  held 
this  construction  was  altogether  too  nar- 
row, and  that  the  remedy  was  intended  to 
take  effect  wherever  there  was  any  litiga- 
tion between  incumbrances  respecting  the 
validity,  e.Ktent,  or  priority  of  their  liens. 

1  Hand  v.  Savannah  &  Charleston  R. 
Co.  (1880),  13  S.  C.  467;  s.  c.  12  Am.  & 
Eng.  R.  R.  Cas.  488. 

2  Swann  ('.  Wright's  Exrs.  (1884),  110 
U.  S.  590,  598. 


3  Bound  V.  South  Carolina  Ey.  Co. 
(1893),  58  Fed.  Rep.  473. 

*  Turner  v.  Indianapolis,  B.  &  W.  R. 
Co.  (1878),  8  Biss.  385.  In  this  case  the 
sale,  instead  of  being  made  subject  to  such 
judgments,  taxes,  and  leases,  and  a  pay- 
ment by  the  purchaser  of  such  sum,  in 
cash  or  certificates  of  the  receiver,  as 
should  be  necessary  to  pay  that  portion  of 
the  receiver's  debts  made  in  the  operation 
of  the  main  line  of  railroad,  not  thereto- 
fore directed  to  be  assumed  by  the  pur- 
chaser, with  such  other  claims  as  should 
be  allowed  by  the  court  on  appeal  to  the 
Supreme  Court,  was  made  in  pursuance  of 
amendment  to  the  decree  in  the  lower 
couit,  to  the  effect  that  the  sale  should  be 
made  subject  to  the  judgments  for  rights 
of  way,  to  the  taxes,  to  a  certain  lease 
made  by  the  receiver,  and  also  to  certain 
debts  which  might  be  due  from  the  re- 
ceiver, as  well  as  to  such  claims  as  might 
be  allowed  by  the  court  on  appeal  to  the 
Supreme  Court  of  the  United  States. 
Judge  Drummond  said  in  regard  to  this 
change :    "It   was,   so    to  speak,  simply 


736  RAILWAY   BONDS   AND   MORTGAGES.       [CHAP.  XXXIII. 

The  sole  essential  condition  to  the  validity  of  an  order  requir- 
ing the  payment  of  undisputed  claims,  and  leaving  for  future 
ascertainment  the  interests  of  persons  claiming  admission  to  the 
several  classes  of  creditors,  is,  that  the  debts  paid  have  a  clear 
priority  over  those  remaining  to  be  ascertained.^ 

In  determining  whether  an  immediate  sale  shall  be  ordered, 
the  court  will  be  governed  largely,  if  not  altogether,  by  the  wishes 
of  the  parties  interested.^ 

In  other  cases  the  sale  will  be  ordered  subject  both  to  those 
liens  which  have  already  been  established  as  superior  in  rank  to 
that  of  the  mortgage,  and  also  to  all  liens  of  that  character  which 
may  be  established  by  references  pending  at  the  time  of  the 
decree.^ 

Unanimity  among  the  bondholders  is,  of  course,  desirable  in 
such  a  case  ;  but  if  circumstances  point  strongly  to  the  expediency 
of  an  immediate  sale,  and  the  largest  part  of  the  bondholders  are 
in  favor  of  it,  the  court  will  not  hesitate  to  order  it.  A  small 
minority  of  the  bondholders  cannot,  against  the  wishes  of  the 
trustees  and  the  rest  of  their  co-bondholders,  procure  the  post- 
ponement of  the  sale  until  all  disputed  questions  as  to  the  distri- 
bution of  the  proceeds  are  settled.  Under  such  circumstances  a 
representation  by  such  minority  that  the  "  bidding  will  be  de- 
terred on  account  of  the  risk  and  uncertainty,  and  the  property 
will  be  in  great  danger  of  being  sacrificed,"  cannot  be  allowed  to 

changing  the  amount  of  money  which  was  Co.  (1880),  13  S.  C.  467;  s.  c.  12  Am.  & 

required  to  be  bid  for  the  property.     Un-  Eng.  R.  R.  Cas.  488. 

doubtedly  it  would  have  been  better,  and  ■^  In  Turner  v.  Indianapolis,  B.  &  W.  R. 

much  more  satisfactory,  if  the  court,  be-  Co.,   supra,   the  action  of  the  court  was 

fore  it  had  ordered  a  sale  under  the  origi-  concurred  in  by  all  the  parties  in  iuterest. 

nal  decree,  could  have  informed  tlie  parties  In   Middleton  v.   New  Jersey  West  Line 

who   might   purchase   the   property  what  R.  Co.  (1874),  25  N.  J.   Eq.  306,   a  sale 

was  the  precise  amount  of  liens  upon  it.  free   from    incumbrances    was   decreed   at 

But  that,  in  the  nature  of  the  case,  was  the  instance  of  the  receiver,  although  the 

impossible,  unless  the  sale  of  the  property  bondholders  had  not  expressed  any  formal 

had  been  delayed  until  the  final  determi-  wish  to  that  effect,  either  individually  or 

nation  of  these  various  claims  by  the  Su-  through  the  trustees,  there  being  a  strong 

jmniie  Court  of  the  United  States,  which  impression  on  the  Chancellor's  mind  that 

might  have  involved  the  retention  of  the  a  largo  part  of  the  bondholders  were  in 

Y)roperty  by  the  court   for  several   years,  favor   of   such   action.      In    Randolph  v. 

Therefore    it   was    thought    best   by   the  Larned  (1876),  27  N.  J.  Eq.  557,  the  Court 

court,  and  by  the  parties  who  are  inti^rested  of  Errors  and  Appeals  reversed  this  order, 

in  the  property,  that  it  should  be  sold,  and  on  the  ground  tliat  this  impression  was  a 

that  the  purchaser  should  pay  enougii  to  wrong  one 

meet  all  the  claims  then  definitely  ascer-  ^  S\\-an  v.  Wright's  Exrs.  (1884),   110 

tained,  and  that  tlie  property  should  be  U.  S.  590,  598.     In  this  case  the  sale  had 

subject  to  tho.se  adjudicated  hereafter."  originally    been    ordered    free    of    incum- 

1  Hand  v.  Savannah  &  Charleston  E.  brauces,  and  afterwards  modified. 


§§  752-754.]  FORECLOSURE   DECREES.  737 

prevail  against  the  opposing  consideration  that  the  financial  con- 
dition of  the  company  under  the  administration  of  the  receiver  is 
steadily  growing  worse. ^ 

§  752.  Decree  preserving  Lien  of  Unmatured  Part  of  Debt.  —  In 
a  proper  case  a  court  of  equity  has  the  power  so  to  mould  its 
decree  as  to  order  a  sale  of  mortgaged  property  to  satisfy  that 
part  of  the  mortgage  debt  which  is  overdue,  and  preserve  the  lien 
on  the  mortgaged  property  in  the  hands  of  the  purchaser  as  to 
the  unmatured  part  of  the  debt.  Thus  where  the  P.  company 
indorsed  the  bonds  of  the  A.  company,  with  a  stipulation  binding 
it  to  purchase  at  maturity  the  bond  and  each  coupon  at  par,  and 
providing  that,  when  so  purchased,  each  and  all  of  said  bonds  and 
coupons  are  to  be  held  by  the  said  company,  with  all  the  rights 
thereby  given,  and  with  all  the  benefit  of  every  security  therefor, 
and  the  P.  company,  having  been  obliged  to  purchase  coupons, 
filed  a  bill  before  the  maturity  of  the  bonds,  it  was  held  that  the 
contract  was  to  be  so  construed  as  to  preserve  to  the  bondholders 
their  lien  until  the  P.  company  should  have  fully  performed  its 
obligations  according  to  the  tenor  of  its  indorsement,  and  that, 
in  the  meantime,  its  remedies  upon  purchased  coupons  must  be 
kept  within  such  limits  as  will  effect  that  object.  The  court 
being  of  opinion  that  the  original  bill  was  framed  upon  the  true 
theory  of  the  equitable  rights  of  the  parties,  decreed,  in  accord- 
ance with  its  prayer,  that  the  sale  should  be  made  under  and 
subject  to  the  lien  of  the  mortgage  as  to  the  principal  of  the  bonds 
secured  thereby,  and  the  interest  payable  after  the  sale.^ 

§  753.  Decree  ordering  Trustee  to  sell  before  Maturity  of  Bonds^ 
though  not  authorized  by  Trust  Deed.  —  A  trustee  may  be  Ordered 
to  sell  before  maturity  of  bonds,  though  the  mortgage  does  not 
in  terms  authorize  a  sale  upon  default  in  payment  of  interest,  if 
that  is  the  only  way  in  which  the  security  can  be  saved.  A 
sale  under  such  a  mortgage  has  been  held  to  have  been  properly 
decreed,  where  the  evidence  showed  that  the  mortgagor  was 
insolvent;  that  a  subsequent  purchaser  of  the  road,  under  a 
junior  incumbrance,  would  do  nothing  to  discharge  the  interest; 
that  the  road,  if  operated  by  the  trustee,  would  be  run  at  a 
loss,   and,   if  unused,   would  decay.  ^ 

§  754.  Decree  may  find  Amount  due  on  Bonds,  before  Proof  of 
same.  —  A   decree  is   not  necessarily  objectionable   because   it 

1  First  Nat.  Bank  of  Cleveland  v.  ^  McLane  v.  Placerville  &  Sacramento 
Shedd  (1886),  121  U.  S.  74.  Valley  II.  Co.  (188.'>),  66  Cal.  606  ;  s.  C. 

2  Pennsylvania   R.    Co.    v.    Allegheny  26  Am.  &  Eng.  R.  R.  Cas.  404. 
Valley  E,  Co.  (1891),  48  Fed.  Rep.  139. 

47 


738  RAILWAY   BONDS    AND   MORTGAGES.        [CHAP.  XXXIII. 

undertakes  to  declare  and  find  the  amount  due  under  each  of  the 

several  mortgages  foreclosed,  before  the  bonds  have  been  regu- 
larly produced  and  proved.  ^ 

§  755.  Decree  nisi  may  be  rendered  before  Production  of  Bonds. 
—  In  a  suit  to  foreclose  for  default  in  the  payment  of  interest, 
a  decree  nisi  may  be  rendered  although  the  bonds  are  not  pro- 
duced, nor  the  various  claimants  identified.  At  that  stage  of 
the  action  it  is  only  necessary  that  the  default  and  its  amount 
should  appear.  If  the  decree  of  sale  is  made  absolute,  the 
holders  of  bonds  can  then  be  required  to  produce  their  bonds, 
and  all  questions  of  ownership  and  of  the  amount  due  to  each 
claimant  can  be  then  determined. ^ 

§  756.  Allo-wance  of  Time  for  Payment  of  Amount  found  due.  — 
In  a  suit  seeking  foreclosure  for  interest,  there  should  be  a 
decree  nisi  for  the  amount  due,  and  for  sale  of  mortgaged  prop- 
erty, in  case  such  amount  is  not  paid  at  the  appointed  time.^ 

Upon  payment  of  the  amount  due,  the  decree  will  be  sus- 
pended until  default  occurs  in  the  payment  of  interest.^ 

The  time  allowed  for  payment  is  within  the  discretion  of  the 
court,  but  a  period  of  four  months  is  unreasonably  short.  If 
the  length  of  period  to  be  allowed  for  redemption  before  final 
sale  is  subject  of  an  express  enactment  by  a  State,  a  federal 
court  sitting  in  that  State  will  be  guided  by  the  terms  of  that 
enactment,  although  the  general  rule  is  that  such  a  court  will 
follow  the  federal  procedure  in  foreclosure  suits  wherever  it  is 
diiierent  from  that  of  the  State  courts.  The  reason  for  thus 
qualifying  the  general  rule  is  that  the  rights  of  the  mortgagor 
cannot  be  adequately  protected  without  allowing  him  the  period 
for  redemption  which  he  is  entitled  to  by  the  lex  loot  contractus.^ 

1  Toler  V.  East  Tennessee,  V.  &  G,  R.  (1865),  3  Wall.  196,  provided  that  the 
Co.  (1894),  67  Fed.  Rep.  168.  mortgaged  premises  should  be  sold  at  pub- 

2  Toler  V.  East  Tenn.,  V.  &  G.  R.  Co.  lie  auction,  unless  the  mortgagors  should, 
(1894),  67  Fed.  Rep.  168,  181,  citing  prior  to  such  sale,  pay  to  the  complain- 
Guaranty  Trust  &  Safe  Deposit  Co.  v.  ants  the  amount  of  the  mortgage  debt  as 
Green  Cove  Springs  &  M.  R.  Co.  (1891),  specified  in  the  decree. 

139  U.  S.  137,  150.     The  doctrine  of  the         *  Farmers'  Loan  &  Trust  Co.  v.  Chicago 

text  was  reaffirmed  in  Northern  Trust  Co.  &  A.  Ry.  Co.  (1886),  27  Fed.  Rep.  146. 
et  al.  V.  Columbia  Straw  Paper  Co.  et  al.  ^  Jackson  &  Sharp  Co.   v.  Burlington 

(1896),  7.')  Fed.  Rep.  936.  &  L.   R.  Co.    (1887),  29  Fed.   Rep.   474. 

8  Farmers'  Loan  &  Trust  Co.  v.  Chicago  There  the  court  allowed  the  period  of  one 

&  A.  Ry.  Co.  (1886),  27  Fed.  Rep.   146  ;  year,  which  was  provided  by  the  laws  of 

Chicago,   Danvile,  &  Vincennes  R.  Co.  v.  Vermont  in  all  cases  in  which  the  security 

Fosdick  (1883),  106  U.  S.  47,70;  Howell  was  not  inadequate,    and   there  were  no 

V.  Western  R.   Co.   (1876),  94  U.  S.  463,  other  special  reasons  why  the  time  should 

from   which  a  passage   is  quoted   above,  be  shortened. 
The   decree   in   Blossom  v.   Railroad  Co. 


§§  757,  758.]  FORECLOSURE  DECREES.  739 

§  757.  Provisions  of  Decree  reserving  Control  of  the  Property.  — 
Provisions  in  decree  of  foreclosure  and  order  confirming  the 
sale,  whereby  the  court  retains  authority  to  retake  the  property, 
and  resell  it  for  failure  on  the  part  of  the  purchaser  to  comply 
with  the  terms  of  sale,  are  intended  as  a  reservation  of  jurisdic- 
tion over  the  property,  to  be  exercised  in  the  event  of  such  non- 
compliance, and  are  not  inserted  to  secure  to  that  purchaser  the 
right  to  complete  the  purchase  or  not,  as  he  pleases.^ 

An  order  which  would  have  the  effect  of  setting  aside  the  sale 
altogether  is  not  warranted  by  the  fact  that  the  order  confirming 
such  sale  contains  the  clause,  "the  right  to  any  further  order  is 
reserved, "2  or  a  clause  reserving  the  power  "to  make  further 
orders  respecting  the  claims,  rights,  or  interests  in,  or  liens  on, 
the  property. "  ^ 

§  758.  Modifications  of  Decree,  and  -what  is  a  Final  Decree.  —  A 
decree  which  terminates  the  litigation  between  the  parties  on 
the  merits  of  a  case  is  a  final  decree.* 

A  final  decree  cannot  be  vacated,  altered,  or  modified  after  the 
close  of  the  term  at  which  it  was  rendered.^ 

A  decree  of  sale  in  a  foreclosure  suit,  which  settles  all  the 
rights  of  the  parties,  and  leaves  nothing  to  be  done  but  to  make 
the  sale  and  pay  out  the  proceeds,  is  a  final  decree.^ 

A   decree   of   foreclosure   and   sale  was  entered  in   railroad 

1  Atkins  V.  Wabash,  St.  Louis,  &  Pac.  for  I  do  not  see  anything  in  this  decree 
Ry.  Co.  (1886),  29  Fed.  Rep.  161,  170.  which  requires  the  delivery  of  the  posses- 

2  Wetmore  V.  St.  Paul  Pi.  Co.  (1880),  sion, — probably  for  the  making  of  a  deed, 
3  Fed.  Eep.  177,  180.  Mr.  Justice  Miller  (for  I  do  not  see  anything  here  about  the 
said:  "The  language  of  that  order  dif-  making  of  a  deed).  There  are  fifty  things 
fers  but  little  from  the  ordinary  language  you  can  imagine  which  would  be  consist- 
made  use  of  in  decrees,  to  the  effect  that  ent  with  the  confirmation  of  the  sale, 
'  further  orders  may  be  made  upon  a  foot-  and  which  might  yet  require  further 
ing  of  this  decree  ; '  and  I  cannot  believe  orders  of   the  court." 

that  when  it  was  made  it  was  in  the  con-  ^  Farmers'  Loan  &  Trust  Co.  v.  New- 

templation  of  the  court  who  was  confirm-  man  (1888),  127  U.  S.   649;  s.  c.  8  Sup. 

ing   this   sale   that  the    'further    order'  Ct.  Piep.  1364. 

there   spoken   of   was   such   an   order   as  *  Bostwick  v.  Brinckerhoff  (1882),  106 

would  set  aside  the  sale.     That  was  the  U.  S.  3  ;  s.  c.  1  Sup.  Ct.  Rep.  15. 

thing  they  were  passing  upon."     Further  ^  Bronson  v.  Schulten  (1881),  104  U. 

on  he  continues:   "It  is  much  more  in  S.  410;  Williams  i).  Morgan  (1884),   111 

conformity  with  reason,    with  precedent,  U.  S.   684 ;  s.  c.  4  Sup.   Ct.    Rep.   638  ; 

and  common  sense,   to  believe   that   the  Central   Trust  Co.  v.   Grant  Locomotive 

'  further  orders'  referred  to  here  are  such  Works  (1890),  13.5  U.  S.   207,  224  ;  s.  c. 

orders  as  might  be  necessary  for  the  dis-  10  Sup.  Ct.  Rep.  736. 

tvibution  of   the  funds,   as   between  the  ^  Grant     v.     Phoenix     Insurance     Co. 

parties  and   the   payment   of   the   bonds  (1882),  106  U.   S.  429  ;  s.  c.  1  Sup.   Ct. 

which  had  to  come  in,  and  which  might  Rep.  414 ;  Green  v.  Fisk  (1880),  103  U.  S. 

be  disputed  as  to  their  ownership  —  prob-  518;  Railroad  Company  v.  Swasey  (1874), 

ably  for  the  delivery  of  the  possession,  23  Wall.  405. 


740  RAILWAY   BONDS   AND    MORTGAGES.        [CHAP.  XXXIII. 

foreclosure  proceedings,  with  a  reference  to  the  master  to  ascer- 
tain and  report  the  amount  of  the  mortgage  indebtedness,  the 
proper  allowances  to  be  made  as  compensation  to  and  for 
expenses  of  the  receiver,  the  amount  of  outstanding  receivers' 
certificates,  and  proper  allowances  to  the  trustee  and  its  solici- 
tors. The  master  reporting,  a  decree  was  entered  confirming 
his  report,  though  no  sale  had  then  been  made.  This  latter 
decree,  taken  in  connection  with  and  aided  by  the  former,  was 
held  to  have  terminated  the  litigation  on  the  merits,  fixed  the 
rights  of  the  parties,  and  that  consequently  it  was  a  final  decree, 
and  was  not  subject  to  alteration  or  modification  after  the  close 
of  the  term.i 

After  the  expiration  of  the  term  in  which  a  final  decree  is 
entered,  the  court  cannot  change  its  essential  parts. ^ 

But  this  rule  does  not  apply  to  an  interlocutory  decree,  such 
as  one  allowing  petitioning  bondholders  to  come  in  and  partici- 
pate in  the  undisturbed  residuum  of  a  fund.  Such  a  decree  may 
be  altered  or  vacated  at  any  time,  with  or  without  a  motion  for 
that  purpose.^ 

On  the  other  hand,  even  a  final  decree  may  be  amended  after 
the  end  of  the  term,  as  to  the  mode  of  its  execution,  manner  of 
sale,  time  of  publication  of  such  sale,  and  distribution  of  pro- 
ceeds arising  therefrom.  Thus  a  decree  which  provides  that 
purchasers  shall  pay  enough  in  money  to  liquidate  certain  judg- 
ments, taxes,  and  other  claims,  if  they  shall  be  allowed,  may  be 
amended  during  a  subsequent  term  by  providing  that  the 
property  shall  be  sold  subject  to  the  judgments,  taxes,  claims, 
etc.,  in  the  hands  of  purchasers.* 

A  decree  in  which  the  property  to  be  sold,  and  method  of  sale, 
are  stated,  and  rights  of  parties  determined,  will  not  be  altered 
on  eve  of  sale,  long  after  it  has  been  filed,  at  instance  of  an 
applicant  who  alleges  a  difficulty  in  understanding  its  terms, 
no  party  to  the  suit  having  previously  objected  to  it.  ^ 

1  Petersburg  Sav.  &  Ins.  Co.  et  al.  and  without  the  consent  of,  adverse  par- 
V.  Dellatorre  et  ul.  (1895),  70  Fed.  Rep.  ties,  and  was  held  to  have  been  properly 
643.  vacated,   although   the   first   two  days  of 

As  to  modification  of  decrees  in  fore-  the  ensuing  term,  the  period  within  which 

closure  suit,   see   Farmers'  Loan  &  Trust  a]>plications  for  the  vacation    of   decrees 

Co.   ct  al.  V.   Oregon  Pac.    R.    Co.    et  al.  were  required  to  be  made  under  the  rules 

(Oregon,  1895),  40  Pac.  Rep.  1080.  of  court,  had  already  expired. 

2  Turner  v.  Indianapolis,  B.  &  W.  Ry.  *  Turner  v.  Indianapolis,  B.  &  W.  Ry. 
Co.  (1878),  8  P.iss.  380.  Co.  (1878),  8  Biss.  380. 

8  Pinkard  v.  Allen's  Admr.  (1883),  75  ''  Duncan    v.    Atlantic,  Mississijipi,    & 

Ala.  73.  There  the  decree  in  f|uestioii  liad  Ohio  Ry.  Co.  (1882),  4  Hughes,  12.5, 
been  made  iu  vacation,  without  uotice  to,     131.     "If,"  said  the  court,  "  there  is  any 


§§  759,  760.]         FORECLOSURE  DECREES.  741 


Article  II.  —  Effect  op  Decree. 

.§  759.  Effect  of  Foreclosure  Decree  generally.  —  In  the  absenco 
of  any  statute  to  the  contrary,  the  foreclosure  cuts  off  all  rights 
and  interests  of  mortgagor  in  mortgaged  property,  and  nothing 
is  left  for  general  creditors  and  stockholders  save  their  interests 
in  the  surplus  after  mortgage  is  satisfied.^ 

This  result  is  not  affected  by  the  fact  that  the  purchase  is 
made  in  pursuance  of  a  plan  of  reorganization  authorized  by 
statute.     Such  a  plan  has  reference  only  to  the  new  corporation.  ^ 

"  Where  there  is  a  fund  in  court  to  be  distributed  among  a 
class  of  creditors,  a  decree  of  distribution  which  seems  to  make 
no  provision  for  some  of  the  class  will  not  ordinarily  preclude 
any  of  the  class  having  rights  similar  to  those  of  other  claimants 
from  asserting,  by  bill  or  petition,  their  rights  to  a  share  in  the 
fund. "  3 

§  760.  Conclusiveness  of  Decree.  —  It  may  be  said  in  general 
that  a  judgment  or  decree  affirming  the  existence  of  any  fact  is 
conclusive  upon  parties  or  their  privies,  whenever  the  existence 
of  such  fact  is  again  in  issue  between  them. 

Hence  if  a  court  of  competent  jurisdiction,  after  full  hearing 
as  to  validity  of  bonds,  has  pronounced  them  void,  a  bill  to 
charge  a  successor  corporation  with  such  bonds  will  not  be 
entertained  by  any  other  court  ;^  provided  the  person  who  seeks 
to  raise  the  same  questions  in  a  second  suit  was  not  prevented 
from  raising  them  in  the  former  suit  by  the  wrongful  act  of  the 
other  party.  ^ 

Where  the  validity  of  a  trust  deed  has  been  determined  in 
the  prior  suit,  that  question  cannot  again  be  litigated  between 
the  same  parties,  although  the  allegations  of  the  first  bill  are 
supported  and  fortified  by  other  charges,  where  no  reason  is 
given  why  the  supplementary  allegations  were  not  included  in 
the  former  bill.^ 

A  State  court  receiver  in  a  stockholder's  suit,  and  afterwards 

difficulty  created  by  its  terms  in  the  bid-  ^  Ibid. 

ding,  and  it  can  be  shown  after  the  sale  ^  Liirton,  Circuit  Judge,  in  Burke  v. 

that   bidders   were   hindered   by  any  ob-  Shortt  (1897),  79  Fed.  Rep.  6,  8. 

scurity   or   harshness   of    its    terms,    the  *  Beals  v.    Illinois,    M.  &  T.    E.    Co. 

party  suffering  from  that  defect  can  come  (1886),  27  Fed.  Rep.  721. 

into  court  and  object  to  the  ratification  of  ^  Brooks   &   Hardy   v.    O'Hara    Bros, 

the  sale  on  that  ground."  (1881),  8  Fed.  Rep.  529. 

1  Vatable  et  ah    v.   New  York,    Lake  ^  state  v.  Brown  (1885),  64  Md.  199  ; 

Erie,  &  Western  R.  Co.  (1884),  96  N.  Y.  s.  c.  1  Atl.  Rep.  54  ;  6  Atl.  Rep.  172;  24 

49  ;  s,  c.  17  Am.  &  Eng.  R.  R.  Gas.  268.  Am.  &  Eng.  R.  R.  Cas.  192, 


742  RAILWAY   BONDS   AND   MORTGAGES.        [CHAP.  XXXin. 

in  a  bondholder's  suit,  who,  upon  removal  of  latter  suit  to 
federal  court,  pays  in  the  amount  found  due  upon  an  account- 
ing, and  has  his  compensation  fixed  at  the  same  time,  the  judg- 
ment rendered  on  the  appeal  of  the  whole  case  is  conclusive 
as  to  the  point  that  the  liability  of  the  fund  to  him  has  been 
fully  disccharged ;  and  he  cannot  make  good  a  claim  for  addi- 
tional compensation  by  reinstating  the  stockholder's  suit  on  the 
docket  of  the  State  court,  and  procuring  an  order  from  that 
court  granting  him  a  further  allowance.^ 

The  principle  of  res  judicata  also  extends  to  the  grounds  of 
defence  or  recovery  which  might  have  been,  but  were  not,  pre- 
sented in  former  suit.^ 

A  foreclosure  decree  which  adjudges  that  defendants  named, 
including  one  who  holds  a  mortgage  prior  in  date,  but  distinctly 
alleged  in  the  bill  to  constitute  a  subordinate  lien,  shall  be 
barred  and  foreclosed,  etc.,  determines  the  question  of  priority 
raised,  although  it  does  not  expressly  state  that  such  defendant's 
mortgage  is  inferior  to  one  in  suit.^ 

So  a  prayer  that  the  mortgage  be  decreed  a  first  lien  on  the 
road  and  franchises,  coupled  with  the  joinder  of  certain  con- 
tractors as  defendants,  and  an  allegation  that  they  set  up  claims 
against  the  road,  which  complainant  does  not  admit  to  be  of  any 
validity  against  his  mortgage,  constitute  sufficient  grounds  for 
a  decree  to  sell  the  mortgaged  property,  discharged  of  all  liens, 
the  result  being  that  the  contractor's  claim  is  thereby  concluded.* 

Although  claim  of  a  creditor  for  services  is  paramount  under 
a  statutory  provision  to  the  mortgage,  yet  if  creditor  is  made 
a  party  to  a  foreclosure  in  which  the  validity  of  his  claim  is 
denied,  and  after  appearance  suiTers  the  bill  to  be  taken  pro  con- 
fesso,  he  will  be  estopped  from  asserting  a  lien  upon  property  in 
hands  of  purchaser,  under  a  decree  that  the  sale  shall  convey 
title  discharged  of  all  liens  and  claims.  The  rights  of  the 
creditor  are  not  strengthened  in  such  a  case  by  the  fact  that  he 


1  In  re  Hinckley  (1880),  3  Fed.  Kep.  action  between  the  same  parties  is  not  res 

556  ;  s.  c.  sicb.  nom.  Hinckley  v.  Morton  adjudicata  as  to   an   action    in    anotlier 

(1881),  103  U.  S.  764.  district.     Compton  v.  Jesup  (1897),  167 

•^  Beloit   V.    Morf,'an    (1868),    7    Wall.  U.  S.  1. 
6iy,  622;  State?;.  Brown  (1885),  64  Md.  »  Board  of  Supervisors  r.  Mineral  Point 

1&9;  8.  c.  1  Atl.   Rep.  54;  6  Atl.  Kep.  R.  Co.  (1869),  24  Wis.  93. 
172;   24  Am.   &  Eng.   R.   R.   Cas.    192;         *  Woods  &  McBrown  r.  Pittsburg,  Cin- 

Bell  V.  Chicago,  St.  Louis,  &  N.  0.  R.  Co.  cinnati,  &  St.   Louis  Ry.   Co.   (1881),   99 

(1882),  34  La  Ann.  785.  Pa.  St.  101  ;  s.  c.  7  Am.  &  Eng.  R.  R 

A    decree     rendered     in     the     United  Caa.  478. 
Stiitcs  Circuit  Court  for  one  district  in  an 


§  760.J 


FORECLOSURE  DECREES. 


743 


reduced  his  claim  to  judgment  before  bill  was  filed  in  fore- 
closure.^ 

A  bondholder  is  bound  by  decree  giving  priority  to  a  levy  as 
against  the  mortgage  when  he  docs  nut  show,  in  presenting  his 
claim,  whether  it  arose  before  or  after  such  levy.^ 

On  the  other  hand,  claims  which  are  neither  expressly  passed 
upon  by  the  decree,  nor  of  such  a  character  that  their  settlement 
is  necessarily  involved  in  the  decision  actually  rendered,  are 
not  concluded  by  a  decree  of  sale  which  virtually  ignores  the 
pleadings  in  which  the  claims  are  presented,  and  contains  no 
reference  to  them,  except  an  order  that  the  portion  of  the  com- 
plainants' bill  relating  to  those  claims  is  to  be  consolidated  with 
the  causes  pending  in  the  court  against  the  same  respondents, 
and  a  provision  reserving  for  the  future  consideration  of  the 
court  so  much  of  the  complainants'  demand  as  asserts  a  first 
lien  upon  certain  specific  personal  property.^ 


1  Woods  &  McBrown  v.  Pittsburg,  Cin- 
cinnati, &  St.  Louis  Ky.  Co.  (1881),  99 
Pa.  St.  101  ;  s.  c.  7  Am.  &  Eng.  R.  R. 
Cas.  478. 

Chief  Justice  Sharswood  said:  "The 
principal  contention  of  the  plaintiff  has 
been  that  there  was  no  prayer  in  the  bill 
that  the  road  should  be  sold  clear  of  all 
incumbrances.  If,  then,  contractors  had 
come  and  established  their  claim,  no  such 
decree  could  have  been  made.  The  sale 
would  have  been  necessarily  subject  to 
their  claim.  It  might  well  be  that  the 
sale  would  not  produce  sufficient  to  pay 
them.  The  purchasers  must  then  take 
cum  onere.  But  no  such  contractors  mak- 
ing defence,  though  summoned  and  ap- 
pearing, the  decree  of  sale  could  then 
properly  be  made,  as  it  was,  clear  of  all 
incumbrances.  If  all  that  the  bill  sought 
was  to  ascertain  who  were  lienholders  to 
be  paid  from  the  proceeds,  they  were  un- 
necessary parties.  This  they  knew  very 
well  ;  they  have,  or  ought  to  have,  known 
that  they  were  made  parties  as  having  an 
interest  in  the  road  paramount  to  the 
mortgage.  It  is  perfectly  clear  that  the 
object,  and  sole  object,  in  making  them 
parties  was  to  ascertain  what  claims  the 
road  would  be  subject  to  in  the  hands  of 
the  purchasers,  so  that  bidders  might 
know  for  what  they  were  bidding.  They 
appeared  to  the  bill  :  they  had  the  oppor- 
tunity to  prove  their  claim  conclusively 


against  purchasers.  They  did  not  avail 
themselves  of  it.  When  ruled  to  plead, 
answer,  or  demur,  they  suffered  the  bill  to 
be  taken  pj-o  confesso  against  them.  What 
did  this  mean  ?  Surely  that  they  had  no 
such  interest  in  the  road,  as  contractors, 
as  would  be  set  up  against  the  mortgage. 
They  chose  to  take  this  course,  and  must 
adopt  the  consequences." 

2  McKee  et  al.  v.  Grand  Rapids  & 
Reed's  Lake  Street  Ry.  Co.  (1829),  41 
Mich.   274. 

3  Simmons  v.  Taylor  (1885),  23  Fed. 
Rep.  849. 

"In  the  consolidated  suit,"  said  Judge 
Brewer  in  the  course  of  his  opinion, 
"there  was  a  decree  barring  the  mort- 
gagor's equity  of  redemption  in  default  of 
the  payment  of  the  mortgaged  sum  within 
ten  days  after  the  decree,  a  finding  of  the 
amount  due  under  the  three  first  mort- 
gages, an  order  requiring  the  payment  of 
such  sums  within  ten  days,  and  an  order 
for  a  general  execution  for  any  balance  of 
such  sums  not  realized  upon  the  sales 
ordered,  —  in  short,  everything  to  show  a 
foreclosure  of  those  prior  mortgages,  and 
an  omission  of  all  of  those  matters  in 
respect  to  this  second  mortgage.  There 
was  no  finding,  no  orders,  no  decree  of 
foreclosure  against  it  as  concerned  this 
second  mortgage.  In  fact,  there  was  no 
other  reference  to  it  than  in  the  simple 
reservation   for   future   determination    by 


744:  RAILWAY   BONDS    AND   MORTGAGES.        [CHAP.  XXXlir 

The  rule  to  be  applied  in  this  and  similar  cases  is  that  the 
language  of  the  decree  must  be  construed  in  reference  to  the 
issue  which  is  put  forward  by  the  prayer  for  relief  and  other 
pleadings,  and  which  these  show  it  was  meant  to  decide. 
Hence,  though  such  language  is  very  broad  and  emphatic,  suffi- 
ciently so,  perhaps,  when  taken  in  the  abstract  merely,  to 
include  the  decision  of  questions  between  co-defendants,  yet 
where  the  pleadings,  including  the  prayer  for  relief,  are  not 
framed  in  the  usual  way  in  equity,  when  it  is  meant  to  bring  the 
respective  claims  and  rights  of  co-defendants  before  the  court, 
but  are  framed  as  in  a  controversy  between  the  complainant  and 
defendant  chiefly  or  only,  such  general  language  will  be  held 
down  to  these  two  principal  parties  alone.  ^ 

An  action  in  which  the  validity  of  the  bonds  is  put  in  ques- 
tion IS  not  barred  by  a  decree  in  a  former  action  in  which  that 
question  was  not  raised.^ 

Where  the  United  States  Circuit  Court  has  acquired  jurisdic- 
tion of  foreclosures  brought  by  trustees  of  principal  mortgage, 
and  afterwards  consolidated  with  various  suits  for  foreclosure  of 
divisional  mortgages  brought  by  their  several  trustees,  though 
the  diverse  citizenship  of  parties,  under  decree  of  foreclosure, 
has  been  made,  a  bill  brought  by  stockholders  of  the  defendant 
corporation  in  the  same  court  to  set  aside  the  decree  in  the 
original  consolidated  cause,  on  allegations  that  it  was  obtained 

the   court   of    so  much   of    its    claim    as  party   presenting   it   is    in    court.      The 

asserted  a  first  lien  upon  certain  specific  rights  of  the  various  parties  to  a  foreclos- 

personal  property.     The  decree,  except  as  ure  suit  are  determined  by  the  nature  of 

to  a  little  matter  of  alleged  priority  in  the  decree  entered.    And  nothing  is  deter- 

respect  to  some  personal  property,  ignores  mined  which  is  not  expressly  determined, 

the   answer   and   cross-bill    filed    by   the  or  which  is  not  impliedly  settled  by  the 

appointed   trustee  for  this   second   mort-  terms  of  the  decree  in  fact  entered." 
gage."      Counsel  had  taken   the   ground  ^  Graham   v.    Chamberlain    (1866),    3 

that  there  was  such  a  difference  between  Wall.  704. 

the  old  proceedings  for  strict  foreclosure,  The  owner  of  a  judgment  in  the  State 
and  the  ordinary  proceedings  at  the  pres-  court  establishing  a  statutory  lien  upon 
ent  day  for  foreclosure  by  sale,  that  all  railroad  property,  whose  petition  to  be 
the  rights  of  all  the  parties  to  the  suit  are  allowed  the  privilege  of  intervening  in  pro- 
cut  off  by  the  sale.  The  learned  judge  ceedings  in  the  United  States  Circuit  Court 
pronounced  this  doctrine  to  be  too  broadly  has  been  discussed  without  prejudice,  will 
stated,  saying  :  "I  agree  tliat  every  right  not  be  enjoined  from  enforcing  his  judg- 
presented  and  adjudicated  for  or  against  nient,  for  the  reason  that  the  property  has 
any  mortgage  or  mortgagor  is  determined  been  sold  under  a  decree  of  the  United 
by  the  decree,  but  I  cannot  agree  that  a  States  court.  Blair  v.  Walker  (1886),  26 
right  presented  by  bill  or  cross-bill,  and  Fed.  Rep.  73. 

unnoticed  in  the  decree,  and  not  absolutely  2  City  of  Chicago  v.  Cameron  (1887), 

necessaiy  for  d  .tcrrninntion  in  the  decree,  120  111.  447  ;  s.  c.  11  N.  E.  Rep.  899. 
is  determined  by  the  simple  fact  that  the 


§§  761,  762.]         FORECLOSURE  DECREES.  745 

by  collusion,  fraud,  etc.,  is  an  ancillary  or  auxiliary  suit  to  the 
main  one.  If  such  bill  be  dismissed,  and  the  com{)lainant8 
appeal  from  the  order  to  the  United  States  Circuit  Court  of 
Appeals,  and  this  latter  court  make  a  decree  aflirming  the 
decree  of  the  Circuit  Court,  the  decree  of  the  Circuit  Court  of 
Appeals  is  a  final  decree,  within  the  provisions  of  the  sixth 
section  of  the  act  of  March  3,  1891,  and  no  appeal  from  it 
will  lie  to  the  Supreme  Court. ^ 

A  bondholder  will  not  be  allowed  to  intervene  to  have  the 
decree  opened  and  himself  allowed  to  make  a  defence  after  a 
decree  of  sale  in  a  foreclosure  suit,  upon  his  allegations  that  he 
had  first  heard  of  the  foreclosure  suit  after  the  advertisements 
of  the  sale  were  posted,  where  he  has  been  directly  contradicted 
by  a  witness,  and  the  foreclosure  is  clearly  shown  to  have  been 
long  a  matter  of  general  discussion  in  the  neighborhood  where 
the  bondholder  resided. ^ 

§  761.  Federal  Courts  bound  by  Decisions  of  State  Courts 
respecting  State  Statutes.  —  Where  the  Supreme  Court  of  the 
State  in  which  a  federal  court  is  held  has  decided  that  the  fore- 
closure of  a  mortgage  under  the  law  of  that  State  was  hoiia  fide, 
and  in  conformity  with  the  State  law,  such  judgment  must  be 
held  as  furnishing  the  rule  of  decision  to  the  federal  court, 
except,  perhaps,  as  regards  the  question  whether  the  State  law 
is  constitutionaL^ 

§  762.  Estoppel  by  Decree.*  —  Persons  made  parties  to  a  fore- 
closure suit,  as  subsequent  incumbrancers,  whose  rights  were 
already  acquired,  and  existed  at  commencement  of  suit,  are 
bound  to  set  up  their  claims  and  assert  thoir  rights  in  that  suit, 
on  peril  of  being  cut  off  and  foreclosed,  in  respect  to  such 
claims.^ 

So  far  as  regards  the  conclusiveness  of  the  decree  upon  their 
rights,  it  is  immaterial  what  their  liens  actually  are.  That 
they  are  brought  in  as   judgment   creditors,    owing  to  the  fact 

1  Carey  v.  Houston  &  Texas  Central  which  they  are  represented  by  a  trustee  is 
Ry.  Co.,  161  r.  S.  115  ;  s.  c.  16  Sup.  Ct.     discussed  in  another  chapter. 

Rep.  537  (1806).     See  also  Carey  v.  Hous-  ^  Benjamin    v.     Elmira,    Jefferson,    & 

ton  &  Texas  Central  Ry.  Co.  (1893),  150  Canandaigua  R.  Co,  (1867),  49  Barb.  441. 

U.  S.  170,  180.  In  this  case  a  decree  declaring  a  mortgage 

2  Farmers'  Loan  &  Trust  Co.  v.  Eocka-  of  after-acquired  property  to  be  a  valid 
way  Valley  R.  Co.  et  al.  (1895),  69  Fed.  lien  thereon  was  held  to  conclude  the 
Rep.  9.  plaintiffs,  who  had  a  chattel  mortgage  on 

3  Sullivan  v.  Portland  &  Kennebec  R.  a  part  of  the  same  property,  but  who, 
Co.  (1874),  4  Cliff.  212.  although  made  parties  to  the  suit,  failed 

*  The  extent  to  which  bondholders  are  to  litigate  the  question  of  the  relative 
bound  by  a  decree  rendered  in  a  suit  in    rank  of  the  two  liens.    . 


746  RAILWAY   BONDS   AND   MORTGAGES.       [CHAP.  XXXIII. 

that  the  plaintiff  does  not  know  that  they  hold  a  chattel  mort- 
gage on  the  property,  is,  in  this  point  of  view,  of  no 
consequence.^ 

A  company  purchasing  the  mortgaged  property  at  a  fore- 
closure sale,  subject  to  the  lien  of  a  mortgage  of  indemnity 
given  by  the  vendor  company  to  secure  a  county  for  the  loan  of 
its  bonds,  cannot  question  the  validity  of  those  bonds,  when  the 
county  itself  has  already  raised  that  point  by  a  cross-bill  filed 
in  a  creditor's  suit  against  the  vendor  company,  and  that  cross- 
bill has  been  dismissed  by  a  decree  absolute  in  its  terms. ^ 

The  transferee  of  the  purchaser  at  the  sale  will  not  be 
allowed  to  reopen  an  inquiry  as  to  a  claim  which  was  pending 
at  the  time  decree  was  made,  where  sale  is  expressly  made  sub- 
ject to  all  liens  of  certain  classes,  among  which  is  the  claim  in 
question,  and  the  purchaser  made  no  suggestion  before  the  con- 
firmation of  the  sale  that  he  bought  the  property  in  ignorance 
of  the  existence  of  these  claims,  or  that  the  court  should  reserve 
the  right  to  establish  them  as  liens  superior  to  the  mortgage; 
and  neither  raised  an  objection  that  they  had  been  allowed  for 
larger  amounts  than  those  originally  contended  for,  nor  asked 
that,  in  view  of  their  allowance,  he  be  permitted  to  surrender 
his  purchase,  so  that  the  property  might  be  resold  for  the  benefit 
primarily  of  those  having  first  liens.  ^ 

A  suit  brought  for  general  benefit  of  all  stockholders,  as,  for 
example,  to  stay  a  foreclosure  sale  on  ground  that  trust  deed  is 
invalid,  is  binding  upon  all  of  them,  and  they  cannot  thereafter 
be  heard  to  deny  the  right  of  the  trustees  to  sell  in  accordance 
with  terms  of  deed  of  trust.* 

The  unsecured  creditors  of  a  railroad  company,  although  not 
parties  to  a  foreclosure  suit,  are  bound  by  adjudications  rendered 
therein ;  as,  for  instance,  by  an  order  in  which  it  is  determined 
that  certain  stocks  and  bonds  which  are  not  in  terms  covered  by 
the  mortgage  shall  be  held  and  dealt  with  by  the  receiver  as 
])art  of  the  fund  subject  to  the  lien  of  such  mortgage,  and  by  a 
final  decree  in  which  it  is  determined  that  they  shall  be  sold  as 
pai-t  of  the  mortgaged  property,^ 

But   no   one    who   holds  a  specific   lien  upon  the  corporate 

1  Iknjamin  v.  Elinira,  JefTorson,  &  4  statti  r.  Brown  (1885),  64  Md.  199; 
Oaiian.iaifjua  R.  Co.  (1807),  49  Barb.  441.     s.  c.  1  Atl.  Rej).  54  ;  6  Atl.  Rep.  172  ;  24 

2  Wasliington,  Oliio,  &  W.   B.  Co.  v.     Am.  &  Eng.  K.  R.  Cas.  192. 

Cazeiiove  (1887),  83  Va,  744  ;  S.  C.  3  S.  ^  Herring  v.   New  York,  L.  E.  &  W. 

E.  n<\>.  433.  R.  Co.  (1887),   105  N.  Y.  340;  s.  c.  12 

8  Swann  v.  Wriglifs   Adnirs.    (1884),  N.  E.  Rep.  763. 
110  U.  S.  590. 


§§  763,  764.]        FORECLOSURE  DECREES.  747 

property  is  bound  by  decree  rendered  in  a  foreclosure  to  which 
he  is  not  a  party.  Hence  a  decree  declaring  a  mortgage  a  first 
lien  upon  that  property  will  not  give  it  precedence  over  a  lien 
which  is  actually  a  prior  one,  held  by  one  who  has  no  notice  of 
the  proceedings,  and  is  not  privy  to  the  decree.  ^ 

Similarly,  as  a  decree  does  not  conclude  judgment  creditors 
whose  petition  to  be  allowed  to  intervene  has  been  dismissed, 
the  latter  will  not,  at  the  instance  of  the  purchaser  at  the  sale, 
enjoin  the  creditors  from  enforcing  their  judgment  lien.^ 

Nor  will  a  decree  declaring  a  mortgage  to  be  a  first  lien  on 
the  property  affect  the  rights  of  a  judgment  creditor  who  had 
no  notice  of  proceedings,  and  was  neither  a  party  nor  privy  to 
the  decree.  The  existence  of  such  a  decree  is,  therefore,  no 
defence  to  a  scire  facias  to  continue  the  lien  against  the  com- 
pany which  has  succeeded  the  original  judgment  debtor  in  the 
ownership  of  the  road.^ 

§  763.  Decree  pro  confesso.  —  A  decree  taken  pro  confesso 
against  lienholders  upon  their  failure  to  plead  is  as  binding 
upon  them  as  if  they  had  actually  appeared  and  presented  their 
case  to  the  court.  ^ 

§  764.  Decree  by  Consent.  —  Parties  to  a  Suit  have  the  right  to 
agree  to  anything  they  please  in  reference  to  the  subject-matter 
of  their  litigation,  and  the  court,  when  applied  to,  will  ordi- 
narily give  effect  to  their  agreement,  if  it  comes  within  the 
general  scope  of  the  case  made  by  the  pleadings.  Thus  it  is  in 
the  power  of  the  parties  to  a  foreclosure  suit  to  agree  that  a 
decree  may  be  entered  for  a  sale  of  the  mortgaged  property, 
without  any  specific  finding  of  the  amount  due  on  account  of  the 
mortgage  debt,  or  without  giving  a  day  of  payment.  It  is  also 
competent  for  them  to  agree  that,  if  the  property  is  bought  at 
the  sale  by  or  for  the  bondholders,  payment  of  the  purchase- 
money  may  be  made  by  a  surrender  of  the  bonds.  Where  the 
decree  embodies  agreements  made  by  the  parties  as  to  such 
matters,  it  does  not  lie  with  them  to  complain  of  what  the  court 
has  done  to  give  effect  to  these  agreements.^ 

A  decree  by  a  court  of  record,  purporting  upon  its  face  to  be 

1  Pittsburg,  CinciTinati,    &   St.    Louis  St.  187.     Compare  Tyrone  &  Clearfield  R. 

Ey.  Co.  V.  Marshall  (1877),  8.5  Pa.  St.  187.  Co.  v.  Jones  (187.5),  79  Pa.  St.  60. 

"  =2  Blair  v.  Walker  (1886),  26  Fed.  Rep.  *  Woods   &    McBroom    v.    Pittsburg, 

73.  Cincinnati,  &  St.  Louis  Ry.  Co.   (1881), 

8  Stewart  v.  Wheeling  &  L.  E.  R.  Co.  99  Pa.  St.  101  ;  s.  c.  3  Am.  &  Eng.  R.  R. 

(1895).   53  Ohio  St.   151  ;  s.  c.  41  N.  E,  Cas.  525. 

Rep.   247 ;    Pittsburg,    Cincinnati,   &  St.  ^  Pacific  Railroad  V.  Ketchum  (1879), 

Louis  Ry.  Co.  v.  Marshall  (1877),  85  Pa.  101  U.  S.  289,  297. 


748  RAILWAY    BONDS    AND    MORTGAGES.         [CHAP.  XXXIII. 

taken  by  consent  of  all  parties  to  the  record,  has  the  verity  of  a 
record  as  to  the  recital  of  the  consent,  and  is  not  to  be  con- 
troverted except  for  fraud,  accident,  or  mistake,  and  then  only 
in  a  proceeding  directly  to  set  it  aside.  ^ 

This  principle  has  been  held  to  give  validity  to  a  decree 
which  would  otherwise  have  been  objectionable  as  being  in  con- 
travention of  a  statutory  provision  by  virtue  of  which  a  court  of 
chancery  is  deprived  of  its  power  of  deciding  disputed  issues  of 
fact  without  a  jury.  In  Clews,  etc.  v.  First  Mortgage  Bond- 
holders, ^  ruled  with  reference  to  §4206,  Georgia  Code  of  1882,  a 
receiver  was  appointed  in  a  creditor's  suit  to  marshal  the  assets 
of  an  insolvent  railroad,  and  several  claims,  after  being  reported 
upon  by  a  master,  were  considered  either  by  a  jury,  or,  where 
the  parties  so  agreed,  by  the  court  sitting  without  a  jury. 
Judgments  upon  these  claims  having  been  taken,  fixing  the 
amount  and  character  of  each  lien  upon  the  fund,  a  decree  of 
sale  was  entered  by  the  consent  of  all  the  parties,  reserving  the 
rights  of  certain  creditors  whose  claims  were  still  unsettled, 
and  providing  that  the  proceeds  of  the  sale  should  be  brought 
into  court  and  distributed  among  the  lienholders  whose  rights 
had  been  fixed.  The  property  was  sold,  and  at  the  next  term 
the  court  made  a  final  decree,  holding  up  so  much  of  the  pro- 
ceeds as  was  necessary  to  pay  the  claimants,  whose  rights  had 
been  reserved,  and  ordered  the  remainder  to  be  distributed  by 
commissioners  according  to  the  provisions  of  the  consent  decree. 
This  final  decree  was  held  to  have  been  properly  made  without 
the  intervention  of  a  jury,  as  it  was  merely  a  judgment  carrying 
into  effect,  through  ministerial  officers,  the  previous  decree 
taken  by  consent  of  the  parties.  Similarly  a  claim  of  a  surety 
on  an  appeal  bond,  asserted  to  have  priority  over  the  mortgage, 
may  be  allowed,  if  assented  to  by  all  the  parties  concerned, 
though  otherwise  it  would  be  rejected.^ 

A  decree  cannot  be  deemed  to  be  one  taken  by  consent, 
although  the  record  shows  the  presence  of  the  parties,  and  con- 
tains a  recital  that  they  consented  to  such  decree,  or  submitted 
a  decree  which  they  desired  to  have  entered,  where,  notwith- 
standing all  this,  the  record  goes  on  to  state  that  the  court  did 
not  enter  that  particular  decree,  but  took  the  papers  and  entered 
a  decree  uf)on  its  own  consideration.* 

1  Clews  V.  First  Mortgage  Bondholders  Lonis,  &  Pac.  Ry.  Co.  (1885),  24  Fed. 
(187}),  51  Ga.  131.  Rep.  98. 

2  51  Oa.  131  (1874).  ••  Wetmore  v.  St.  Paul  &  Pac.  R.  Co., 
«  Central   Trust   Co.    v.    Wabash,    St.     3  Fed  Rep.  177. 


§  765.]  FORECLOSURE  DECREES.  749 

§  765.  Acquiescence  in  Decree.  —  It  is  a  well-SCttlcd  rule  of 
law  that,  where  an  unauthorized  sale  of  property  is  expressly 
or  impliedly  ratified  by  the  owner,  he  is  precluded  from  subse- 
quently setting  up  his  title  against  the  purchaser.  Acquiescence 
is  an  implied  sanction  of  the  sale.  As  in  all  other  cases  in 
which  the  aid  of  a  court  of  chancery  is  asked,  the  petitioner 
who  seeks  to  set  aside  a  decree  must  act  with  reasonable  prompti- 
tude in  order  to  obtain  relief.  Judgments  and  decrees  become 
binding  by  the  acquiescence  of  the  parties  affected  by  them, 
especially  when  they  have  actually  been  executed  and  carried 
into  effect.  1 

Thus,  although  stockholders  who  refuse  to  consent  to  a  lease 
of  the  corporate  property  have  a  right  to  procure  the  annulment 
of  a  subsequent  foreclosure  sale,  by  which  interests  under  this 
lease  pass  from  the  lessee  to  another  company,  yet  even  if  the 
lease  is  ultra  vires  and  tainted  with  fraud,  they  will  be  denied 
relief,  where  they  take  no  steps  to  assert  their  rights  for  about 
ten  years.  The  mere  fact  that,  at  the  time  the  lease  was  made, 
the  lessor's  road  was  in  the  hands  of  trustees  is  not  an  excuse 
for  such  inactivity,  for  they  still  had  a  right  to  be  heard  before 
a  court  as  to  the  permanent  alienation  of  the  property. ^ 

If  corporate  officers  fraudulently  consent  to  a  judgment  or 
decree  in  a  foreclosure  suit,  the  stockholders  may,  perhaps, 
afterwards  file  a  bill  to  set  it  aside,  provided  they  do  so  within 
a  reasonable  time  after  discovery  of  the  fraud.  But  if  they 
have  received  notice  that  the  officers  were  not  faithfully  defend- 
ing that  suit,  and  notwithstanding  such  notice  neglected  to 
intervene  or  take  any  steps  in  the  way  of  endeavoring  to  do  so, 
and  permitted  final  judgment  or  decree  to  be  entered,  and  sale 
to  take  place,  they  cannot,  after  the  lapse  of  years,  be  allowed 
to  attack  the  validity  of  the  proceedings,  and  the  corporation  is 
in  such  a  case  equally  estopped.^ 

Especially  will  relief  be  denied  to  a  stockholder  who  neglects 
to  move  for  such  a  long  period  as  ten  years,  when  no  conceal- 
ment is  charged,  and  the  facts  relied  on  were  well  known  to  the 
officers  of  the  company,  and,  if  not  actually  known  to  the  com- 
plainant himself,  might  have  readily  been  ascertained  by  him 
during  the  progress  of  the  foreclosure  suit.* 

1  Vermont  &  Canada  R.  Co.  v.  Ver-  ^  Pacific  Railroad  (of  Missouri)  v.  Mis- 
mont  Central  R.  Co.  (1877),  50  Vt.  500  ;  soiiri  Pacific  Ry.  Co.  (1881),  2  McCrary, 
s.  c.  14  Am.  Ry.  Rep.  497.  227,  231. 

2  Boston  &  Providence  R.  Corp.  v.  *■  Foster  v.  Mansfield,  C.  &  L.  M.  R. 
New  York  &  New  England  R.  Co.  (1881),  Co.  (1888),  36  Fed.  Rep.  627. 

13  R.  I.  260  ;  s.  c.  2  Am.  &  Eng.  R.  R. 
Gas.  300. 


750  RAILWAY   BONDS   AND   MORTGAGES.       [CHAP.  XXXIII. 

Nor  can  the  stockholders  procure  the  cancellation  of  a  decree 
of  foreclosure  and  sale  rendered  against  the  corporation,  where 
they  had  knowledge,  pending  the  suit,  that  the  corporate  officers 
were  not  acting  in  good  faith,  and  delayed  their  application  for 
relief  for  a  period  of  four  years,  during  which  the  decree  has 
been  fully  executed,  the  property  sold,  the  sale  confirmed,  and 
the  property  conveyed  by  the  purchaser  to  a  new  corporation 
which  has  issued  new  stock,  and  placed  negotiable  bonds  for 
large  sums  upon  the  market.  ^ 

Relief  will  be  denied  to  one  who,  after  exchanging  his  bonds 
for  preferred  stock,  makes  application  for  a  rescission  of  the 
contract  long  after  the  property  of  the  company  has  been  sold 
by  the  trustees  of  the  mortgage  securing  the  bonds  so  exchanged, 
since  such  rescission  would  render  it  necessary  to  set  aside  the 
sale  and  the  title  acquired  thereunder  by  the  purchasers. ^ 

One  who  claims  the  right  of  avoiding  the  purchase  made  by 
another  at  a  judicial  sale,  or  of  holding  the  purchaser  as  a 
trustee,  and  availing  himself  of  the  purchaser's  bid,  cannot 
delay  the  assertion  of  this  right  for  the  purpose  of  being  able  to 
decide,  in  the  light  of  subsequent  events,  whether  it  will  be 
profitable  or  not  to  take  action.^ 

§  766.  Estoppel  of  Junior  Lienor.  —  A  second  mortgagee  is  not 
estopped  from  asserting  that  his  rights  are  cut  off  by  a  fore- 
closure under  a  senior  mortgage  to  which  he  is  a  party,  merely 
because  he  remains  silent  when  that  foreclosure  is  consummated 
by  a  decree  which  does  not  bar  his  rights,  nor  file  the  amount 
due  under  his  mortgage,  nor  make  any  order  for  the  sale  of  the 
property  to  satisfy  that  mortgage.  The  mere  fact  that  he  is 
made  a  party  casts  no  obligation  upon  him.  He  may  remain 
silent,  and,  if  no  decree  is  taken  against  him,  his  rights  remain 
as  though  he  had  not  been  made  a  party.  * 

A  junior  mortgagee  has  a  right  to  redeem,  and  if  he  stands 
by  while  a  sale  in  a  foreclosure  suit  to  which  he  was  a  party  is 
made  and  confirmed,  he  must,  in  equity,  be  deemed  to  have 
waived  his  right.^ 

1  Piicific  Railroad  (of  Missouri)  v.  Mis-  *  Simmons  v.  Taylor  (1885),  23  Fed. 
60uri  Pacific  Ry.   Co.  (1881),  2  McCrary,     Rep.  849,  per  Brewer,  J. 

231.  ^  Simmons  V.  Burlington,  Cellar  Rapids, 

2  (JoiMington  v.  Railroad  Co.  (1886),  &  Northern  Ry.  Co.,  159  U.  S.  278  ;  s.  c. 
103  U.  S.  409,  411.  The  dismissal  of  the  16  Sup.  Ct.  Rep.  1  (1895),  holding  that  a 
bill  was  based  both  on  the  Statute  of  delay  of  seven  years  before  attempting 
Limitation  and  the  general  doctrine  of  to  enforce  his  alleged  rights  deprived  a 
laches.  junior  mortgagee  of  the  right  to  ask  the 

8  Credit  Co.  V.  Arkansas  Central  R.  aid  of  a  court  of  equity  in  enforcing 
Co.  (1882),  15  Fed.  Rep.  46.  them. 


§  ^^QQ-] 


FORECLOSURE   DECREES. 


751 


A  junior  mortgagee  who  is  a  party  defendant  to  a  foreclosure 
bill  in  which  there  is  a  prayer  that  he  be  decreed  to  redeem, 
and  the  priority  of  the  plaintiff's  mortgage  is  found  or  conceded, 
and  a  sale  is  ordered  in  default  of  payment,  declaring  the  right 
of  the  mortgagee  to  redeem  to  be  forever  barred,  a  similar  order 
as  to  right  of  redemption  by  the  junior  mortgagee  is  not  sub- 
stantially nor  even   formally  necessary.  ^ 


1  Simmons  v.  Burlington,  Cedar  Rapids, 
&  Northern  Ry.  Co.  (1895),  159  U.  S.  278  ; 
s.  c.  16  Sup.  Ct.  Rep.  1. 

Mr.  Justice  Shiras,  iu  the  opinion, 
said  :  "  We  tliink  the  law  was  correctly 
stated  by  Mr.  Justice  Matthews  in  Chicago 
&  Vincennes  Railroad  v.  Fosdick,  106  U. 
S.  47,  68,  where  he  said  :  '  In  case  the 
proceeding  results  finally  in  a  sale  of  the 
mortgaged  premises,  the  sale  is  made  free 
from  the  ecjuity  of  redemption  of  the 
mortgagor  and  all  holders  of  junior  in- 


cumbrances, if  made  parties  to  the  suit, 
and  is  of  the  whole  premises,  when  neces- 
sary to  the  payment  of  the  amount  due, 
or  when  the  property  is  not  properly 
divisible  ;  it  conveys  a  clear  and  absolute 
title  as  ag.iiust  all  the  parties  to  the  suit, 
or  their  privies,  and  the  proceeds  of  the 
sale  are  distributed  after  payment  of  the 
amount  due,  for  non-payment  of  which 
the  sale  was  ordered,  in  satisfaction  of  the 
unpaid  debts  remaining,  whether  due  or 
not.'  " 


752 


KAILWAY   BONDS   AND   MORTGAGES.         [CHAP.  XXXIV. 


CHAPTER   XXXIV. 


DISTRIBUTION   OF   PROCEEDS   OF   FORECLOSURE   SALE. 


Priorities  affected  by  Funding 
Interest. 

Relative  Rank  of  Preferred  Stock- 
holders and  Bondholders. 

Judgments  against  Corporation 
for  Damages. 

Priorities  of  Builder  of  Extension 
of  Koad  during  Receivership. 

Receiver's  Operating  Expenses 
not  payable  out  of  Proceeds. 

Amount  recoverable  by  Pledgees 
of  Bonds. 

Pledgee  not  entitled  to  share  in 
Proceeds  when  Pledge  is  ultra 
vires. 

Lienholder  on  Part  of  Road, 
when  entitled  to  be  paid  out 
of  Whole  Proceeds. 

Surplus,  after  paying  Bondhold- 
ers, belongs  to  Unsecured 
Creditors  of  Company. 


§  767.  Introductory.  —  Many  of  the  principles  by  which  the 
relative  priorities  of  the  various  creditors  of  a  mortg:agor  com- 
pany are  determined  have  necessarily  been  discussed  in  the  pre- 
ceding chapters,  more  especially  in  those  relating  to  bonds, 
mortgages,  and  receiver's  debts.  In  the  present  chapter  it  is 
proposed  to  collect  the  decisions  which  deal  with  the  actual  dis- 
tribution of  the  fund,  apart  from  any  question  as  to  the  particular 
effect  or  validity  of  the  transactions  upon  which  the  rights  of  the 
claimants  are  founded. 

§  768.  Master  or  other  Person  appointed  to  make  Distribution  is 
bound  by  Decree.  —  'I'hc  master  or  other  officer  to  whom  is  as- 
signed tbo  duty  of  distributing  the  proceeds  of  the  sale  cannot  go 
behind  tlio  dcci-ee  to  inrpiirc  whether  the  various  claimants  on 
tbo  fund  are  entitled  to  a  ])osition  different  from  that  which  they 
bold  under  the  terms  of  such  decree.     Thus,  he  is  bound  by  a 


§767. 

Introductory. 

§776 

768. 

Master  or  other  Person  appointed 

to  make  Distribution  is  bound 

777 

by  Decree. 

769. 

Lien  Creditors,  with  some  Excep- 
tions, always  preferred. 

778. 

770. 

Holders  of  Equitable  Debentures 
entitled   to  share  pari  passu 

779 

with  Legal  Holders. 

780. 

771. 

Undisputed  Prior  Claims  may  be 

paid  immediately. 

781 

772. 

"When  Distribution  is  to  be  made 

according  to  Maxim  "  Equal- 

782 

ity  is  Equity." 

773. 

Coupons    usually   payable    pari 

passu  with  Bonds. 

783 

774. 

Priorities   between   Bondholders 
and  Lenders  of  Money  to  take 

up  Coupons. 

784 

775. 

Priorities  of  Persons  surrender- 
ing Securities  and  thereby  in- 
creasing the  Corporate  Assets. 

§§  7G9-772.]        PKOCEEDS  of  foreclosure  sale.  753 

decree  s(!ttling  the  relative  priorities  of  morti^agcs  on  the  prop- 
erty ;  and  it  is  only  a  party  affected  by  the  decision  who  is  enti- 
tled, upon  an  allegation  of  error,  to  ask  for  a  review,  or  a 
rehearing,  by  the  court. ^ 

§  769.  Lieu  Creditors,  -with  some  Exceptions,  always  preferred. 
—  A  creditor  who  fails  to  establish  any  lien,  legal  or  equitable, 
on  the  property  is  always  postponed  to  those  who  hold  such  liens, 
the  only  exception  to  this  rule  being  in  cases  where  debts  for 
operating  expenses  are,  for  some  of  the  reasons  explained  in  a 
previous  chapter,  charged  upon  the  proceeds  in  preference  to  the 
specific  liens.  Thus,  unless  a  judgment  is  by  statute  an  actual 
prior  lien  on  the  property,  it  confers  no  priority  as  against  a  sub- 
sequent mortgage.^ 

Hence  one  who  sells  land  to  the  company,  agreeing  to  receive, 
as  part  of  the  consideration,  second-mortgage  bonds  to  be  after- 
wards issued,  and  who,  upon  the  bonds  being  tendered,  refuses  to 
receive  them  for  the  reason  that  certain  judgments  had  been  con- 
fessed by  the  company  prior  to  the  execution  of  the  mortgage, 
has  no  lien,  either  equitable  or  legal,  for  the  purchase-money  for 
which  the  bonds  were  to  have  been  delivered  to  him.  The  mere 
setting  apart  of  the  bonds  gives  him  no  claim  for  their  amount  in 
the  distribution.  After  rejecting  the  bonds,  he  has  no  further 
claim  on  them.  The  company  can  then  dispose  of  them  as  it 
pleases,  and  he  has  only  a  right  of  action  against  the  company 
for  the  purchase-money.^ 

§  770.  Holders  of  Equitable  Debentures  entitled  to  share  pari 
passu  with  Legal  Holders.  —  Though  debentures  issued  without 
the  name  of  the  obligee  are  void  as  legal  instruments,  one  who 
lends  money  to  the  obligor  and  receives  such  blank  debentures  as 
collateral  security  is  entitled  to  share  in  the  benefit  of  the  trust 
deed  securing  the  debentures  pari  passu  with  the  holders  of  com- 
plete debentures^ 

§  771.  Undisputed  Prior  Claims  may  be  paid  immediately.  — • 
Claims  having  an  undisputed  priority  may  be  paid  without  wait- 
ing to  ascertain  the  extent  of  other  interests  in  the  fund.^ 

§  772.  When  Distribution  is  to  be  made  according  to  Maxim 
"Equality  is  Equity."  —  Each  railroad  bond,  by  the  terms  of  the 
security,  usually  stands  as  an  independent  claim,  entitled  to  its 

1  McElrath  v.  Pittsburg  &  Steuben-  *  Ee  Queensland,  L.  &  C.  Co.  (1894), 
villa  R.  Co.  (1871),  68  Pa.  St.  37;  s.  c.     L.  R.  3  Ch.  181. 

1  Am.  Ky.  Rep.  139.  &  Hand  v.  Savannah  &  Charleston  R. 

2  Foggv.  Blair  (1890),  133  U.  S.  534.      Co.    (1880),   13  S.  C  467;  s.  c.  12  Am. 
«  Rice's  Appeal  (1875),  79  Pa.  St.  168.     &  Eng.  R.  R.  Cas.  488. 

4S 


754  RAILWAY    BONDS    AND    MORTGAGES.         [CHAP.  XXXIV. 

proper  proportion  of  any  fund  which  may  be  reaUzed  from  tlie 
sales.i 

What  that  proportion  is  will  depend  on  the  amount  which  re- 
mains for  application  to  the  particular  class  of  securities  to  which 
any  given  bond  belongs  after  prior  claims  have  been  satisfied.  As 
between  bondholders  of  the  same  class  the  principle  prevails  that 
"  equality  is  equity."  ^ 

In  such  cases  the  principle  regulating  the  distribution  of  money 
among  execution  creditors  at  law  is  not  applicable.^ 

Where  the  trust  deed  provides  that  upon  continuance  of  default 
in  payment  of  interest  for  six  months  all  the  bonds  shall  become 
due,  and  trustees  shall  take  possession  and  sell,  and  from  the 
proceeds  pay  all  such  bonds,  or  so  many  as  may  be  outstanding, 
the  intention  of  the  parties  being  thus  shown  to  be  that  no  sale 
shall  be  made  except  for  the  whole  debt,  the  holders  of  bonds 
upon  which  interest  has  not  been  paid  will  have  no  priority,  as 
to  payment  of  such  interest,  over  others  upon  whose  bonds  the 
interest  has  been  paid.* 

Where  part  of  mortgage  debt  has  been  assigned,  and  the  whole 
mortgage  security  is  about  to  be  appropriated  to  pay  the  debt, 
and  is  insufficient  to  pay  the  whole,  it  is  usually  distributed 
pro  rataP 

§  773.  Coupons  usually  payable  pari  passu  -with  Bonds.  —  In  the 
absence  of  some  special  provision  in  the  mortgage,  coupons  sepa- 
rated from  the  bonds  to  which  they  belong,  and  transferred  to 
other  holders,  have  no  equity  superior  to  that  of  the  bonds  them- 
selves, or  of  subsequently  maturing  coupons.  A  railroad  mortgage 
in  the  ordinary  form  stands  as  a  security  for  the  principal  of  the 
bonds  as  well  as  the  interest,  with  no  priority  as  to  either.  The 
coupons  are  mere  representatives  of  the  claim  for  interest,  and 
the  obligation  of  the  debtor  evidenced  by  them  cannot  be  higher, 
or  entitled  to  greater  privileges,  than  it  would  be  should  the 
bonds  in  their  body  undertake  the  payment  of  interest.^ 

1  Coev.  Columbus,  Piqua;&Indianapo-  ^  Ketchum  v.  Duncan  (1878),  96  U.  S. 
lis  R.  Co.  (1859),  10  Ohio  St.  372,  410.          6.^9,  affinnin,£?  Duncan  v.  Mobile  &  Ohio 

2  Morton  v.  New  Orleans  &  Selnia  R.     II.  Co.  (1877),  3  Woods,  567. 

Co.   (1885),   79  Ala.  590  ;   Rice's   Appeal  In    this    last    case    the    mortgage    re- 

(1875),   79   Pa.  St.   209  ;   In  re  Regent's  quired  the  trustees,  in  the  event  of  a  sale. 

Canal  Iron  Works  (1876),  L.  R.  3  Div.  43.  to  apply  the  residue  of  the  proceeds,  after 

8  Morton  V.  New  Orleans  &  Selma  R.  deducting  costs,  etc.,   "to  pay  the  prin- 

Co.  (1885),  79  Ala.  590,  621,  citing  Cole-  cipal  and  interest  which  may  be  due  on 

brooke  on  Collat.  Sec,  §  159;  1  Story  Eq.  the  boiuls  issued."     The  court  said  that 

Juris.,  §§  .^)51,  555.  the  phun   moaning  of  this  provision  was 

*  Ilunijjhreys   v.    Morton   (1881),    100  that  tiic  lionds  and  interest  due  (that  i.s, 

111.  592.  owing  or  contracted  to  be  paid)  were  to 

'  Sewfdl  V.  P.rninerd  (1865),  38  Vt.  364.  share  in  the  application. 


§  77ij.]  PROCEEDS    OF    FOliECLOSUKE    SALE.  755 

This  principle  is  sonietiincs  embodied  in  the  mortgage  itself,  as 
where  it  is  provided  that  in  case  of  default  and  sale,  or  other  jtro- 
ceedings  to  enforce  the  bonds,  "  all  bonds  which  shall  then  be  a 
lien  in  common  therewith,  and  the  interest  accrued  thereon,  shall 
be  considered  equally  due  and  payable,  and  entitled  to  a  pro  rata 
dividend  of  the  proceeds  of  said  sale  or  other  proceedin<'s."  The 
inference  that  overdue  coupons  are  not  entitled  to  any  preference 
under  such  an  instrument  is  not  rebutted  by  the  addition  of  a 
clause  to  the  effect  that  "  in  no  case  shall  the  principal  of  any 
bond  be  considered  due  until  twenty  years  from  the  date  thereof." 
Such  a  clause  merely  means  that  a  bondliolder  cannot,  under  any 
circumstances,  bring  an  action  for  the  principal  before  it  becomes 
due  by  its  terms. ^ 

It  has  been  held,  however,  that  where  the  fund  is  insufficient 
to  pay  the  whole  principal  and  interest^  unpaid  coupons  belong- 
ing to  a  class  in  which  a  part  of  the  coupons  has  been  already 
paid,  should  be  paid  before  coupons  falling  due  at  a  later  date, 
and  before  the  principal  of  any  of  the  bonds ;  and  that  coupons 
detached,  and  in  the  hands  of  others  than  the  holders  of  the 
bonds  from  which  they  were  detached,  should  be  paid  before 
such  bonds.  2  That  case,  however,  does  not  decide  that  such  a 
preference  would  have  been  just  if  the  mortgage  had  contained 
no  such  provision,  but  merely  that  the  provision  was  decisive 
against  the  correctness  of  the  decree  allowing  the  preference. 
It  was,  in  fact,  cited  in  Ketchum  v.  Duncan,  sifpra,  to  support 
the  rule  that  all  coupons  are  on  an  equality  unless  the  mortgage 
provides  otherwise.  Assuming  such  preference  to  be  proper, 
there  is  no  difficulty  in  accepting  the  secondary  proposition 
laid  down  by  the  learned  judge,  that  the  diligence  of  some  of 
the  holders  of  the  preferred  class  of  coupons  in  demanding 
and  receiving  their  interest  could  not  be  imputed  as  laches  to 
those  who  failed  to  take  action,  so  as  to  work  a  virtual  prefer- 
ence in  favor  of  the  former  (see  p.  416  of  the  opinion).  The 
priority  being  absolute,  if  the  general  doctrine  be  accepted,  the 
right  of  the  coupon-holder  to  insist  on  it  clearly  cannot  be  for- 
feited until  the  right  of  action  itself  on  the  debt  is  lost  by  lapse 
of  time  or  otherwise.      But  it  seems  impossible  to  sustain  the 

^  Dunham    v.    Cincinnati,    Peru,    etc.  the  pro  rata  payment,  as  in   Dunham  v. 

Ry.    Co.    (1863),    1    Wall.     254.      Judge  Cincinnati,    Pera,    etc.    Ey.    Co.,    supra, 

Blatchford    in    making    this    ruling    ap-  which  was  referred  to  by  him,  decided  it 

pears    to    have    assumed    that    past-due  should    be    noticed    before    Ketclium    v. 

coupons  might  be  paid  in  preference  to  Duncan,  xiipra. 

the  principal  of  the  bonds  and  to  hiter  ^  Stevens  v.  New  York  &  Oswego  Mid- 

■  coupons,  unless  the  mortgage  provided  for  land  R.  Co.  (1876),  13  Blatch.  412. 


756  RAILWAY    BONDS    AND    MORTGAGES.        [CHAP.  XXXIV. 

main  principle  on  which  this  decision  rests,  as  it  is  quite  irre- 
concilable with  the  decision  of  the  Supreme  Court  of  the  United 
States  in  Ketchum  v.  Duncan,  supra.  In  a  case  involving  some- 
what similar  circumstances  the  Supreme  Court  of  South  Caro- 
lina has  denied  its  correctness,  holding  that  the  fact  of  some  of 
the  coupons  of  a  certain  issue  of  bonds  having  been  already 
paid  in  bonds  guarantied  by  the  State  did  not  raise  any  equity 
for  the  payment  of  unsettled  coupons  of  the  same  class  and  dates 
in  preference  to  the  bonds  and  later  coupons.^ 

A  decree  of  distribution  of  the  proceeds  of  sale  of  railway 
property  in  payment  of  the  principal  of  the  lionds  proportionally 
has  been  construed  as  intended  to  deal  with  the  ownership  of 
bonds  and  their  coupons  under  the  general  designation  of 
"bonds."  Therefore,  that  coupons  detached  from  such  bonds 
and  matured  at  the  time  of  foreclosure,  as  the  mortgage  had 
given  a  preference  to  interest,  were  entitled  to  be  paid  in  full, 
and  those  maturing  after  the  decree,  if  detached,  to  share  propor- 
tionately with  the  principal  of  the  bonds. ^ 

A  water  company  had  placed  with  a  mortgage  company,  as 
collateral  security,  certain  of  its  bonds  with  the  coupons 
attached.  After  sale  of  its  property  in  foreclosure  proceedings, 
a  bank,  to  which  the  water  company  had  assigned  these 
coupons,  excepted  to  the  report  of  a  master  disallowing  the 
bank's  claim  to  be  paid  the  amount  of  these  coupons  from  the 
proceeds  of  sale.     The  exceptions  were  overruled.^ 

§  774.  Priorities  between  Bondholders  and  Lenders  of  Money  to 
take  up  Coupons.  —  (Compare  Chapters  II.  and  III.,  where  the 
cases  involving  the  question,  whether  bonds  and  coupons  are 
bought  or  paid,  are  discussed.) 

1  Hand  v.  Savannah  &  Charleston  R.  In  Child   v.  New  York   &  New  Eng- 

Co.  (1881),  17  S.  C.  467;  s.  c.  12  Am.  &  land   R.  Co.   (1880),   129   Mass.    170,  the 

Eng.  H.  R.  Cas.  495.     Yet  it  was  recently  court  said,  arguendo:  "  It  may  be  that  if, 

remarked,   obiter,   by   Judge  Acheson,   in  u[>on  foreclosure,  the  proceeds  are  not  suf- 

Pcnnsylvania  R.  Co.  v.  Allegheny  Valley  ficient  to  pay  both,  it  would  be  equitable 

R.  Co.  (1891),  48  Fed.  Rep.   139,  that  a  that  they  should  be  divided  pro  rata  be- 

provision  giving  to  the  overdue  coupons  tween  the  holders  of  the  bonds  and  cou- 

priority  over  the  jnincipal  of  the  bonds  in  pons."     The   point  not  being  directly  in- 

the  distribution  of  the  proceeds  of  the  sale  volved,  the  remark  is  of  no  greater  weight 

is  the  ajipropriation  which  the  law  itself  than  any  other  cautious  suggestion   of  a 

makes  when  the  fund  is  deficient ;  namely,  rule,  but,  as  an  obiter  dictum,  it  goes  to 

to  the  discharge  of  accrued  interest  first,  counteract    the    efTcet   of    the    last   case 

and   tlien    of   principal.      No    authorities  cited. 

were   cited,   and    it  seems   as   if  the   de-  ^  Burke    v.    Sliortt    (1897),    79    Fed. 

cision   of   the    Supreme  Court  to  exactly  Rep.  6. 

the  ojjposite  pfTcct  must  have  been   over-  *  New  York   Security  &  Trust  Co.  v. 

looked    for   the  moment   by  the   learned  Ei|uitable  Mortgage  Co.   (1896),  77  Fed. 

judge.  Rep.  64. 


§§  775,  776.]       PROCEEDS  op  foreclosure  sale.  757 

As  against  bondholders  who  presented  their  coupons  for  pay- 
ment and  not  for  sale,  and  who  had  the  right  to  assume  they 
w.ere  paid  and  extinguished,  a  person  who  advances  the  money 
to  take  them  up  under  an  undisclosed  agreement  with  the  com- 
pany that  the  coupons  should  be  delivered  to  him  uncancelled, 
as  security  for  his  advances,  is  not  entitled  to  an  equal  })riority 
in  the  lien,  or  the  proceeds  of  the  mortgage  by  which  the  coupons 
are  secured.^ 

To  sustain  the  claim  of  an  intervener  to  share  in  the  proceeds 
upon  coupons  which  he  has  paid  to  the  holder,  such  payment 
must  have  been  made  upon  a  distinct  understanding  with  the 
holders  of  the  bonds  to  which  such  coupons  belonged,  that  they 
were  purchased  and  not  discharged.^ 

Coupons  received  by  one  who  advanced  the  money  with  which 
they  were  taken  up,  under  an  agreement  that  they  were  to  be 
delivered  to  him  uncancelled,  as  security  for  the  advance,  are 
valid  securities  in  his  hands,  and  he  may  enforce  the  mortgage 
against  the  company.  But  as  between  him  and  the  bondholders 
who  received  the  amount  of  their  coupons  in  ignorance  of  the 
transaction,  and  supposing  their  coupons  to  have  been  paid,  the 
latter  have  the  prior  equities ;  and  if  the  sum  realized  from 
the  sale  is  insufficient  to  pay  the  face  of  the  bonds,  the  holder 
of  the  coupons  is  not  entitled  to  share  in  the  proceeds.^ 

§  775.  Priorities  of  Persons  surrendering  Securities  and  thereby 
increasing  the  Corporate  Assets.  —  When  title  papers  belonging  to 
an  insolvent  railroad  company  which  have  been  placed  in  the 
hands  of  a  person  to  be  held  until  certain  amounts  due  to  an 
attorney  for  legal  services  in  procuring  rights  of  way,  and  to 
another  creditor  for  advances,  and  the  assets  are  thereby 
increased,  the  debts  for  which  those  papers  were  held  should  be 
paid  out  of  the  proceeds  of  the  sale  next  after  the  right  of  way 
claims.* 

§  776.  Priorities  affected  by  Funding  Interest.  —  First-lien  bond- 
holders who  avail  themselves  of  the  provisions  of  an  interest- 

1  Tarneron  v.  Tome  (1886),  64  Md.  &  Washington  Territory  R.  Co.  (1895),  67 
507  ;  s.  c.  2  Atl.  Rep.  837  ;  2  Cent.  Rep.     Fed.  Rep.  404. 

639,  declaring  the  rule  to  be  well  settled  ^  Union    Trust    Co.    v.    Monticello    & 

to    this    effect    by   Union    Trust    Co.    v.  Port  Jervis  R.  Co.  (1875),  63  N.  Y.  311. 

Monticello  &  Port  Jervis  R.  Co.  (1875),  63  Judge  Earl  said  :   "  Equity  will  keep  the 

N.    Y.    311  ;    Haven   v.   Grand   Junction  securities  in  life  in  such  cases  to  promote 

R.  &   Depot  Co.   (1871),  109   Mass.   88;  the  ends  of  justice,  but  not  against  any 

Ketchum  v.  Duncan  (1877),  96  U.  S.  659,  person  having  a  superior  equity." 

662.  *  McDonald  v.  Charleston,  C.  &  C.  R. 

2  Farmers'  Loan  &  Trust  Co.  v.  Oregon  Co.  (1893),  93  Tenn.  281 ;  s.  c.  24  S.  W. 

,  Rep.  252. 


758  RAILWAY   BONDS   AND    MORTGAGES.        [CHAP.  XXXIV. 

funding  act,  and  accept  bonds  guarantied  by  the  State  in 
exchange  for  their  coupons,  forfeit  the  priority  to  which  they 
were  entitled  as  holders  of  those  coupons.^ 

And  if,  in  such  a  case,  the  proceeds  of  the  sale  are  insufficient 
to  discharge  the  claims  of  all  the  secured  creditors,  the  first- 
lien  bondholders  who  retain  their  bonds  may  insist  on  receiving 
the  full  advantage  of  their  priority.  The  diminution  in  the 
number  of  their  class  resulting  from  the  fact  that  some  of  them 
have  surrendered  their  bonds,  and  thus  lost  their  rank  as  first- 
lien  bondholders,  will  not  inure  to  the  benefit  of  junior  classes 
of  bondholders."'^ 

§  777.  Relative  Rank  of  Preferred  Stockholders  and  Bondholders. 
—  Whether  preferred  stockholders  can  assert  a  priority  of  lien 
as  against  subsequent  bondholders  depends  upon  what  actually 
occurred  at  the  time  the  agreement  was  entered  into  under 
which  the  preferred  stock  was  issued,  and  upon  what  contracts 
affecting  the  property  were  entered  into  by  the  parties  having 
the  right  to  incumber  the  property,  and  not  upon  what  may 
have  been  in  the  minds  of  the  preferred  stockholders  themselves 
at  the  time  the  various  transactions  took  place.  An  agreement 
which  merely  provides  that  the  preferred  stock  is  to  be  "  a  first 
claim  on  the  property  of  the  corporation  after  its  indebtedness," 
and  that  the  interest  on  such  stock  shall  be  paid  before  any 
dividends  on  common  stock,  will  be  construed  as  merely  pre- 
scribing a  method  by  which  the  holders  of  the  preferred  stock 
are  to  receive  a  preference  as  against  the  holders  of  common 
stock,  and  not  as  meaning  that  the  "  indebtedness  "  referred  to 
should  be  that  indebtedness  only  which  then  existed  against  the 
company.  To  attribute  any  other  meaning  to  the  contract 
would  contravene  the  general  rule  that  where  stockholders 
claim  a  priority  of  payment  over  mortgage  creditors,  a  spe- 
cific lien  must  be  shown  beyond  all  doubt  to  exist  in  their 
favor.  ^ 

There  is  no  statutory  power  in  a  corporation  in  Ohio,  Indiana, 
or  Illinois  to  issue  certificates  of  preferred  stock,  and  make  it  a 
lien  upf)ii  the  property  or  assets  of  the  corporation.* 

Prelerred  stockholders  have  sometimes  been  held  to  be  such 


1  Hand  v.  Savannah   &  Charleston  R.  ^  King  v.  Ohio  &  Mississippi  R.  Co, 

Co.  (1880),    12  S.  C.    314  ;   approved    in  (1880),  2  Fed.  Rep.  36;  s.  0.  9  Biss.  278 

Hand   v.   Savannah  &  Charleston   R.   Co.  (1880),  per  Druniniond,  J. 
(1882),  17  S.  C.  219  ;  s.  c.  12  Am.  &  Eng.  *  ContHncntal  Trust  Co.  of  New  York 

Tl.  Vk.  fas.  49r>.  V.  Toledo,  St.  Louis.  &  Kansas  City  R.  R. 

a  11,1,1.  Co.  (1896),  72  Fed.  Rep.  92. 


§  778.]  PROCEEDS  OF  FORECLOSURE  SALE.  759 

only  in  name,  their  real  position  being  that  of  persons  who  have 
lent  money  on  mortgage  security.^  Ijut  in  no  case  have  the 
courts  shown  any  disposition  to  depart  from  the  general  rule 
that  "  stockholders  are  not  entitled  to  any  share  of  the  capital 
stock  nor  any  dividend  of  the  profits,  until  all  the  debts  of  the 
company  have  been  paid.  "^ 

In  Chaffee  v.  Rutland  &  Burlington  R.  Co.^  it  was  strenuously 
contended  that  a  charter  ])roviding  for  the  issue  of  preferred 
stock  by  a  company  organized  by  the  holders  of  second -mortgage 
bonds,  during  proceedings  for  foreclosure  of  their  lien  was  in- 
tended to  provide  means  of  exchanging  the  first-mortgage  bonds 
into  preferred  stock,  without  affecting  the  security,  the  result 
being  to  give  the  scrip  certificates  for  the  amount  of  the  divi- 
dends, convertible  into  bonds  at  the  option  of  the  holder,  a 
priority  over  the  floating  indebtedness.  The  whole  subject  was 
very  elaborately  discussed  by  Judge  Veazey,  and  the  conclusion 
arrived  at  that  the  preferred  stockholders  possessed  every 
privilege  of  shareholders  and  were  exempt  from  none  of  their 
liabilities;  they  must  be  treated  as  shareholders,  as  against 
persons  to  whom  any  part  of  the  floating  indebtedness  was 
owing.  This  consequence  was  not  prevented  by  the  mere  fact 
that,  under  the  charter,  the  preferred  stock  was  to  be  issued 
only  for  the  purpose  of  paying  or  taking  up  prior  claims  or 
incumbrances,  and  that  no  mortgage  should  take  precedence  of 
the  preferred  stock  in  the  application  of  the  income.  These 
provisions  were  merely  safeguards,  designed  to  secure  the 
benefit  of  a  preference  between  the  two  kinds  of  stock,  and  not 
of  a  preference  over  the  creditors  of  the  corporation. 

§  778.  Judgments  against  Corporation  for  Damages.  —  Judgments 
against  the  corporation  for  injuries  to  person  or  property  are, 
as  we  have  seen,  not  usually  reckoned  among  preferential  debts, 
even  as  against  the  earnings  of  the  receivership.  A  fortiori 
will  they  give  the  claim  no  priority,  as  against  the  mortgagees, 
in  the  distribution  of  the  proceeds  of  the  sale.* 

1  This  was  held  to  be  the  result  of  the  8  55  Vt.  110 ;  s.  c.  16  Am.  &  Eng. 
issue  of  preferred  stock  in  Burt  t>.  Rattle     R.  R.  Cas.  408. 

(1876),  31  Ohio  St.   116,  where  the  i.ssue  *  In  Receivers.  Stanton  (1894),  86  Tex. 

was  made  subject  to  the  provision.s  of  a  620,  the  court,  after  a  brief  reference  to 

statute  expressly  declaring  that  the  pre-  the  rule  stated  in  the  text,  discussed  the 

ferred  stock  should  neither  give  its  hold-  effect  of  the  Texas  statute,  prescribing  the 

ers  a  right  to  vote  nor  afiect  them  with  order  in  which  several  classes  of  debts,  iu- 

liability  for  the  debts  of  the  corporation.  eluding  certain  "  back  chums,"  were  to  lie 

2  Railroad  Co.  v.  Howard  (1868),  7  paid,  upon  the  appointment  of  a  receive;', 
Wall.  392.  out   of  such   earnings  as   came   into  his 


760  RAILWAY    BONDS    AND    MORTGAGES.        [CHAP.  XXXIV. 

But  in  some  States  a  different  rule  is  established  by  statute. 
Thus,  under  section  1255  of  the  South  Carolina  Code,  which 
provides  that  "mortgages  of  incorporated  companies,  .  .  . 
whether  in  bonds  or  otherwise,  shall  not  have  power  to  exempt 
the  property  or  earnings  of  such  corporations  from  execution 
for  the  satisfaction  of  any  judgment  obtained  .  .  .  for  torts 
committed  by  such  corporation  whereby  any  person  is  killed,  or 
any  person  or  property  injured,"  it  has  been  held  that  a  judg- 
ment for  personal  injuries  received  before  or  after  the  execution 
of  the  mortgage  takes  precedence  of  such  mortgage  in  the  distri- 
bution of  the  proceeds.  ^ 

A  statute  of  this  description  has  no  extra-territorial  force.^ 

A  statute  which  makes  a  judgment  a  lien  on  the  real  property 
of  the  debtor  "from  the  first  day  of  the  term  at  wdiich  it  is 
rendered,"  does  not  confer  any  priority  on  a  claim  for  damages 
which  has  not  been  reduced  to  judgment  until  more  than  a  year 
after  the  sale  of  the  road.  Under  such  circumstances  there  is 
no  property  of  the  company  upon  which  the  lien  of  the  judgment 
can  attach  at  the  time  of  its  rendition.  After  the  sale  "the 
relation  of  the  property  to  the  company  is  in  all  respects  as  if 
the  company  never  owned  it. "  And  since  there  is  "  no  such 
lien  at  law  upon  the  road,  there  can  be  none  in  equity  touching 
the  fund  arising  from  the  sale. "  ^ 

So  also  the  foreclosure  of  a  junior  mortgage,  and  a  decree  of 
sale  subject  to  the  prior  liens,  effectually  cuts  off  the  lien  of  all 
judgments  recovered  against  the  maker  of  the  mortgage  so  fore- 
hands. As  the  statute  made  a  judgment  must  rest  upon  the  words  of  the  statute 
for  a  tort  of  the  company  a  lieu  only  on  alone,  for  the  analogy  here  emphasized  by 
the  earnings,  the  right  of  a  creditor  who  the  court  is  not  iu  accordance  with  the 
had  recovered  such  a  judgment  to  resort  weight  of  authority.  See  chapter  on  pre- 
to  the  corpus  of  the  property  for  satisfac-  ferred  debts, 
tion  was  denied.  2  Central  Trust  Co.  r.  East  Tennessee, 

1  Finance  Co.  of  Pennsylvania  v.  Va.&Ga.  Ry.  Co.  (1895),  69  Fed.  Rep.  658. 
Charleston,   C.    &   C.   R.    Co.    (1894),    61  8  Jeffrey  v.  Moran  (1879),  101  U.   S. 

Fed.  Rep.  369.  The  reasoning  of  the  285.  It  was  also  contended  that  the 
court  was  that  the  statute  recognized  the  words  of  the  statute,  "  the  lien  of  judg- 
eijuity  enforced  under  the  doctrine  of  ments  recovered  against  the  corporation," 
the  line  of  cases  beginning  with  Fosdick  were  equivalent  to  "valid  claims  against 
V.  Schall  (1879),  99  U.  S.  2-35,  viz.,  that  the  corporation  ;"  but  the  court  said  :  "No 
"  whoever  contributes  to  keep  a  corpora-  reasoning  can  successfully  maintain  that  a 
ti(jn  a  going  concern  by  materials  or  labor  claim  merely  in  judgment  and  a  judgment 
iriust  be  i)rovi(led  for  before  mortgage  cred-  lien  are  the  .same  thing  in  legal  effect  any 
itor.s  can  claim  out  of  the  earnings."  The  more  than  in  fact.  To  hold  otherwise 
jireferred  expenses,  it  was  considered,  in-  would  be  to  make  the  law  not  to  apply 
elude  "all  damages  done  to  life,  ]>crson,  to  it.  It  is  only  when  a  claim  has  lipened 
or  property  in  keeping  up  the  road."  The  into  a  judgment,  where  there  is  property 
deci-siou    is,    doubtless,    correct ;    but    it    to  be  bound  by  it,  that  a  lien  can  subsist." 


§§  779,  780.]       PROCEEDS  op  foreclosure  sale.  761 

closed,  and  if  any  of  those  are  not  recovered  till  after  the  sale 
has  actually  taken  place,  they  can  never  become  liens  on  the 
property  at  all.^ 

§  779.  Priorities  of  Builder  of  Extension  of  Road  during  Receiver- 
ship. —  It  has  been  stated  above  tliat  the  court  has  no  power, 
without  the  consent  of  the  lien-creditors,  to  charge  the  corpus  of 
the  estate,  and  possibly  not  even  the  income,  with  the  expense 
of  constructing  additions  to  the  road  or  making  permanent 
improvements  partaking  of  the  character  of  actual  additions. 
An  order  authorizing  construction  work,  entered  with  the 
consent  of  some  of  the  bondholders,  only  binds  those  who  do 
consent.  If  the  receiver  undertakes  to  act  upon  such  an  order, 
and  contracts  to  build  an  extension  at  a  cost  not  to  exceed  a 
specific  sum,  the  payment  of  which  is  to  be  made  *•'  out  of  the 
surplus  income,"  he  is  to  be  regarded  as  having  acted  merely  as 
the  agent  of  the  consenting  bondholders ;  and  if  the  work  is  done 
at  a  greater  cost  than  that  agreed  upon,  and  finally  sold  as  a 
part  of  the  entire  road,  with  his  acquiescence,  he  will  merely 
have  an  equity  to  share  the  proceeds  of  the  sale  to  the  extent 
that  the  section  built  by  him  has  enhanced  the  price  brought  by 
the  whole  property.  On  the  other  hand  the  proportionate  share 
of  a  bondholder  who  refused  to  consent  to  the  extension  is 
entitled  to  his  proportionate  share  of  the  entire  proceeds  of  the 
sale!  2 

§  780.  Receiver's  Operating  Expenses  not  Payable  out  of  Proceeds. 
—  The  operating  expenses  of  a  receiver  are  not  payable  out  of 
the  proceeds,  unless  by  the  authority  of  the  court  regularly  given 
in  proceedings  of  which  the  lien-creditors  have  had  due  notice. 
(See  Chapter  XXX.,  relating  to  receivers'  certificates.)  A 
different  doctrine  is,  of  course,  applicable  when  the  claimant 
relies  on  a  specific  lien,  and  not  merely  on  the  fact  that  his  debt 
is  for  operating  expenses.  Thus  it  has  been  held  that  a  mort- 
gage lien  will  be  postponed  in  the  distribution  of  the  proceeds 
to  a  claim  for  the  rental  of  rolling-stock  sold  to  the  company, 
with  a  vendor's  lien  reserved,  and  used  by  the  receiver  in  oper- 
ating the  road.^ 

1  Bronson  v.  La  Crosse  &  Milwaukee  R.  In  a  Canadian  case,  Gray  v.  Manitoba 
Co.,  2  Wall.  283,  304.  &  Northwestern  Ry.   Co.,    32  Can.  L.J. 

2  Hand  v.  Savannah  &  Charleston  E.  N.  S.  167,  the  working  expenses  of  the 
Co.  (1881),  17  S.  C.  219  ;  s.  c.  12  Am.  &  whole  railway  were  declared  in  an  amended 
Eng.  li.  R.  Cas.  495.  decree  of  sale  to  be  a  first  lien  on  the  rev- 

**  Kneeland  v.  American  Loan  &  Trust  enue,  and  must  be  provided  for  in  priority 
Co.  (1890),  136  U.  S.  89;  s.  c.  43  Am.  &  of  the  claim  of  the  mortgagees.  See 
Eng.  R.  E.  Cas.  519.  this  case  affirmed  and  modified  in  House 


762  RAILWAY   BONDS   AND   MORTGAGES.       [CHAP.  XXXIV. 

Among  the  operating  expenses  which  are  payable  out  of  the 
income  of  the  receivership  only  are  the  amounts  awarded  as 
damages  for  injuries  resulting  from  the  acts  of  the  receiver's 
servants.^ 

A  fortiori  if  the  receiver  was  appointed  merely  for  the  pur- 
pose of  realizing  profits  to  pay  arrears  of  rent,  and  is  rather 
a  managing  agent  for  the  various  parties  in  interest  than  a 
technical  receiver,  there  is  no  warrant  for  selling  the  property 
to  discharge  a  floating  debt  which  the  earnings  of  the  road  are 
insufficient  to  liquidate. ^ 

§  781.  Amount  recoverable  by  Pledgees  of  Bonds.  —  (Compare 
Chapter  II.)  A  pledgee  of  bonds,  if  a  bona  fide  holder  for  value 
before  maturity,  may  prove  for  the  entire  amount  due  thereon, 
but  cannot  recover  more  than  the  amount  of  bis  advances,  with 
proper  costs  of  suit.^ 

Thus,  where  the  company  authorizes  an  agent  to  raise  money 
for  its  uses,  and  delivers  bonds  to  him  to  be  deposited  as  col- 
lateral security  for  such  money  as  he  might  borrow,  a  lender 
who  makes  advances  on  the  personal  note  of  the  agent  and  the 
security  of  a  portion  of  the  bonds  intrusted  to  him  will  not  be 
entitled  to  receive  the  full  amount  of  the  bonds  and  account  to 
the  agent,  bat  only  the  amount  of  his  loan  and  interest.  It  is 
error  in  a  master  or  referee  to  leave  the  excess  in  the  hands  of 
the  creditors,  for  when  the  proceeds  of  a  sale  of  the  mortgaged 
property  are  brought  into  court,  it  is  its  duty  to  make  distribu- 
tion of  the  entire  fund  according  to  law  and  equity.'* 

§  782.  Pledgee  not  entitled  to  share  in  Proceeds  virlien  Pledge 
is  ultra  vires.  —  Where  an  issue  of  coupon  bonds  secured  by  mort- 
gage on  the  real  estate  of  a  corporation  is  authorized  by  the 
board  of  directors  "  for  the  purpose  of  raising  money  to  pay  off 
the  floating  debts  of  the  company,"  the  powers  of  the  agent 
deputed  to  negotiate  the  bonds  are  restricted  according  to  the 

of    Lords    (1897),     L.    R.  App.   Cas.,    p.  2  Vermont  &  Canada  R.  Co.  r.  Vermont 

254.  Central  R.  Co.  (1877),  50  Vt.  500  ;  s.  c. 

The    court    may,    in    an   action   of    a  14  Am.  Ry.  Rep.  497. 
debenture-holder,   decline  to  ovdc^r  a  sale  ^  Morton  v.  New  Orleans  &  Selma  Ry. 

of  the  property  of  a  company  which  is  of  Co.  (1885),  79  Ala.   590,  621,  citing  nu- 

piiblic  utility  in  its  purposes.     Blaker  v.  merous  cases,   among  others  Duncomb  i'. 

Hertz  &   Essex   Waterworks  Co.,  41  Ch.  New  York,    Housatonic,   &   Northern  R. 

Div.  399.  Co.,  84  N.  Y.  190,  where  a  ruling  of  the 

^  Haml  V.   Savannah  &  Charleston  R.  referee,   based  on    this   doctrine,   was  ap- 

Co.  (1882),  17  S.  C.  219  ;  s.  c.  12  Am.  &  proved  by  the  court  without  iny  question 

Eng.  K.  11.  Cas.  495  ;  Ryan  v.  Hays  (188  })>  -is  to  its  correctness. 

62  Tex.  42;  s.  c.   23  Am.  &  Eng.  R.  R.  <  Rice's    Appeal   (1875),    79    Pa.    St. 

Cas.  501.  168. 


§§  783,  784.]       PROCEEDS  of  foreclosure  sale.  763 

terms  of  the  mortgage.  A  pledge  of  the  bonds  to  secure  a  prior 
debt  of  the  mortgagor  is,  therefore,  ultra  vires,  and  the  pledgee 
has  no  legal  right  to  share  in  the  proceeds  of  the  mortgaged 
property.^ 

§  783.  Lienholder  on  Part  of  Road,  -when  entitled  to  be  paid 
out  of  "Whole  Proceeds.  —  One  who  has  a  lien  on  a  part  of  a  road 
only  is  entitled  to  be  paid  out  of  the  aggregate  proceeds  of  the 
property,  when  the  receiver,  in  consideration  of  the  surrender 
of  the  lien,  agrees  to  pay  a  specified  sum  in  satisfaction  of  such 
a  lien  out  of  any  money  coming  into  his  hands  from  the  part  of 
the  road  covered  by  the  lien,  or  "arising  from  the  sale  thereof 
under  the  decree  of  the  court,"  and  subsequently  procures  a  sale 
of  the  property  as  an  entirety.  The  right  of  the  lienor  to  be 
thus  paid  is  not  to  be  defeated  by  the  fact  that  the  bondholders 
exercise  the  privilege  given  by  the  decree  to  make  payment  not 
in  cash,  but  in  bonds.  If  the  purchasers  fail  to  discharge  the 
lien  in  a  reasonable  time  fixed  for  that  purpose,  the  property 
should  be  sold  again  as  an  entirety,  or  so  much  thereof  sold  as 
may  be  necessary  to  raise  that  amount  due  to  him,  with  interest 
and  costs  from  the  time  he  intervened  to  assert  his  rights. ^ 

§  784,  Surplus,  after  paying  Bondholders,  belongs  to  Unsecured 
Creditors  of  Company.  —  Whenever  the  lien  of  the  bondholders  is 
legally  discharged,  the  property  embraced  in  the  mortgage,  or 
whatever  remains  of  it,  belongs  to  the  corporation,  and  is  a  part 
of  the  assets  for  the  payment  of  its  other  debts.  Any  compro- 
mise arrangement  between  the  bondholders  and  stockholders 
which  ignores  the  paramount  right  of  the  general  creditors  to 
any  surplus  remaining  after  the  claims  of  the  various  lienors 
have  been  satisfied,  is  fraudulent  as  against  such  general  cred- 
itors. For  the  purposes  of  this  rule  it  is  immaterial  that  the 
property  is  mortgaged  for  a  sum  exceeding  the  price  which  it 
would  fetch  at  an  ordinary  foreclosure  sale,  and  that,  if  such  a 
sale  had  actually  taken  place,  there  would  have  been  no  funds 
available  for  distribution  among  the  general  creditors.  Any 
sum  which  is  set  free  for  the  stockholders  in  consequence  of  the 
consent  of  the  lienors  to  surrender  a  part  of  their  rights  belongs 
to  the  general  creditors.^ 

The  same  principles  are  applied  where  the  bondholders,  for 
their  own  interest,  become  parties  to  an  arrangement  by  which 

1  Shaw    V.    Saranac    Horse    Nail    Co.  ^  Farmers'  Loan  &  Trust  Co.  v.  New- 

(1894),    144  N.  Y.  220;  s.  c.  39  N.    E.     man  (1887),  127  U.  S.  649. 
Rep.  73.  s    Railroad  Co.    v.    Howard    (1868),   7 

Wall.   392. 


764 


RAILWAY   BONDS   AND   MORTGAGES.        [CHAP.  XXXIV. 


the  sale  of  the  trust  property  is  arrested,  and  the  unsecured 
creditors  are  deprived  ot"  their  right  to  satisfaction  out  of  any 
surplus  which  may  result  from  such  sale.  Thus,  if  the  bond- 
holders, instead  of  proceeding  to  a  sale  after  the  rendition  of  a 
decree  of  foreclosure,  enter  into  an  agreement  with  the  company, 
by  which  the  property  is  to  be  leased  to  another  company  for  a 
rental,  expressed  in  terms  of  a  percentage  of  the  earnings  and 
whatever  surplus  remains,  after  applying  that  rental  to  interest, 
taxes,  etc.,  is  to  be  handed  over  to  the  lessor  company,  the 
holders  of  unsecured  notes  given  in  liquidation  of  a  debt  grow- 
ing out  of  the  construction  of  a  part  of  the  insolvent's  road,  and 
to  prevent  a  lien  thereon,  are  entitled  to  have  their  debts  estab- 
lished as  equitable  liens  upon  the  property  and  funds  of  the 
insolvent  road  paramount  to  the  lien  of  the  mortgage. ^ 

1  Farmers'  Loan  &  Trust  Co.  v.  Mis-     Rep.  264 ;  s.  c.  17  Am.  &  Eng.  K.  R.  Cas. 
souri,    I.   &  N.  R.  Co.    (1884),    21    Fed.     314. 


§  T85.] 


SALES   OF   MORTGAGED   PROPERTY. 


765 


CHAPTER   XXXV. 


SALES   OF   MORTGAGED   PROPERTY. 


§  785. 

Manner  of  Sale  generally. 

§  791. 

Advertisement    of    Sale 

786. 

Sale  of  Property  as  Entirety. 

Power. 

787. 

Power  of  Court  and  Officers  to 

792. 

Re.served  or  Upset  Prices. 

postpone  Sale. 

793. 

Bids. 

788. 

Conduct  of  Sale  under  Power  in 

794. 

Deposits  of  Bidders. 

Mortgage  generally. 

795. 

Liability   of    Bidders  for 

789. 

Sale  under  Power  not  postponed 

upon  Resale. 

till  Number  of  Bonds  justly 

796. 

Payment  in  Bonds. 

due  ascertained. 

797. 

Who  may  be  Purchaser. 

790. 

Place  of  Sale. 

798. 

Confirmation  of  Sale. 

under 


Loss 


§  785.  Manner  of  Sale  generally.^  —  A  chancery  court  has  the 
power,  and  it  is  its  right  and  duty,  to  supervise  all  sales  made 
under  its  decrees  and  made  by  its  special  officers  or  commis- 
sioners, and  to  protect  the  parties  from  all  fraud,  mistake, 
unfairness,  and  imposition.  This  right  of  the  court  extends  also 
to  purchasers  at  such  sales,  who,  by  the  act  of  purchase  under 
the  decree,  submit  themselves  to  the  jurisdiction  of  the  court.^ 

The  statutes  of  a  State  requiring  the  sale  of  property  by 
sheriff  under  process  of  execution  or  order  of  sale  may  be 
resorted  to  by  the  court  administering  the  property  through  a 
receiver;  but  such  statutes  are  not  exclusive  in  effecting  sales  of 
this  character,  and  the  court  may,  in  the  exercise  of  its  discre- 
tion, order  a  sale  by  the  receiver  or  commissioners.^ 

When  the  property  cannot  be  sold  for  cash  for  an  amount 
sufficient  to  pay  the  bondholders,  possibly  the  most  equitable 
modes  of  disposing  of  it  are  to  decree  a  strict  foreclosure  in 
which  all  will  participate  alike,  or  to  make  a  sale  for  the  equal 
benefit  of  all  the  bondholders  who  choose  to  come  in  and  partici- 


1  See  Woods'  Ry.  Law,  1636  ;  Rorer 
on  Railroads,  911,  913. 

The  validity  of  a  foreclosure  sale,  in  so 
far  as  it  depends  upon  the  jurisdiction  of 
the  court  to  order  it,  or  the  hx  loci  rr,i 
sitae,  is  discussed  in  Chapter  XXT. 

2  Parker   v.    Bluffton    Car  Wheel   Co. 


et  al.  (Ala.,  1896),  18  So.  Rep.  938,  in 
which  the  court  approved  the  confirmation 
of  a  receiver's  sale  over  the  objection  that 
the  price  was  inader[uate,  etc. 

^  Farmers'  k  Mcrcliants'  Nat.  Bank  v. 
Waco  Elfctric  Ry.  &  Light  Co.  (Tex.  Civ. 
App.,  1896),  36  "S.  W.  Rep.  131. 


766  RAILWAY    BONDS    AND    MORTGAGES.  [CHAP.  XXXV. 

pate.  But  both  of  these  methods  have  their  drawbacks.  A 
strict  foreclosure  involves  special  difficulties  in  those  States 
where  a  mortgage  is  a  mere  security,  and  does  not  give  a  legal 
title,  and,  besides  this,  it  places  the  property  in  the  hands  of  a 
vast  number  of  beneficiaries  whose  consent  may  be  very  hard  to 
obtain  in  perfecting  a  new  organization  for  conducting  the  busi- 
ness. A  sale  for  the  benefit  of  all  is  attended  with  the  difficulty 
of  determining  who  shall  make  the  bid.  The  court  sometimes 
authorizes  the  trustees  to  bid  for  the  bondholders;  but  it  is 
obvious  that,  in  such  a  case,  one  class  or  other  of  the  bond- 
holders would  be  dissatisfied  with  any  selection  of  trustees 
which  the  court  might  make;  while,  on  the  other  hand,  to 
decree  that  all  the  bondholders  shall  be  allowed  to  participate 
in  any  sale  that  may  be  made  would  practically  nullify  an  auction 
sale,  inasmuch  as  no  one  could  be  expected  to  bid  on  such  terms.  ^ 

In  view  of  these  difficulties,  the  court  will  sometimes  avail 
itself  of  a  plan  of  reorganization  which  aims  at  obviating  the 
necessity  of  any  sale,  and  postpone  the  sale  for  the  purpose  of 
giving  the  bondholders  who  have  not  assented  to  the  plan  an 
opportunity  of  coming  in,  ordering,  at  the  same  time,  that  if 
the  property  shall,  after  all,  be  sold  and  purchased  in  behalf  of 
the  reorganizing  combination,  the  non-assenting  bondholders 
are  to  be  allowed  to  participate  in  such  purchase  on  the  same 
footing  as  the  others.^ 

§  786.  Sale  of  Property  as  Entirety.  —  Whether  the  property  is 
to  be  sold  as  an  entirety  is  an  inquiry  which  presents  itself  in 
two  forms.  The  fact  that  a  railroad  is  a  property  of  an 
extremely  composite  character  naturally  presents  the  question 
whether  a  court  would  be  justified  in  selling  the  component 
elements  of  that  property  separately.  On  the  other  hand,  the 
fact  that  a  railroad  is  often  a  property  of  vast  extent,  running, 
it  may  be,  through  several  States,  and  that  its  several  sub- 
divisions are  not  infrequently  subject  to  separate  liens,  the 
foreclosure  of.  one  of  which  only  may  be  sought  in  the  pending 
litigation,  gives  rise  to  some  grave  and  difficult  problems  in 
regard  to  expediency  or  inex))ediency  of  breaking  up  the  system 
under  the  given  circumstances.^ 

1  Duncan  v.  Mobile  &  Ohio  R.  Co.  losa,  M.  L.  R.  (1886),  2  Q.  B.  (('an.)  491. 
(1879),  3  Woods,  5'j7.  Oil  the  sn/e  of  a  section  of  a  road  where 

2  Ibid.  part  is  within  and  part  without  the  juris- 
"  .S(!e  f^enerally,  as  to  sale  of  railroad  as     dirtion  of  the  court,  see  Graj'  v.  Manitoba 

an  entirety,  Woods'  Ry.  Law,  1640,  1642,  &  Northwestern  Ry.  Co.  (1897),  L.  R.  App. 
and  tlie  note  to  1  Am.  &  Knj,'.  R.  K.  (as.  Cas.  2.54.  Compare  Comptoa  v.  Jesup 
616.    See  also  Stephen  v.  Banque  d'Hoche-     (1897),  167  U.  S.  1. 


§  786.]  SALES    OF    MORTGAGED    PROPERTY.  767 

The  former  question  does  not  seem  to  have  been  much  dis- 
cussed, the  courts  assuming,  perhaps,  that  in  the  case  of  such  a 
property,  everything  of  which  it  consists,  both  realty  ^nd  per- 
sonalty, must  be  sold  together.  Certainly  where  the  mortgage 
itself  provides  that  the  personal  property  embraced  in  it  shall 
be  sold  with  the  other  property,  the  mortgagor  cannot  comj)lain 
that  the  sale  is  so  made.'^ 

And  the  true  rule  jjossibly  is  that  when  a  railroad,  its  appur- 
tenances, and  franchises  are  mortgaged  as  a  whole,  there  is  no 
power  or  authority  to  sell  them  separately. ^ 

But  in  Ohio  it  has  been  held  that  the  real  estate  of  a  railroad 
must  be  sold  subject  to  rules  governing  real  estate,  and  must, 
therefore,  be  appraised.  As  to  this  appraisement,  it  was  said 
the  court  had  no  discretion;  but,  on  account  of  the  peculiar 
nature  of  the  property,  it  might  apply  to  the  details  of  the  pro- 
ceedings, a  mope  stringent  or  more  liberal  rule  than  the  one 
ordinarily  adopted,  as  might  be  demanded  by  the  circumstances 
of  the  case.^ 

As  to  the  pro"per  way  of  disposing  of  the  property  where,  as  in 
the  common  case  of  foreclosure  for  interest,  the  total  value  of 
the  entire  system,  or  even  of  the  division  covered  by  the  mort- 
gage which  it  is  sought  to  enforce,  is  greater  than  the  sum 
demanded,  the  authorities  are  not  entirely  harmonious.  In 
some  of  the  earlier  cases  relating  to  foreclosure  sales  we  find 
the  rule  laid  down  that,  where  the  interest  only  is  in  default, 
so  much  of  the  property  should  be  sold  as  will  discharge  the 


1  Wood    V.    Whelen    (1879),    93    111.  apolis,    B.  &  W.  Ry.  Co.  (1878),  8  Biss. 
153.  380,  which  liolds  that  a  railroad  must  be 

2  Peoria  &  Springfield  R.  Co.  v.  Thomp-  sold  subject  to  redemption,  as  provided  by- 
son  (1882),   103  111.  187  ;  s.  c.  7  Am.  &  the  statute. 

Eng.  R.  R.  Gas.  101.  In  this  case  the  ^  Coe  v.  Columbus,  Piqua,  &  Indian- 
court,  adopting  this  conclusion,  drew  the  apolis  R.  Co.  (1859),  10  Ohio  St.  372. 
further  inference  that,  as  a  railroad  was.  In  this  case  the  court  ordered  "(1)  That 
strictly  speaking,  neither  realty  nor  per-  the  railroad,  with  its  fijctures,  constituting 
sonalty,  it  did  not  fall  clearly  within  the  an  entire  tract  of  real  estate,  indivisible 
Illinois  statute  yiroviding  that  real  estate  for  the  purpose  of  the  sale,  together  with 
must  be  sold  subject  to  redemption,  and  the  franchise  connected  therewith,  should 
that,  as  there  was  as  much  reason  for  con-  be  sold  in  like  manner  as  an  entire  tract 
sidering  it  to  be  personalty  as  realty,  rail-  lying  in  two  or  more  counties,  the  pro- 
road  real  estate  was  presumably  to  be  ceedings  incidental  to  the  sale  to  be  had 
excepted  from  the  general  provision,  in  the  connty  in  which  the  action  was 
This  ojiinion  was  based  partly  on  consid-  brought;  (2)  That  the  personal  property 
erations  of  public  policy,  which,  it  was  should  be  sold  as  personal  property,  but 
thought,  warranted  the  court  in  giving  with  such  precautions  as  to  prevent  a  sac- 
this  construction  to  the  statute.  The  rul-  rifice,  and  to  procure  the  highest  price,  ns 
ing  is  in  conflict  with  Turner  v.  Indian-  the  court  in  its  discretion  might  order." 


768  RAILWAY    BONDS    AND    MORTGAGES.  [CHAP.  XXXV. 

amount  due,  ^  —  this  rule,  of  course,  being  understood  with  the 
implied  limitation  that  the  property  involved  is  susceptible  of 
division ;  otherwise  that  the  sale  of  the  property  should  be  as 
an  entirety,  or  that  it  should  be  leased,  if  the  company  pre- 
ferred it,  for  the  shortest  term  that  would  bring  the  amount 
due.'^ 

The  rule  thus  acted  upon,  if  expressed  formally,  would  be, 
that,  when  a  railroad  cannot  be  divided  and  sold  in  pieces  with- 
out manifest  injury  to  its  value,  the  whole  may  be  sold  even 
before  the  principal  is  due,  upon  default  in  the  payment  of 
interest  upon  a  mortgage  which  covers  only  a  specific  portion  of 
the  property,  while  if  such  a  division  is  feasible,  without  detri- 
mentally affecting  the  interests  of  all  the  parties  in  interest,  the 
section  incumbered  should  alone  be  sold,  so  that  every  incum- 
brancer may  have  the  chance  of  protecting  his  securities  without 
involving  himself  in  onerous  engagements.^ 

On  the  authority  of  the  more  recent  decisions,  however,  it 
seems  justifiable  to  state  the  rule  much  more  strongly  in  regard 
to  the  propriety  of  selling  a  railroad  as  an  entirety.  It  may  be 
said  that  the  courts  now  proceed  upon  the  assumption  that  a 
railroad  is  so  rarely  susceptible  of  being  broken  up  without 
detriment  to  the  parties  in  interest,  that  a  sale  of  the  property 
in  parcels  should  never  be  ordered,  unless  the  special  circum- 
stances of  the  case  indicate  the  expediency  of  such  a  course. 
Thus  it  has  been  expressly  declared  that,  since  a  railroad  and 
its  appurtenances  are  in  the  nature  of  an  entirety,  the  elements 
of  which  are  so  essentially  intermingled  that  they  cannot  be 
sold  separately  without  disastrous  results  to  all  concerned,  a 
claim  for  unpaid  interest  on  bonds  should  be  satisfied  by  author- 
izing a  sale  of  the  whole  premises,  although  the  principal  is  not 
due.* 

1  Goodman  v.  Cincinnati  «Sb  Chicago  R.  creditor  on  the  ground  that  it  was  in 
Co.  (1858),  2  Disney  (Ohio),  176.  In  this  gross,  unless  it  was  shown  that  there  had 
case  the  discussion  turned  upon  whether  been  fraud,  or  that  the  property  would 
the  property  could  be  sold  at  all  to  pay  have  commanded  a  larger  sum  if  sold  in 
mere  arrears  of  interest.     There  were  no  lots. 

arguments  presented  as  to  the  impolicy  of  8  Wilmer  v.  Atlanta  &  Richmond  Air 
divi.liiig  the  railroad  by  selling  separate  Line  R.  Co.  (1872),  2  Woods,  447  ;  Farm- 
portions  of  it.  ers'  Loan  &  Trust  Co.  v.  Oregon  &  C.  Ry. 

2  Bardstown  &  Louisville  R.  Co.  v.  Co.  (1885),  24  Fed.  Rep.  407.  Compare 
Metcalfe  (1862),  4  Mete.  (Ky.)  199.  In  Campbell  v.  Texas  &  New  Orleans  R.  Co. 
Allen   V.    Montgomery  &  West   Point  R.  (1872),  2  "Woods,  2fi.3. 

Co.  (1847),  11  Ala.  437,  the  court,   with-  *  McFadden  v.  May's  Landing  &  Egg 

out  passing  directly  on  the  point,  said  it  Harbor  City  R.  Co.  (1891),   49  N.  J,  Eq. 

was  very  questionable  if  the   sale  would  176;  8.0.  122  Atl.  Rep.  932. 
be  opened  at  the  instance  of  a  judgment 


§  786.]  SALES   OF   MORTGAGED   PROPERTY.  769 

In  other  words,  the  legal  and  proper  mode  of  selling  railroad 
properties  is  in  gross,  not  in  parcels.^ 

Such  is  also  the  rule  as  to  a  sale  under  a  power,  which,  it  is 
held,  must  be  executed  upon  all  the  property  mortgaged.  ^ 

A  railroad  company  gave  a  mortgage  in  Arkansas  upon  "all 
of  the  property,  real  and  personal,"  belonging  to  it,  with  a  sub- 
sequent specific  description  of  the  kinds  of  property  to  one,  to 
secure  a  note  of  the  company  given  him  for  an  indebtedness, 
probably  for  construction.  In  his  foreclosure  suit  there  was  a 
decree  ordering  the  property  conveyed  by  the  deed  of  trust  sold 
to  satisfy  the  judgment.  The  company  requested  the  court  to 
order  specifically  that  the  property  be  sold  as  a  whole.  This 
the  court  declined  to  do,  and  the  company  excepted.  On  appeal, 
the  Supreme  Court,  after  referring  to  the  provision  of  the  Con- 
stitution of  Arkansas,  art.  17,  §  11,  declaring  that  "rolling- 
stock"  of  railroad  companies  should  be  "considered  personal 
property,"  said,  "Notwithstanding  this  provision  of  the  consti- 
tution requires  us  to  treat  this  rolling-stock  as  personal 
property,  it  was  still  within  the  discretion  of  the  Circuit  Court 
to  have  ordered  the  property  covered  by  this  deed  of  trust  to  be 
sold  in  bulk,  as  an  entirety,  for  the  deed,  by  its  terms,  does  not 
seem  to  contemplate  but  one  sale."  It  was  then  intimated  that 
the  wishes  of  the  debtor  might  have  been  followed,  if  it  was 
clear  that  it  could  be  done  with  safety  to  the  creditor  and  with- 
out injury  to  others  having  claims  against  the  company  or  its 
property.  They  construed  the  order  of  sale  to  be  on  the  line  of 
this  principle,  one  which  would  allow  the  commissioner  to  offer 
it  as  a  whole ;  and  if  no  bids  could  be  obtained  in  that  way,  then 
to  offer  the  real  and  personal  property  separately,  and  leave  the 
final  determination  of  the  question  when  there  was  an  applica- 
tion for  confirmation  of  the  sale.^ 

Where  a  company  has  mortgaged  its  entire  road,  and  aban- 
doned its  construction  after  completing  the  middle  section,  and 
the  work  is  afterwards  finished  by  another  company,  it  is  error 

1  Sahlgaard  v.  Kennedy  (1882),  13  Fed.  way  would  be  defeated,   see  Marshall  v. 

Rep.  242,   245.     Compare  Chicago,  D.  &  Tramways  Co.    (1893),    L.   R.    2  Ch.   38. 

"V.  R.  Co.  V.  Fosdick  (1882),  106  U.  S.  47;  Tliis  general  question  is  discussed  earlier 

Credit  Co.    v.  Arkansas   Central   R.    Co.  in  this  treatise.     See  also  Bartlett  v.  Tram- 

(1882),   15  Fed.   Rep.  46  ;  Farmers'  Loan  ways  (1894),  L.  R.  2  Ch.  287. 
&  Trust  Co.  V.  Oregon  &  C.  Ry.  Co.  (1885),  2  Coe  v.   Columbus,   Piqua,   &  Indian- 

24  Fed.  Rep.  407,  supporting  the  same  doc-  apolis  R.  Co.  (1863),  14  Ohio  St.  187. 
trine  in  more  or  less  decided  terms.  ^  Southwestern  Arkansas  &  L  T.  Ry. 

On  the  question  whether  the  sale  of  a  Co.  v.  Hays  (Ark.,  1897),  38  S.  W.  Rep. 

tramway  can  be  had  if  the  purposes  of  the  665. 

49 


770  RAILWAY   BONDS   AND    MORTGAGES.  [CHAP.  XXXV. 

to  order  a  sale  of  the  middle  section  only,  leaving  the  remainder 
valueless.  The  entire  road  should  be  sold,  and  the  proceeds 
distributed  between  the  new  company  and  the  mortgagee  accord- 
ing to  the  ratio  which  the  work  done  by  the  first  company  bears 
to  the  value  of  the  whole  road,  as  completed.^ 

The  rule  that  a  railroad  may  be  sold  as  an  entirety,  wherever 
it  cannot  be  sold  in  parcels  without  loss  and  prejudice  to  the 
parties  in  interest,  is  applicable  to  a  system  created  by  the  con- 
solidation of  several  distinct  divisions,  upon  which  separate 
mortgages  have  been  given  prior  to  the  consolidation. ^ 

The  fact  that  the  particular  division  on  which  a  mortgage 
rests  is  sold  at  the  same  time  as  other  divisions  of  the  road, 
does  not  violate  in  any  manner  the  contract  entered  into  with 
the  mortgagee,  for  a  sale  of  all  the  separate  divisions  is  plainly 
an  effectual  performance  of  the  stipulation  providing  that  each 
separate  division  may  be  sold  upon  default.  The  fund,  after  the 
sale,  will  be  apportioned  upon  equitable  principles  according 
to  the  earnings  of  the  different  divisions  of  the  road,  with  the 
result  that  the  lienholders  of  the  different  divisions  will  receive 
in  the  distribution  the  proportion  to  which  they  are  entitled; 
and  if  the  expectation  which  is  the  inducement  for  adopting 
this  method  of  sale  is  that  the  total  sum  to  be  apportioned 
will  be  larger  than  the  aggregate  of  the  prices  which  the 
divisions  would  have  sold  for,  if  sold  separately,  the  arrange- 
ment will,  evidently,  be  beneficial  to  all  the  mortgagees. ^ 

Quite  in  a  line  with  the  principle  of  the  decisions  cited 
above  is  the  rule  laid  down  by  a  federal  court,  that  a  sale 
under  execution  cannot  be  made  separately  of  that  part  of  the 
road  not  subject  to  the  lien  of  the  mortgage,  but  that  the  entire 
road,  for  the  purposes  of  sale,  must  be  treated  as  indivisible, 
the  proceeds  being  brought  into  court,  and  distributed  with  due 
regard  to  the  priority  of  the  liens  and  the  portions  of  the  road 
respectively  subject  to  those  liens.* 

So  also,  where  a  number  of  ji.  fas,  are  proceeding  against  a 
railroad  in  the  various  counties  through  which  it  passes,  it  has 
been  held  that  to  allow  the  road  to  be  thus  cut  up  into  frag- 
ments would  not  only  sacrifice  the  rights  and  interests  of  cred- 

1  Chica;,'o,  Danville,  &  Vincennes  R.  &  Great  Southern  R.  Co.  (1880),  33  Gratt. 
Co.  V.   Louwenthal  (1879),  93  111.  433.         (Va.)  586  ;  s.  c.  1  Am.  &  Eng.  R.  R.  Cas. 

2  Griniiell    v.   Trustees    (Ohio    Ct.    of    473. 

Comm.  PI.,  1857),  2  Redf.  Law  of  Rail-  *  Ludlow  v.  Clinton  Line  R.  Co.  (1861), 

ways,  498.  1  Flip.  25. 

8  Gibert  v.  Wa-shiugton  City,  Va.  Midi. 


§  787.]  SALES   OP   MORTGAGED   PROPERTY.  771 

iters,  but  defeat  the  objects  and  intentions  of  the  legislature  in 
granting  the  charter,  and  that  a  court  of  equity  may  therefore 
properly  interfere,  and,  having  enjoined  the  executions,  direct  a 
sale  of  the  entire  property  for  all  concerned. ^ 

§  787.  Power  of  Court  and  Officers  to  postpone  Sale.  —  A  COUrt 
of  equity,  after  a  decree  in  foreclosure  ordering  the  sale  of  a 
railroad,  will,  if  necessary,  take  the  responsibility  of  delaying 
the  sale  to  await  a  better  condition  of  the  finances  and  business 
of  the  country  that  exists  at  the  time  of  the  decree.  But  the 
fact  that  a  railroad  begins,  after  a  period  of  financial  adversity, 
to  show  a  prosperous  state  of  earnings,  indicating  that  in  a  few 
years  it  will  be  able  to  pay  off  an  accumulation  of  overdue  and 
unpaid  interest,  does  not  furnish  ground  for  a  postponement  of 
its  sale  in  foreclosure,  —  especially  if  the  company  owning  the 
railroad  offers  no  guaranty  that  such  prosperity  will  continue. ^ 

A  sale  may  also  be  postponed  where,  owing  to  the  operation 
of  a  statute,  only  a  portion  of  the  property  can  be  sold  imme- 
diately, and  it  seems  advisable  in  the  interests  of  all  parties 
that  the  property  shall  not  be  dismembered.^ 

The  court  will  not  postpone  the  sale  where  an  appeal  is  taken 
more  than  sixty  days  after  the  foreclosure  decree,  and  therefore 
fails  to  operate  as  a  supersedeas.  The  taking  of  such  an  appeal 
docs  not  cast  such  a  shadow  on  the  title  as  to  afford  a  ground 
for  postponement.* 

In  regard  to  a  sale  which  is  actually  in  progress,  the  officer 
designated  to  conduct  it  has  a  limited  discretion  as  to  whether 
it  shall  be  adjourned  to  prevent  a  serious  sacrifice  of  the 
property,  as,  for  instance,  where  only  a  single  bidder  attends 
the  sale.  A  master  or  a  marshal,  in  carrying  out  an  order  of 
sale,  is  something  more  than  an  auctioneer.  They  have  duties 
to  perform,   and  while  engaged   in  the   performance    of   those 

1  Macon  &  Western  R.  Co.  v.  Parker  present  case,"  said  the  court,  "have  no 
(1851),  9  Ga.  377.  absolute  right  to  an  immediate  sale,  even 

2  Duncan  v.  Atlantic,  Mississippi,  &  of  the  personal  property  and  corporate 
Ohio  R.  Co.   (1880),  4  Hughes,  125.  franchises.     It  is  not  therefore  necessary, 

3  Benedict  v.  St.  Joseph  &  W.  R.  Co.  in  order  to  follow  the  statutes,  that  we 
(1883),  19  Fed.  Rep.  173,  175.  A  Kansas  divide  and  dismember  the  mortgaged 
statute  (Comp.  L.  §  3983)  provided  tliat  property.  The  stay  can  be  ordered  as  to 
no  order  of  sale,  on  the  foreclosure  of  a  the  entire  property,  and  its  unity  thereliy 
mortgage,  containing  a  waiver  of  tlie  ap-  be  preserved,  and  the  statute  at  the  same 
praisement  of  the  real  estate  could  be  time  enforced,  and  all  rights  under  it 
issueil  until  the  expiration  of  six  months,  maintained." 

It  was  held  that,  in  view  of  such  a  statute,  *  Duncan   v.   Atlantic,    Mississippi,   & 

the  sale  of  the  entire  property  should  be     Ohio  R.  Co.  (1880),   4  Hughes,  125. 
postponed.      "  The   complainants   in   the 


772  RAILWAY   BONDS   AND   MORTGAGES.  [CHAP.  XXXV. 

duties  may  postpone  the  sale  for  good  cause  shown.  All  that 
can  be  required  of  them  is  that  they  make  themselves  acquainted 
with  the  circumstances,  and  act  in  good  faith. ^ 

§  788.  Conduct  of  Sale  under  Poorer  in  Mortgage  generally.^  — 
When  an  express  power  to  sell  is  conferred  on  the  trustee,  it 
must  be  strictly  followed  in  all  essential  respects.^ 

An  authority  to  sell  "as  provided  by  law  "  has  been  held  to 
mean  according  to  the  law  regulating  public  sales  made 
pursuant  to  decrees.^ 

A  sale  made  in  pursuance  of  a  power  is  virtually  a  foreclosure 
of  the  mortgagor's  equity  of  redemption ;  for  the  mortgagor  has 
created  the  power  expressly  to  give  the  purchaser  a  perfect  title 
to  the  whole  estate,  and  thus  to  secure  to  himself  the  benefit  of 
an  outside  price. ^ 

§  789.  Sale  under  Power  not  postponed  till  Number  of  Bonds 
justly  due  ascertained.  —  Where  the  deed  of  trust  makes  it  the 
duty  of  the  trustee  to  exercise  the  power  of  sale  given  by  the 
instrument  upon  receiving  the  written  request  of  a  majority  in 
interest  of  the  bondholders,  the  sale  will  not  be  delayed  merely 
to  ascertain  how  many  of  the  bonds  are  justly  due.  Each  bond- 
holder holds  his  own  bonds  separately  and  independently  of  the 
others,  and  when  his  interest  remains  in  arrear  under  the  cir- 
cumstances mentioned,  he  ought  not  to  be  delayed  by  a  con- 
troversy which  has  arisen  about  the  validity  of  bonds  held  by 
other  persons.  In  this  respect  the  proceedings  differ  from  those 
in  the  case  of  an  ordinary  foreclosure  sale,  for  upon  the  filing  of 
a  bill  to  foreclose  a  mortgage  the  authority  conferred  upon  the 
court  is  to  decree  a  sale  unless  the  debt  and  costs  are  paid  at  or 
before  the  time  fixed  by  the  decree ;  and  it  is  necessary  for  the 
court  to  ascertain  the  amount  of  the  debt,  so  that  the  defendant 

1  Blossom   V.    Railroad   Co.    (1865),   3  which  their  debentures  are  a  charge  by  a 

Wall.  196.     In  this  case  the  decree  was  to  liquidator  of  the    company  in  a  winding 

the  effect  that  the  property  should  be  sold  up   on   the   ground   that   a   sale   by  him 

at  a  certain  time,    unless  the  mortgagor  would  realize  more  money.     Perry  v.  Ori- 

should  previously  pay  the  mortgage  debt ;  ental  Hotels  Co.,  12  Eq.  127  ;  Longendale 

and  it  was  held  that  a  few  short  adjourn-  Spinning  Co.,  8  Ch.  Div.  150. 
ments,   to  enable  the  mortgagor  to  make  2  ^g   to   the   cumulative    character  of 

arrangements  to  pay  the  amount  due  on  this  remedy,  see  ante,  on  remedies, 
the  mortgage,  were  allowed  for  a  sufficient  ^  Bradley   v.    Chester    Valley   R.    Co. 

cause,  although  granted  at  the  instance  of  (1800),  36  Pa.  St.  151. 
the  plaintiff's  solicitor.     As  to  the  power  *  I'jrunswick     &     Albany    R.    C(w.    v. 

of  a  trustee  to  postpone  a  sale  made  under  Hughes  (1874),  52  Ga.  557  ;  s.  c.  7  Am. 

a   power  in  the   mortgage,   see   Jones  on  Ry.   Kep.  137. 
Mortgages,   §  1873.  "^  Bradley   v.    Chester    Valley   R.    Ca 

DeVK'utun'-liolders  cannot  be  restrained  (1800),  36  Pa.  St.  151. 
from  selling  property  of  the  company  on 


§§  790-792.]        SALES  OP  mortgaged  property.  773 

may  know  how  much  it  is  necessary  for  him  to  pay  in  order  to 
prevent  the  sale.  ^ 

§  790.  Place  of  Sale.  —  It  has  been  held  in  Maryland  that  the 
statute  of  that  State  prohibiting  a  sale  of  mortgaged  premises 
out  of  the  county  in  which  they  lie  refers  to  technical  mort- 
gages only,  and  has  no  application  to  a  trust  deed  giving  the 
trustees  a  power  to  enter  upon  and  sell  a  railroad  when  the 
interest  on  the  bonds  secured  by  the  instrument  is  in  default. ^ 

§  791.  Advertisement  of  Sale  under  Power.  —  It  is  proper,  if 
not  necessary,  that  the  advertisement  should  state  how  the 
sale  will  be  made.  It  should  be  made  known  generally,  as  well 
as  to  the  purchasers,  whether  a  sale  will  be  subject  to  the  debts 
and  liabilities  of  the  old  company  or  not.^ 

Where  a  power  of  sale  is  to  be  exercised  by  a  trustee,  in 
case  of  continued  default  for  sixty  days  after  notice  to  the  mort- 
gagor of  an  intention  to  sell,  but  not  until  the  sale  has  been 
previously  advertised  for  sixty  days,  the  two  periods  are  not 
synchronous,  but  successive.  The  term  required  for  the  adver- 
tisement to  run  does  not  begin  until  the  term  of  the  prescribed 
notice  has  expired.^ 

If  the  decree  required  notice  of  the  sale  of  the  property  to  be 
advertised  in  certain  newspapers,  among  which  was  A.,  printed 
in  a  certain  city,  and  it  appears  that  before  such  advertisement 
was  inserted  A.  had  been  merged  into  B.,  or  its  name  changed 
to  B.,  the  identity  of  the  paper  remaining,  the  advertisement  in 
B.  is  a  substantial  compliance  with  the  order. ^ 

A  notice  of  foreclosure  by  advertisement,  stating  that  the 
sale  will  be  held  at  the  court  in  a  designated  village  and  county, 
sufficiently  describes  the  place  of  sale.^ 

Where  a  trust  deed  gives  the  trustee  the  power  to  advertise 
and  sell  the  mortgaged  premises  on  default  of  payment,  when 
so  requested  by  the  holder  of  the  indebtedness,  giving  thirty 
days'  notice  of  such  sale,  these  provisions  must  be  strictly  com- 
plied with  to  render  the  sale  valid. '^ 

§  792.  Reserved  or  Upset  Prices.  —  The  practice  of  the  English 
Court  of  Chancery,  established  first  by  rules  of  court,  and  then 

1  Brown  v.  State  of  Maryland  (1885),  Railroad  Co.  (1879),  63  Ga.  103  ;  s.  c.  1 
64  Md.  199;  s.  c.  24  Am.  &  Eng.  R.  R.     Am.  &  Eng.  R.  R.  Cas.  378. 

Cas.  192.  5  Sage'r.    Central    R.   Co.    (1879),   99 

2  Harrison  v.  Annapolis  &  Elk  Ridge     U.  S.   334. 

R.  Co.  (1878),  50  Md.  490.  6  MeCammon  v.   Detroit,  L.  &  N.  R. 

8  Alexandria,  Washington,  &  George-  Co.  (1894),  103  Mich.  104  ;  s.  c.  61  N.  W. 

town  R.  Co.  V.  Alexandria  &  Washington  Rej).  273. 
R.  Co.  (1870),  19  Gratt.  (Va.)  592,  618.  ''  E(iuitable  Trust  Co,  v.  Fisher  (1883), 

4  Macou  &  Augusta  R.  Co.  v.  Georgia  106  111.  189. 


774  RAILWAY   BONDS   AND    MORTGAGES,         [CHAP.  XXXV. 

by  legislation,  is  a  system  of  reservation  bids,  under  wbicli  the 
court,  upon  application  of  the  parties  or  of  its  own  motion, 
ascertains  the  probable  value  of  the  property  as  nearly  as  may 
be,  and  determines  the  lowest  price  it  is  willing  to  take,  has 
received  the  approval  of  the  federal  courts.  The  property  is 
not  sold  unless  at  public  auction  it  brings  as  much  or  more  than 
this  reserved  price,  which,  as  it  is  not  "  revealed  "  until  after 
the  sale,  cannot  influence  the  biddings.^ 

By  fixing  an  upset  price  the  court  intends  to  convey  the 
meaning  that  it  is  better  that  the  road  shall  sell  at  that  price 
than  not  at  all.  If  the  road  sells  above  the  upset  price,  the  sale 
will  not  be  set  aside  on  the  ground  of  the  inadequacy  of  the 
price,  because,  in  the  light  of  subsequent  events,  the  property 
proves  to  have  been  of  greater  value.  ^ 

The  Circuit  Court,  in  the  case  of  Southwestern  Arkansas  & 
1.  T.  Ry.  Co.  V.  Hays,  in  its  decree  of  sale  of  the  railroad 
property  in  a  foreclosure  suit  on  the  mortgage  deed  securing  the 
debt,  required  the  commissioner  of  sale  to  have  the  property 
appraised,  and  not  to  sell  it  for  less  than  two-thirds  of  its  value. 
This  was  excepted  to  by  the  mortgagee,  and,  on  appeal,  the 
exception  was  sustained  and  the  decree  modified  in  this  respect. 
The  Supreme  Court  said:  "As  the  mortgage  in  this  case  con- 
fers the  right  to  an  absolute  sale,  it  is  doubtful  whether  the 
court  could  prevent  such  a  sale  by  requiring  that  the  property 
should  be  appraised  and  not  sold  for  less  than  two-thirds  of  its 
value."  They  assumed  that  the  court  was  prompted  to  this 
order  by  a  belief  that  the  statute  of  Arkansas,  regulating  sales 
under  powers  of  sale  contained  in  mortgages  of  deeds  of  trust, 
applied  in  such  a  case,  but  reiterated  the  rule  that  it  did  not 
apply  to  sales  under  decrees  of  court.  ^ 

§  793.  Bids.  —  The  question  of  sale  or  no  sale,  so  far  as  it 
depends  on  the  validity  of  the  bid,  is  tested  by  the  same  rules 

1  Blackburn  v.  Selma  R.  Co.  (1880),  3  ^  As  to  setting  aside  a  sale  for  inade- 
Fed.  Rej).  689,  692.  For  upset  price  quacy  of  price,  see  Farmers'  Loan  &  Trust 
named  in  decree,  see  Blair  v.  St.  Louis,  H.  Co.  et  al.  v,  Oregon  Pac.  R.  Co.  et  al, 
&  K.  K.  Co.  (1885),  2.^)  Fed.  Rep.  232,  240,  (Oregon,  1895),  40  Pac.  Rep.  1089. 

and  Wetinore  v.  St.  Paul  &  Pac.  R.  Co.,  3  Where  the  reserve  bid  is  not  made  at  a 

Fed.  Kep.  177,  183.  sale,  and  the  amount  bid  is  insufficient  to 

2  Wetmore  v.  St.  Paul  &  Pac.  R.  Co.  pay  off  first  and  second  mortgage  debent- 
(1880),  3  Fed.  Rep.  177,  183,  per  Miller,  J.  ures,  a   .sale  will    be   stayed  and   a   fore- 

As   to  power  of  court   to   change  the     closure  of  the  mortgages  directed.     "Welch 
reserved  or  ufiset  price  in  its  decree,  see     v.   National  Cycle  Co.   (1886),   W.  N.  27, 
Fanners'  Loan  &  Trust  Co.  ct  nl.  v.  Oregon     196. 
Pac.  Ry.  Co.  et  al.  (Oregon,  1895),  40  Pac. 
Rep.  1089. 


§§  794,  795.]       SALES  of  mortgaged  property.  775 

substantially  as  those  which  are  applicable  in  cases  of  sales 
under  common-law  process,  or  other  sales  at  public  auction. 
There  is  no  sale  where  the  property  has  never  been  struck  off 
to  the  bidder,  nor  his  bid,  by  act  or  word,  or  in  any  manner, 
accepted  by  the  seller.  ^  As  to  the  power  of  the  trustee  to  bid 
beyond  the  amount  fixed,  see  ante. 

§  794.  Deposits  by  Bidders.  —  To  guard  against  the  failure  of 
a  sale,  and  the  consequent  expense  and  delay,  it  is  within  the 
discretion  of  the  court  to  require  a  deposit  of  money,  or  other 
satisfactoi-y  security  that  the  terms  of  the  sale  will  be  complied 
with.^ 

A  lien  for  the  purchase-money  may  also  be  reserved  on  the 
property  as  an  additional   security.^ 

The  amount  of  the  deposit  may  reasonably  be  fixed  in  refer- 
ence to  the  amount  of  cash  required  for  the  discharge  of  costs 
and  other  claims  calling  for  immediate  payment.  But  the 
officer  conducting  the  sale  should  not  be  authorized  to  exact  a 
cash  advance  before  the  close  of  the  biddings.  It  is  considered 
that  any  convenience  that  may  result  from  possessing  this 
means  of  eliminating  spurious  bids,  during  the  progress  of  the 
bids  is  counterbalanced  by  the  tendency  of  such  a  condition  to 
chill  the  bids  by  deterring  some  parties  from  bidding,^ 

A  court  is  justified  in  requiring  each  bidder  at  a  sale  of  large 
railroad  interests  to  make  as  large  a  deposit  as  $50,000.^ 

§  795.  Liability  of  Bidders  for  Loss  upon  Resale.  —  A  reorgani- 
zation committee  which  fails  to  make  good  its  bids,  not  for 
want  of  funds,  but  because  it  thinks  that  the  price  was  too  high 

^  Blossom  V.   Railroad  Co.   (1865),    3  and  other  property  not  consumed  by  use, 

Wall.   196.  and  to  return  the  same  to  the  company  at 

2  Coe  V.  Columbus,    Piqua,  &  Indian-  the  end  of  the  term  in  as  good  condition 

apolis  R.  Co.  (1889),  10  Ohio  St.  372,  409  ;  as  it  may  be  in  when  received  ;  and,  to 

Bardstown  &  Louisville  R.  Co.  v.  Metcalfe  prevent  future  controversy  with  reference 

(1862),  4  Mete.  (Ky.)  199.  thereto,    the    court,    before    ordering   the 

*  Bardstown   &    Louisville    R.    Co.   v.  lease,    should   cause   an   inventory   to   be 

Metcalfe  (1862),  4  Mete.  (Ky.)  199.    This  made  of  the  property,  its  value,  condition, 

case   also   rules    that,   if  the   property  is  etc.,  which  should  be  filed  in  the  cause, 

leased  for  the  purpose  of  paying  the  ar-  and  declared  in  the  decree  ordering  the 

rears   of    interest,    the    lessee    should    be  lease   to   be   conclusive  evidence  of  such 

required  to  give  bonds,  with  good  security,  value,  condition,   etc.,  at  the  commence- 

for  the  payment  of  such  arrears,  and  of  ment  of  the  term. 

the  interest  to  accrue  while  he  remains  in  *  Hand  v.  Savannah  &  Charleston  R. 

possession,  and,  as  an  additional  security,  Co.  (1880),  13  S.  C.  467;  s.  c.  12  Am.  & 

a  lien  on  the  term  should  be  reserved.     In  Eng.  R.  R.  Cas.  488. 

such   a   case,    the   lessee    should   also   be  *  Turner  v.  Indianapolis,  B.  &  W.  Ry. 

compelled  to  give  a  covenant,  with  good  Co.  (1878),  8  Biss.  380. 
security,  to  keep  in  repair  the  roads,  cars, 


776  EAILWAY   BONDS   AND   MORTGAGES.         [CHAP.  XXXV. 

and  that  it  might  have  made  a  better  bargain,  will  not  be 
excused,  upon  a  resale  of  the  property  at  a  less  price,  from 
making  good  the  difference,  if  the  unsecured  creditors  will 
derive  advantage  therefrom.  ^ 

§  796.  Payment  in  Bonds.  —  If  bondholders  purchase  the  entire 
property,  they  have  an  equitable  right,  after  satisfying  the  costs 
and  charges  of  the  litigation  and  the  trust,  to  pay  the  balance 
in  bonds,  so  far  as  their  own  proportion  of  the  balance  extends, 
for  it  is  to  come  to  them.^ 

The  Supreme  Court  of  the  United  States,  in  approving  a 
decree  which  ordered  the  master  to  receive  in  payment  bonds 
and  coupons  ascertained  by  him  to  be  due  and  owing,  and 
recognized  by  the  court  as  valid  obligations,  remarked,  with 
regard  to  the  arrangement:  "Permission  to  bondholders  who 
are  mortgagees  to  purchase  at  a  sale  of  the  mortgaged  property 
and  to  pay  by  their  bonds  is  not  only  usual,  but  it  is  highly 
advantageous  to  all  persons  who  have  an  interest.  It  tends  to 
enhance  the  price  which  may  be  obtained,  and  thus  benefits 
other  creditors  as  well  as  the  mortgagor.^ 

Bonds  should  not  be  received  in  payment  for  a  bid  at  a  fore- 
closure sale  of  corporate  property  at  par  unless  the  purchase 
price  is  adequate  to  pay  the  par  value  of  all  outstanding  bonds. 
If  the  price  is  inadequate  to  pay  the  par  value,  then  bonds 
should  be  received  from  the  purchaser  only  for  the  proportion 
of  the  sum  bid  as  the  holder  of  the  bonds  will  be  entitled  to 
in  the  distribution  of  the  proceeds.* 

Where  the  court  has  required  the  payment  in  cash  of  a  sum 
sufficient  to  discharge  all  allowed  claims  of  general  creditors 

1  Central  Trust  Co.  v.  Cincinnati,  J.  &  sacrifice,  and  turn  the  minority  off  with  a 
M.  Ry.  Co.  (1892),  58  Fed.  Rep.  500.  mere  pittance. 

2  Duncan  v.  Mobile  &  Ohio  R.  Co.  3  Ketchum  v.  Duncan  (1877),  96  U.  S. 
(1879),  3  Woods,  597,  per  Bradley,  J.  It  659.  This  case  was  followed  in  KrophoUer 
was,  however,  pointed  out  by  the  learned  v.  St.  Paul  &  Pac.  Ry.  Co.  (1880),  2  Fed. 
justice  that  the  re.sult  of  the  operation  of  Rep.  302,  where  the  purchaser  was  author- 
this  rule  would  evidently  be  to  give  those  ized  to  pay  all  his  bid,  except  $50,000, 
who,  whether  singly  or  in  combination,  in  the  debentures  issued  by  order  of  the 
hold  a  large  portion  of  the  bonds  a  great  court  and  in  the  bonds  secured  by  the 
advantage  over  the  minority,  for  they  can  mortgage  foreclosed,  at  such  a  percentage 
pay  their  own  proportion  of  the  purchase-  of  their  fair  value  as  should  be  equal  to 
money,  which  is  much  the  largest,  in  the  ilividend  to  which  they  would  be  enti- 
bonds,  and  have  only  a  small  amount  in  tied  upon  a  distribution  of  the  proceeds  of 
cash  to  pay  ;  whilst  the  minority  can  only  the  sale. 

pay  a  small  jiroportion  in  bonds,  and  have         ^  Thayer,  Circuit  Judge,   in   American 
a  large  amount  to  pay  in  cash,  which,  as  a  Waterworks  Co.  of  Illinois  ct  al.  v.  Farm- 
general  rule,  they  arc  (juite  unable  to  pay.  er.s'  Loan  &  Trust  Co.  (1896),  73  Fed.  Rep. 
This  practically  puts  it  in   the  power  of  956,  964. 
the  majority  to  get  the  jiropcrty  at  a  great 


§  797.]  SALES   OP   MORTGAGED   PROPERTY.  777 

and  the  expenses  of  the  suit,  the  rest  of  the  price  heing  paid  in 
bonds,  the  owners  of  such  allowed  claims,  if  they  assent  to  the 
subsc(iuent  application  of  a  part  of  this  money  to  liabilities  not 
properly  chargeable  against  it,  will  be  regarded  as  having 
waived  their  rights  to  the  extent  that  such  application  affects 
tne  ability  of  the  fund  to  discharge  the  principal  and  interest  of 
their  debts,  and  they  cannot  afterwards  require  the  j)urchasers 
to  substitute  sufficient  cash  in  lieu  of  bonds  to  pay  their  claims 
in  fuU.i 

Where  the  court  decrees  that,  at  the  sale,  the  mortgage  bonds 
may  be  received  in  part  payment  of  the  purchase  price,  it  is 
not  necessary  nor  customary  to  fix  the  value  of  such  bonds  prior 
to  the  confirmation  of  the  sale.^ 

§  797.  Who  may  be  Purchaser.  —  It  is  desirable  to  guard 
against  the  perils  of  a  forced  sale  of  a  valuable  property  for 
cash.  At  judicial  sales  of  railroads  for  cash  there  is,  as  is  well 
known,  little  likelihood  of  obtaining  a  bid  for  a  sum  at  all  com- 
mensurate with  the  value  of  the  property  sold,  or  with  the 
amount  of  incumbrances  upon  it,  the  amount  required  being 
usually  so  large,  that  it  is  beyond  the  reach  of  ordinary  pur- 
chasers. The  bondholders  are  generally  the  only  parties  that 
can  become  purchasers,  because  they  need  not  pay  their  bid  in 
cash.  These  are  the  reasons  that  so  often  an  association  of  the 
bondholders  is  formed  to  effect  a  purchase.  For  convenience 
sake  they  usually  appoint  a  purchasing  committee  to  buy  the 
property,  take  the  title  for  the  benefit  of  all,  and  transfer  it  to  a 
new  corporation. 3 

The  arrangement  in  this  case  was  made  under  the  power 
given  in  the  mortgage  to  a  majority  of  the  bondholders.  The 
plan  was  for  the  trustee  to  purchase  for  their  benefit,  the 
minority  being  guarded  in  their  interest.  The  court  made  a 
decree,  therefore,  authorizing  the  trustee  to  bid  at  the  sale  at 
least  the  amount  of  principal  and  interest  of  the  first-mortgage 
bonds.  This  decree  was  approved  by  the  Supreme  Court  on 
appeal.  The  validity  of  such  associations  of  bondholders  is 
fully  recognized,*  provided  they  are  formed  in  good  faith,  and 
not  with  a  view  to  prevent  others  from  purchasing.^ 

1  Central  Trust  Co.  v.  Cincinnati,  J.  &  *  Pennsylvania  Transportation  Co.'s 
M.  E.  Co,  (1892),  58  Fed.  Rep.  501.  Appeal  (1882),  101  Pa.  St.  576;  Vatable 

2  Farmers'  Loan  &  Trust  Co.  v.  Green  v.  New  York,  L.  E.  &  W.  R.  Co.  (1884), 
Bay  &  Minnesota  R.  Co.  (1881),  10  Biss.  96  N.  Y.  49  ;  s.  c.  17  Am.  &  Eug.  R.  R. 
203.  Cas.  268. 

3  Sage  V.  Central  K.  Co.  (1879),  99  &  Ketchum  v.  Duncan  (1877),  96  U.  S. 
U.  S.  334,  339.  659,  674. 


778  RAILWAY   BONDS   AND   MORTGAGES.         [CHAP.  XXXV. 

Stockholders  may  also  combine  under  a  like  limitation  to 
buy  in  the  property,  and  save  it  from  being  sacrificed.  ^  Where 
the  property  is  thus  bid  in  by  a  committee  acting  as  agents  for 
the  bondholders,  the  fact  that  the  return  of  the  officer  appointed 
to  make  the  sale  does  not  state  who  are  the  principals  is  no 
ground  for  refusing  to  confirm  the  sale.  The  court  may  take 
judicial  notice  that  such  a  committee  represents  the  owners  of 
the  property,  and  all  that  can  be  required  of  them  is  that  it 
shall  comply  with  the  orders  of  the  court.  ^ 

A  purchase  by  the  solicitor  of  the  company,  who  takes  the  title 
for  the  bondholders,  is  not  necessarily  in  and  for  itself  invalid. 
He  simply  holds  the  title  until  the  real  purchasers  are  in  a  con- 
dition to  take  it  themselves.  Such  purchases  will  be  scrutinized 
closely,  but,  until  impeached,  they  must  stand. ^ 

§  798.  Confirmation  of  Sale.  —  The  sale  is  not  final  until  a 
report  is  made  to  the  court  by  the  officer  appointed  to  conduct 
it,  and  it  is  approved  and  confirmed.  This  report  is  subject  to 
objection  from  either  party,  and  the  purchaser  himself  who 
becomes  a  party  to  the  sale  may  appear  before  the  court,  and, 
if  any  mistake  has  occurred,  may  have  it  corrected.* 

Under  the  acts  of  Congress  the  power  to  confirm  or  reject  a 
sale  belongs  exclusively  to  the  Circuit  Courts  of  the  United 
States.  The  powers  conferred  on  the  District  Courts  are  only 
such  as  are  necessary  to  control  the  ministerial  duties  of  officers 
in  the  execution  of  final  process.^ 

The  court,  by  confirming  a  sale  under  a  foreclosure  decree 
which  has  been  made  by  a  sheriff  on  a  day  different  from  that 
designated  in  the  decree  of  sale,  will  render  the  sale  valid.^ 

1  Pennsylvania  Transportation  Co.'s  §  3941,  Sale  as  an  entirety.  Kentucky, 
Appeal   (1882),    101   Pa.   St.    576.  Gen.  Stats.   1887,  ch.  56,  subd.  iv.,  Judi- 

2  Turner  o.  Indianapolis,  B.  &  W.  Ry.  eial  sales  of  such  property.  Michigan, 
Co.  (1878 J,  8  Biss.  380.  How.   Anier.  Stats.,  §  3351,    Sales  under 

3  Pacific  Railroad  v.  Ketchum  (1879),  power.  Mississippi,  Rev.  Code  1880, 
101  U.  S.  289,  300.  §   1038,    Property  and   franchises   salable 

•*  Blos.som   V.    Railroad   Co.    (1865),    3  under  judgment.     Ohio,  Rev.  Stats.  1890, 

Wall.  196,  207.  §   3400,    Property  need  not  be  appraised 

^  Milwaukee  R.  Co.  v.  Soutter  (1866),  before  foreclosure  sale  ;  upset  price  should 

5  Wall.  660,  662.  be  fixed  ;  §§  3420-3424,  Conduct  of  sale. 

6  Fanners'  Loan  &  Trust  Co.  et  al.  v.  Texas,    Saylo's  Civ.    Stats.    1888,   §4261, 

Oregon  Pac.  Ry.  Co.  ct  al.  (Oregon,  1895),  Conduct  of  sales  under  deed  of  trust  or 

40  I'ac.  Rep.  1089.  power.     West  Virginia,  Code,  ch.  54,  §  72, 

Statutes  in   some  of  the  States  relat-  Sale,  purchaser. 
ing  to  sales:    Indiana,    Rev.  Stats.  1888, 


CHAP.  XXXVI.]       RIGHTS   OF   PURCHASERS  AT  SALE. 


779 


CHAPTER  XXXVI. 


EIGHTS   OF   PURCHASERS    AT   A   SALE   OF   THE    MORTGAGED    PROPERTY. 


Art.  I.  —  Effect  of  Salk  as  regards 

THE   MORTGAGOK. 

§  799.    Corporation    not    dissolved   by 
Sale. 

800.  How  far  Kule  affected  by  Stat- 

utes permitting  Purchasers  to 
incorporate. 

801.  Extent   to   which    Liability  of 

Mortgagor  Company  ceases 
with  Foreclosure  Sale. 

802.  Eflfect  of  Sale   upon  Rights  of 

Debtors     and     Creditors    of 
Mortgagor   Company. 
Art.  II. — Rights    of    Purchasers   at 
Foreclosure  Sales. 
§  803.    Purchaser  bound  by  Decree. 

804.  What    passes    to   Purchaser   at 

Trustee's  Sale. 

805.  Right  to  Alunicipal  Aid  does  not 

pass  by  Foreclosure  Sale. 

806.  Purchaser's  Right  to  Earnings 

of  the  Road  accumulated  in 
the  Receiver's  Hands. 

807.  Right  to  use  Lands  appropriated 

by  Company  not  lost  by  Non- 
use  of  Moi-tgagor  Company's 
Franchises. 

808.  Statutory    Right     to     regulate 

Tolls   does   not   pass. 

809.  Exemption  from  Taxation  some- 

times passes  to  Purchaser. 

810.  The    same    Principle    of    Con- 

struction is  applied  where  the 
Rights  of  Purchasers  are  de- 
fined by  Statute. 

811.  Vested    Rights    of    Purchasers 

cannot  be  impaired  by  Leg- 
islation. 
Art.  III.  —  Liabilities  of  Purchasers 
at  Foreclosure  Sales. 
§  812.    Generally. 

(a)  Purchaser  takes   free  from 
Subsequent  Liens. 


(b)  Purchaser  sometimes  takes 

free  from  Liens  held 
by  Persons  not  Actual 
Parties. 

(c)  Purchaser   takes   free  from 

Liens  which  he  had  a 
Right  to  suppose  dis- 
charged. 

(d)  Purchaser   takes   free  from 

Tax  Lien  sometimes. 

(e)  Purchaser  takes  subject  to 

Liens     absolutely    para- 
mount by  Statute. 
(/)  Purchaser  takes  subject  to 
Statutory  Obligations  as 
to  Operation  of  Road. 
(g)   Purchaser  takes  subject  to 
Obligations  and  Restric- 
tions imposed  by  Mort- 
gagor's Charter. 
§813.   Contracts   of    Mortgagor    Com- 
pany  are   not,    as   a  General 
Rule,  binding  on  its  Successor. 

814.  Trust  availing  against  Purchaser 

avails  against  his  Assignee. 

815.  Purchaser  takes  subject  to  Ven- 

dor's Lien  sometimes. 

816.  Assumption   of  Obligations  in- 

ferred from  Fact  of  Purchase 
under  a  given  Decree. 

817.  Purchaser  affected  with  Notice 

of  Proceedings  in  Foreclosure 
Suit. 

818.  Liability  of  Purchaser  by  Rea- 

son of  its  Occupation  of  Land 
acquired  by  Mortgagor. 

819.  Assumption   of   Obligations  in- 

ferred from  Agreements  of 
New  Company  or  its  Trans- 
ferrers. 

820.  Purchaser   not   generalh^  liable 

for  Mortgagor's  Torts  in  Oper- 
ation of  Road. 


780 


RAILWAY   BONDS   AND   MORTGAGES.        [CHAP.  XXXVI. 


§  821.  Liability  of  New  Company  for 
Damages  caused  by  Operation 
of  Road  by  Trustees. 
822.  Liability  of  Purchasers  for  Dam- 
ages caused  by  Operation  of 
Road  by  Receiver. 


§  823.  No  Liability  attaches  to  Pur- 
chasers until  Sale  is  con- 
firmed. 

824.  Purchasers  organizing  as  a  New 

Company  not  liable  for  Debts 
of  Mortgagor. 

825.  The  Right  of  Redemption. 


Article  1.  —  Effect  of  Sale  as  regards  the  Mortgagor. 

§  799.  Corporation  not  dissolved  by  Sale.  —  As  was  emphati- 
cally said  in  Atkinson  v.  Marietta  &  Cincinnati  R.  Co.,^  "  Al- 
though the  corporation  may  be  divested  of  its  property,  together 
with  the  franchise  of  operating  and  making  profit  from  the  use  of 
its  road,  its  corporate  existence  survives  the  wreck,  and  endures 
until  the  State  sees  fit  to  terminate  it  by  proper  proceedings." 

The  foreclosure  of  a  railroad  mortgage  cuts  oif  all  the  rights 
and  interests  of  the  mortgagor  corporation  in  the  mortgaged 
property,  and  leaves  nothing  for  the  stockholders  except  the  sur- 
plus, if  any,  which  remains  after  satisfying  the  mortgage  and 
other  preferential  claims.^ 

But  the  corporation  itself  is  not  dissolved  by  the  sale  of  its 
property.  3 


1  15  Ohio  St.  21  (1864). 

2  Vatable  v.  New  York,  L.  E.  &  W.  R. 
Co.  (1884),  96  N.  Y.  49  ;  s.  c.  17  Am.  & 
Eng.  R.  R,  Cas.  268. 

8  Waterman  on  Corp.,  §  432. 

Gulf,  Colorado,  &  Santa  Fe  Ry.  Co. 
V.  Morris  (1887),  67  Tex.  692.  Compare 
Memphis  &  Little  Rock  R.  Co.  v.  Rail- 
road Comn)issioners  (1884),  112  U.  S. 
609,  where  Mr.  Justice  Matthews,  in  the 
course  of  his  opinion,  adverted  incide«t- 
ally  to  the  rule  stated  in  the  text  as 
being  well  established.  In  Rogersville  & 
Gt.  Jefferson  R.  Co.  v.  Kyle  (1882),  9  Lea 
(Tenn.),  691  ;  s.  c.  14  Am.  &  Eng.  R.  R. 
Cas.  576,  it  was,  however,  held  that  a  de- 
cree which  adjudged,  among  other  thing.s, 
that  the  lien  of  the  State  imposed  by 
statute  was  superior  to  all  claims  what- 
soever ;  that  this  lien  extended  to  the 
road,  its  rolling-stock,  and  other  property, 
rights,  privileges,  and  franchises  ;  and  that 
upon  a  sale  to  any  one  but  the  originiil  com- 
pany, that  company  and  its  stockholders 
should  cease  to  liave  any  light,  legal  or  equi- 
table, in  the  jtroperty,  rights,  or  franchises 
80  sold,  —  liad  the  effect  of  dissolving  the 
original  company  when  tlie  subject-matter 


of  the  lien  passed  into  the  hands  of  a 
different  company.  "  For  all  the  practical 
purposes  of  its  original  creation,"  said  the 
court,  "the  corporation  ceased  to  exist. 
A  corporation  possessing  neither  property, 
rights,  nor  franchises  is  scarcely  conceiv- 
able." This  mode  of  arriving  at  a  con- 
clusion regarding  the  existence  of  a 
corporation  under  such  circumstances 
seems  rather  lacking  in  precision.  In 
view  of  the  general  principle  .stated  in 
the  text,  the  question  seems  to  reduce 
itself  simply  to  the  inquiry,  Did  the  fran- 
chise to  be  a  corporation,  as  well  as  the 
other  franchises,  pass  by  the  sale  ?  If  it 
did  not,  it  must  still  exist  somewhere,  in 
the  ab.sence  of  some  statute  providing  for 
such  a  case  ;  and  there  is  apparently  no 
reason  why  the  original  company  should 
not  be  regarded  as  still  in  possession  of 
this  mther  barren  privilege.  Even  under 
the  Code  of  Tennessee  a  dissolved  corpo- 
ration may  be  continued  in  existence  for 
the  purpose  of  prosecuting  and  defending 
suits.  The  court,  in  deciding  the  above 
case,  was  largely  influenced  by  the  section 
of  that  Code  (3-)31),  declaring  that  "a 
coiporation  is  not  dissolved  by  mere  non- 


§§  800,  801.]  RIGHTS   OF   PURCHASERS    AT   SALE.  781 

§  800.  How  far  Rule  is  affected  by  Statutes  permitting  Purchasers 
to  incorporate.  —  The  charter  and  franchises  are  not  an  incident 
which  is  annexed  to  and  passes  with  a  transfer  of  the  pi'operty  of 
the  corporation,  even  though  the  legislature  allows  the  purchasers 
to  organize  themselves  into  a  new  company,  with  all  tlie  rights, 
privileges,  powers,  and  franchises  of  the  former  company.  If 
such  a  transfer  constitutes  a  cause  of  forfeiture  for  non-user,  the 
forfeiture  must  be  determined  judicially  to  make  it  effectual. ^ 

Nor  docs  a  special  act  incorporating  the  purchasers  of  an  insol- 
vent railroad,  and  investing  them  with  "  all  the  rights,  powers, 
privileges,  and  franchises  "  of  the  former  company,  operate  as  a 
revocation  of  tlie  charter  of  the  latter.  Such  an  act  will  be  con- 
strued as  a  grant  of  only  such  rights,  etc.,  as  the  legislature  has 
the  authority  to  grant;  and  it  has  no  such  authority  in  respect  to 
the  rights,  etc.,  of  the  former  company,  unless  they  have  been 
judicially  declared  forfeited,  or  revoked  by  an  express  enactment, 
which  has  that  effect,  and  is  not  invalid  as  being  repugnant  to 
the  constitution.^ 

Still  less  is  the  mortgagor  corporation  extinguished  by  an  act 
declaring  that  the  purchasers  of  a  railroad,  etc.,  at  a  judicial  sale 
shall  be  and  are  thereby  constituted  a  body  politic  and  corporate, 
invested  with  the  right,  title,  and  interest  of  the  former  corpora- 
tion in  the  property  purchased,  and  also  with  the  franchises  exist- 
ing at  the  time  of  the  sale.^ 

§  801.  Extent  to  which  Liability  of  Mortgagor  Company  ceases 
with  Foreclosure  Sale.  —  The  mortgagor  company  is  not  liable  for 
injuries  resulting  from  the  condition  of  the  road  after  a  fore- 
closure sale,  and  a  purchase  under  an  act  declaring  that  the 
corporate  rights  and  franchises  should  be  as  fully  vested  in  the 
purchaser  as  if  he  had  been  the  original  corporator.  Such  a 
purchaser  does  not  become  identical  with  the  company  itself,  so 
that  by  suit  against  the  company  his  duties  may  be  enforced. 
This  being  the  case,  the  company  is  relieved  of  liability  for  the 
safety  of  those  using  the  road,  upon  the  general  principle  that, 
by  the  sale,  its  power  over  the  road  has  entirely  ceased,  and  with 

user  or  assignment  to  others,  in  whole  or  Co.  (1861).  25  111.  353  ;  Mctz  v.  Buffalo, 

in   part,    of    its    powers,    franchises,    and  Cony,  &  Pittsburg  R.  Co.  (1874),  58  N.  Y. 

privileges,  unless  ail  the  corporate  prop-  61. 

erty  has   been   appropriated  to  the   pay-  -  Wilmington    R.    Co.    v.    Downward 

ment   of    its    debts."      Apart   from    this  (Del.,  1888),  13  Centr.  Rep.  284;  s.  c.  4 

proviso,    the    case    cannot    be   reconciled  Ry.  &  Corp.  L.  J.  234. 
with  the  authorities  cited  under  the  pres-  ^  Commonwealth  v.  Central  Passenger 

ent  section.  Ry.  Co.  (1866),  52  Pa.  St.  506. 
1  Bruffett  V.  Great  Western   Railroad 


782  RAILWAY   BONDS   AND    MORTGAGES,        [CHAP.  XXXVI. 

its  power  its  duty  to  keep  the  road  in  good  condition  has  also 
terminated.^ 

The  presumption  is  that  the  purchasers  of  a  road  who  subse- 
quently organize  a  new  company  are  in  possession  of  the  property 
between  the  date  of  the  sale  and  the  time  of  filing  the  certificate 
of  reorganization.  The  mortgagor  company,  therefore,  is  not  lia- 
ble for  the  operation  of  the  road  during  that  period,  unless  its 
possession  is  affirmatively  shown.^ 

S  802.  Effect  of  Sale  upon  Rights  of  Debtors  and  Creditors  cf 
Mortgagor  Company.  —  The  continued  existence  of  the  corporation 
inures  to  the  benefit  of  its  creditors  whose  debts  are  unpaid  at  tiie 
time  of  the  sale.  Such  creditors  may  still  enforce  their  claims 
against  the  corporation,  notwithstanding  the  surrender  or  sale  of 
its  corporate  franchises.^ 

Thus,  since  the  creditors  of  a  railway  company  are  entitled  to 
consider  an  unconditional  subscription,  made  by  a  municipality 
to  aid  the  work  of  construction,  as  a  part  of  the  corporate  assets 
as  soon  as  it  is  granted,  they  may  still  enforce  their  right  to  the 
fund  after  the  property  and  franchises  have  been  sold  and  trans- 
ferred by  the  legislature  to  a  new  company.  The  municipality, 
in  such  a  case,  has  no  power  to  donate  a  portion  of  the  bonds 
issued  on  its  subscription  to  the  new  company,  except  so  far  as 
the  creditors  of  the  old  company  will  not  be  prejudiced  by  the 
donation.* 

The  creditors  may  enforce  their  claims  by  garnishment  of  the 
debtors  of  the  corporation.  Thus,  when  certain  persons  have 
subscribed  for  corporate  stock,  and  then  compromised  a  suit  for 
the  subscription  by  a  contract  to  deliver  cross-ties  at  a  certain 
price,  part  of  which  is  to  be  paid  in  stock  and  the  remainder  in 
cash,  they  are  liable  as  garnishees  to  a  judgment  creditor  whose 

1  Wellshoroiish  &  Tioga  Plank  Eoad  bus,  Piqua,  &  Indianapolis  Pt.  Co.  (1859), 
Co.  V.  Griffin  (186S),  57  Pa.  St.  417,  ilis-  10  Ohio  St.  372  :  "After  an  act  of  dis- 
tinguishing Conimononwealth  v.  Central  position  wliich  separates  the  franchise  to 
Passenger  Ry.  Co.  (1866),  52  Pa.  St.  506,  maintain  a  railroad  and  make  profit  from 
supra,  decided  with  reference  to  another  its  use  from  the  franchise  of  being  a  cor- 
act.  poration,  though  a  judgment  of  dissolu- 

2  Pittsburg,  Cincinnati,  &  St.  Louis  tion  may  be  authorized,  yet  until  there  be 
Ry.  Co.  V.  Fierst  (1880),  96  Pa.  St.  144  ;  such  judgment  the  rights  of  the  corpora- 
S.  c.  9  Am.  &  Kiig.  R.  R.  Cas.  437.  tors  and  of  third  persons  may  require  that 

8  Riiiiroad  Co.  v.  Howard  (1868),  7  the  corporation  be  considered  as  still  ex- 
Wall.  392  ;    Memi.his  &  Little   Rock  R.  isting." 

Co.  D.  Railroad  Commissioners  (1884),  112  *  Morgan    County  v.  Thomas,   76    111. 

U.    S.    609.      In  the  latter  case   Justice  121    (1875),    citing    James   V.  Woodruff 

Matthews  refers  with  approval  to  the  fol-  (1815),  2  Dcuio,  574. 
lowing  worrls  of  tlie  court  in  Coe  v.  C'olum- 


§§  803,  804.]  EIGHTS   OF   PURCHASERS   AT    SALE.  783 

execution  against  the  corporate  property  has  been  returned  nulla 
bona} 

But  it  has  been  lield  that,  altliough  the  sale  does  not  extin- 
guish debts  owing  to  the  corporation,  nor  judgments  of  record  in 
its  favor,  the  corporation  is  dormant  and  incapable  of  action  in 
regard  to  such  debts  and  judgments,  and  is  therefore  incapable 
of  conveying  a  judgment  entered  in  its  favor  after  the  execution 
of  the  mortgage,  and  marked  after  the  sale  for  the  use  of  a  new 
company  organized  by  the  purchasers.^ 

Article  II.  —  Rights  op  Purchasers  at  Foreclosure  Sales. 

§  803.  Purchaser  bound  by  Decree.  —  The  purchaser  at  a  fore- 
closure sale  looks  to  the  decree  as  the  measure  of  liis  rights  and 
liabilities,  except  in  those  cases  where  his  position  is  defined 
by  a  general  or  special  statute.  The  sale  does  not  go  beyond 
the  decree.  The  purchaser  takes  nothing,  acquires  no  rights, 
incurs  no  liabilities,  except  those  which  are  determined  and 
prescribed  by  the  decree.^ 

Usually  the  decree  is  so  worded  as  to  make  the  subject-matter 
of  the  sale  coextensive  with  that  of  the  mortgage,  and  in  this 
case  the  question.  What  passes  to  the  purchaser  ?  is  evidently 
only  another  form  of  the  question,  —  What  does  the  mortgage 
cover  ?  The  decisions  dealing  with  the  effect  of  the  mortgage 
in  this  respect,  both  from  the  point  of  view  of  the  authority  of 
the  company  to  execute  a  mortgage  of  the  thing  specified,  and 
also  with  reference  to  matters  of  mere  construction,  have  been 
already  discussed  in  a  previous  chapter,  and  need  not  be  cited 
again.  The  same  remark  applies  where  a  statutory  lien  is 
declared  in  favor  of  the  State,  and  enforced  by  appropriate  ])ro- 
ceedings.  The  purchaser  at  the  sale  acquires  the  various  kinds 
of  property  covered  by  the  lien,  —  no  more,  no  less.  For  a  dis- 
cussion of  the  scope  of  those  liens  the  practitioner  is  referred  to 
an  earlier  portion  of  this  treatise. 

§  804.  "What  passes  to  Purchaser  at  Trustee's  Sale.  —  Property 
which  is  mentioned  neither  in  the  decree  directing,  nor  the  ad- 
vertisement announcing,  a  trustee's  sale,  will  not  pass  to  the 
purchaser,  although  that  property  constitutes  a  part  of  the 
security  of  the  bondholders.* 

1  Smith  V.  Gower  (1865),  2  Duv.  3  Simmons  v.  Taylor  (1885),  23  Fed. 
(Ky. )  17.                                                              Tiep.  849.     See  generally,  as  to  this  prin- 

2  Wilmington     R.  Co.     v.    Downward     ciple,  Rorer  on  Railroads,  921. 

(Del.  1888),' 13  Centr.  Rep.   284.  *  Osterber  v.  Union  Trust  Co.  (1876), 

93  U.  S.  424.     The  rule  was  here  applied 


784  RAILWAY   BONDS    AND    MORTGAGES.        [CHAP.  XXXVI. 

A  notice  of  sale  must  be  reasonably  specific  as  regards  the 
subject-matter  to  be  disposed  of,  and  the  purchasers  will  acquire 
nothing  except  what  is  described  with  sulhcient  particularity  to 
indicate  the  value  of  the  property  to  intending  bidders.  A 
covenant  in  favor  of  the  mortgagor  company  does  not  pass  to 
the  purchaser  under  a  trustee's  notice  of  sale  which  designates 
the  subject-matter  of  the  sale  as  the  "property,  rights,  privi- 
leges, and  franchises,  things  in  action,  and  other  things 
described  in  the  mortgage,  as  appears  in  the  bill  filed  by  the 
complainant. "  ^ 

S  805.  Right  to  Municipal  Aid  does  not  pass  Foreclosure  Sale. 
—  Until  a  company  to  which  aid  has  been  voted  by  a  municipal- 
ity occupies  a  position  which  will  enable  it  to  enforce  whatever 
right  or  interest  it  may  have  in  the  appropriation,  such  an 
appropriation  is  not  a  chose  in  action  which  can  be  mortgaged, 
so  as  to  pass  the  right  to  enforce  it  to  a  purchaser  at  the  fore- 
closure sale.2 

§  806.  Purchaser's  Right  to  Earnings  of  Road  accumulated  in 
Receiver's  Hands.  —  The  purchaser  is  not  entitled  to  money  accu- 
mulated in  the  receiver's  hands,  as  the  net  income  of  the  road 
from  the  date  of  the  decree  of  foreclosure  to  the  date  of  the  sale. 
Those  earnings  are  the  property,  not  of  the  company,  but  of 
its  creditors,  and  should  be  applied  by  the  court  to  the  payment 
of  their  claims  according  to  their  priorities.^ 

to  funds  coming  into  the  receiver's  hands  ment  if  there  was  no  specific  and  certain 

from  the   sales   of  land   assigned   by  the  designation  of  the  property  offered  for  sale, 

company  to  trustees.  ...  A  sale  at  auction  and  upon  notice 

1  Milwaukee  &  St.  Paul  R.  Co.  v.  Mil-  implies   that    there    is    some   designation 

waukee   &   Minnesota   R.   Co.   (1865),   20  of  the  thing  offered  to  be  sold,  so  that 

Wis.  165,   174.     The  court  said :    "  Is  it  persons   whom   the   law   invites   to    such 

permissible  that  choses  in   action,  instru-  auction  may  be  able  to  know  where  and 

ments  in  writing,  should  thus  be  exposed  what   is   the   property  they  are  about  to 

for  sale  and  swept  away  in  this  loose  and  purchase." 

uncertain  manner?  AVhat  purchaser  could  ^  BoardofCommrs.  of  Hamilton  County 

bid  understandingly  when  property  is  thus  j;.   State,   ex  rel.   Cottinghara   (1888),   115 

offered  for  sale  without  any  designation  or  Ind.  64  ;  s.  c.  4  N.  E.  Rep.  589  ;  17  N.  E. 

description?    Obviously  a  bidder  could  not  Rep.  855. 

know,  and  would  have  no  means  of  ascer-  '  Strang  v.  Montgomery  &  Eufaula  R. 

taining,  whether  the  chases  in  action  were  Co.    (1879),    3  Woods,    613  ;    Osterber   v. 

worth  a  thousand,  a  hundred  thousand,  or  Union   Trust   Co.  (1876),   93  U.   S.    424. 

a  million  of  dollars.     The  mortgage  being  In   the  former  case  the  court   also   held 

recorded  as  a  real-estate,  and  not  a  chattel  that,  even  if  the  purchaser  had  a  right  to 

mortgage,  would  probably  not  be  even  con-  such  earnings  on  general  principles,   yet 

structive  notice  to  third  persons  as  to  the  he  could  not  claim  them  under  the  decree 

property  covered  by  it.     No  person,  tlic^re-  in  question,  which  directed  a  sale  of  the 

fore,  attending  the  sale  could  know  what  "  road,   franchises,  right   of  M'ay,  depots, 

price  to  bid  or  how  to  regulate  his  judg-  rolling-stock,  tools,  and  all  other  property 


§§  807-809.]  RIGHTS    OF    PURCHASKRS    AT    SALE.  785 

Tlie  purchasers  under  the  foreclosure  of  a  junior  mortgage, 
consummated  while  a  receiver  appointed  at  the  instance  of  a 
souiur  mortgagee  is  in  possession,  have  an  equity  to  the  earnings 
accumulated  in  such  receiver's  hands  which  is  superior  to  that 
of  the  stockholders  and  unsecured  creditors,  and  a  bill  by  the 
latter  to  hold  the  receiver  to  an  accounting  for  those  earnings 
will  be  dismissed  upon  demurrer. ^ 

Where  the  property  of  a  railroad  company  is  sold  under  fore- 
clos'ire  of  a  junior  mortgage,  subject  to  the  rights  of  prior  mort- 
gagees under  a  mortgage  of  the  "net  income,"  and  under  its 
provisions  the  trustee  of  the  bondholders  in  case  of  default 
foreclosed,  and  the  property  went  into  the  possession  of  the  same 
receiver  as  in  the  prior  suit,  the  purchaser  at  the  sale  acquires 
no  right  to  the  income  during  the  receivership.  It  belongs  to 
the  holders  of  the  prior  mortgage  bonds.  ^ 

§  807,  Right  to  use  Lands  appropriated  by  Company  not  lost  by 
Non-use  of  Mortgagor  Company's  Franchises.  — The  right  (jf  a  pur- 
chaser to  use  the  land  appropriated  by  the  mortgagor  company 
cannot  be  impugned  by  showing  that  the  latter  had,  ])y  non-use 
and  failure  to  construct  its  road,  forfeited  its  franchises.  Such 
a  default  can  only  be  taken  advantage  of  by  the  State.  ^ 

What  passes  under  the  word  "franchises"  generally,  see  the 
chapter  on  Definitions  8uh  voc. 

So  far  as  the  answer  to  this  question  depends  on  the  power  to 
mortgage  franchises,  Chapter  VII,  should  be  consulted. 

§  808.  Statutory  Right  to  regulate  Tolls  does  not  pass.  —  The 
benefit  of  a  statutory  right  to  regulate  tolls,  conferred  upon  a 
company,  cannot  be  claimed  by  a  purchasing  company  organized 
under  a  statute  which  provides  that  it  shall  be  subject  to  all  the 
laws  of  the  State  which  apply  to  railroad  corporations  generally, 
and  there  has  been  passed,  subsequently  to  the  enactment  of  the 
statute  conferring  the  privilege  on  the  former  company,  a  statute 
prcscril)ing  what  rates  of  toll  may  be  charged  by  railroad 
companies.* 

§  809.  Exemption  from  Taxation  sometimes  passes  to  Purchaser. 
—  Exemption  from  taxation  will  not  pass  to  the  purchaser  at  a 

of  the  company,  real,  personal,  and  mixed."  ^  Downs  v.  Farmers'  Loan  &  Trust  Co. 

Such  a  decree  does  not  cover  any  j)crsonalty  (1897),  79  Fed.  Hep.  215. 

except  the  rolling-stock  and  other  prop-  ^  Logan     v.    Vernon,     Greensburg,    & 

erty  placed  on  the  road  by  the  receiver  in  Rushville    R.    Co.    (1883),   90    Ind.   552; 

the  discharge  of  his  duty  to  carry  on  the  s.  c.  14  Am.  &  Eng.  R.  E.  Cas.  43. 

business  of  the  company.  *  Norfolk  &  Western  R.  Co.   v.   Pen- 

1  Lafayette  Co.  v.  Neely  (1884),  21  Fed.  dleton  (1890),  86  Va.  1004  ;  s.  c.  11  S.  E. 

Rep.  738  ;  s.  c.  17  Am.  &  Eng.  R.  R.  Cas.  Rep.  1062. 
242. 

50 


78G 


RAILWAY   BONDS    AND    MORTGAGES.        [CHAP.  XXXVI. 


sale  under  a  decree  covering  all  the  mortgaged  property  of  a 
railroad  company,  including  the  "franchises."  ^ 

Nor  will  the  use  of  the  word  "privileges"  in  the  mortgage 
enlarge  the  rights  of  the  purchasers  in  this  respect. ^ 

A  foreclosure  sale  under  a  mortgage  of  the  "  charter  "  of  the 
company  is  equally  ineffective  to  transfer  this  privilege  to  the 
purchasers.^ 

So  also,  though  the  mortgage  professes  to  transfer  the  charter, 
the  rights  of  a  railroad  company  to  have  the  damages  for  the 
appropriation  of  its  land  assessed  in  a  particular  manner  is  a 
personal  privilege  of  the  grantee,  and  does  not  pass  to  pur- 
chasers incorporating  under  a  general  law  which  transfers  to 
it  the  "property  and  franchises  "  of  the  mortgagor.* 

§  810.  The  same  Principle  of  Construction  is  applied  -where  the 
Rights  of  Purchasers  are  defined  by  Statute.  —  "  Exemption  from 
taxation,"  it  is  declared,  "must  be  construed  to  have  been  the 
personal  privilege  of  the  very  corporation  specifically  referred 
to,  and  to  have  perished  with  that,  unless  the  express  and  clear 
intention  of  the  law  requires  the  exemption  to  pass  as  a  con- 
tinuing franchise  to  a  successor.  This  salutary  rule  of  interpre- 
tation being  founded  on  an  obvious  public  policy  which  regards 
such  exemptions  as  in  derogation  of  the  sovereign  authority  and 


1  Morgan  v.  Louisiana  (1876),  93  U.  S. 
217.  In  this  case  Justice  Field,  on  page 
223,  said:  The  term  "franchises"  "is 
often  used  as  synonymous  witli  rights, 
privileges,  and  immunities,  though  of  a 
personal  and  temporary  character,  so  that 
if  any  one  of  them  exists  it  is  loosely 
termed  a  '  franchise,'  and  is  supposed  to 
pass  upon  a  transfer  of  the  franchises  of 
the  company.  But  the  term  must  always 
be  considered  in  connection  with  the  cor- 
poration or  property  to  which  it  is  alleged 
to  appertain.  The  franchises  of  a  railroad 
corporation  are  rights  or  privileges  which 
are  essential  to  the  operations  of  the  corpo- 
ration, and  without  which  its  road  and 
works  would  be  of  little  value ;  such  as 
the  franchise  to  run  cars,  to  take  tolls,  to 
apprn[)riate  earth  and  gravel  for  the  bed  of 
its  road,  or  water  for  its  engines,  and  the 
like.  They  are  positive  rights  or  privi- 
leges, without  the  possession  of  which  the 
road  of  the  company  could  not  be  success- 
fully worked."  See  also,  to  the  same  effect, 
Railroad  Co.  v.  County  of  Hamblen  (1880), 
102  U.  S.  273  ;  Louis"ville  &  Nashville  R. 


Co.  V.  Palmes  (1883),  109  U.  S.  244,  252  ; 
s.  c.  13  Am.  &  Eng.  R.  R.  Cas.  380  ;  Chesa- 
peake &  Ohio  Ry.  Co.  v.  Miller  (1885),  114 
U.  S.  176. 

2  Picard  V.  East  Tenn.,  Va.  &  Ga.  R. 
Co.  (1889),  130  U.  S.  637. 

3  Memphis  &  Little  Rock  R.  Co.  v. 
Railroad  Commissioners  (1884),  112  U.  S. 
609. 

*  Little  Rock  &  Fort  Smith  Ry.  >•. 
McGehee  (1883),  41  Ark.  202  ;  s.  c.  20 
Am.  &  Eng.  R.  R.  Cas.  82.  Compare 
Dow  V.  Beidleman  (1887),  49  Ark.  32.^ 
where  it  was  held  that,  under  such  a  morr-* 
gage,  a  provision  in  the  charter  that  the 
charge  for  carrying  passengers  should  not 
exceed  five  cents  per  mile  for  each  pas- 
senger, even  if  it  could  be  construed  as  a 
contract  on  the  part  of  the  State  that 
passenger  fare  would  not  be  reduced  be- 
low that  rate,  would  not  have  the  effect 
of  transferring  the  privilege  to  the  pur- 
chasers, since  their  reorganization  under 
a  constitution  enacted  since  the  granting 
of  the  original  charter  created  a  new  cor- 
poration subject  to  legislative  control. 


§  810.]  RIGHTS    OP    PURCHASERS    AT    SALE.  787 

of  common  right,  and  therefore  not  to  be  extended  beyond  the 
exact  and  express  requirement  of  the  grants,  construed  Ktrietis- 
simi  juris. "  ^ 

In  applying  this  principle  the  courts,  with  one  or  two  excep- 
tions, have  taken  the  position  that  the  exemption  will  not  pass 
by  any  word  which  does  not  constitute  an  apt  description  of  tliis 
privilege  as  distinguished  from  others.  Thus  it  has  been  held 
by  the  Supreme  Court  of  the  United  States  that  the  exemption 
will  not  pass  by  a  charter  granting  to  a  railroad  company  all 
the  "rights,  powers,  and  privileges  "  of  another  company. ^ 

In  Kentucky,  also,  it  has  been  held  that  the  purchasing  com- 
pany will  not  enjoy  an  exemption  from  taxation  conferred  on 
the  mortgagor,  merely  for  the  reason  that  the  legislature  has 
recognized  by  the  recitals  of  the  statute  the  fact  that  the 
"  rights,  franchises,  and  property  "  of  the  latter  have  passed  by 
the  sale.  3 

In  Florida,  on  the  other  hand,  the  view  is  taken  that  the  right 
of  exemption  from  taxation  can  be  passed  under  the  general 
language  "all  the  rights,"  as  well  as  any  other.* 

That  the  use  of  the  word  "  immunities  "  will  carry  an  exemp- 
tion from  taxation  in  all  cases  seems  to  be  a  legitimate  inference 
from  several  cases.  In  some  of  these,  however,  the  courts  were 
influenced  more  or  less  strongly  by  other  considerations  which 
were  deemed  to  support  the  inference  that  this  was  the  intention 
of  the  legislature.  Thus  it  has  been  held  that  an  act  providing 
for  the  sale  of  a  road  which  the  State  itself  has  bought  in  fore- 
closure proceedings  to  enforce  its  lien,  and  conferring  on  the 
purchasers  "all  the  rights,  franchises,  privileges,  and  immuni- 
ties "  of  the  defaulting  corporation,  will  cover  any  exemption 
from  taxation  that  the  latter  may  have  possessed,  providing  the 

1  Memphis  k  Little  Rock  R.  Co.  v.  allegation  to  the  contrary,  presume  that  tie 
Railroad  Commissioners  (1884),  112  IT.  S.  sale  embraced  anytliingnot  covered  by  the 
609.  lien.     The  authority  of  Morgan  v.  Louisi- 

2  Railroad  Companies  v.  Gaines  (1878),  ana,  supra,  was,  therefore,  controlling. 

97  U.  S.  697  ;  Wilson  v.  Gaines  (1877),  9  ^  Evansville,    Henderson,  &  Nashville 

Baxt.  (Tenn.)  546,  affirmed  in  Wilson  v.  R.  Co.  v.  Commonwealth  (1872),  9  Bush 

Gaines  (1880),  103  U.  S.  417.     This  case  (Ky.),  438. 

came   before   the    Supreme   Court   of  the  *  Atlantic    &    Gulf    R.    Co.    r.    Allen 

United  States  on  demurrer  to  a  bill  pray-  (1876),    15    Fla.    637.     The    words    used 

ing  that   the    collection  of  taxes  on  the  were  "rights,  franchises,  and  privileges," 

property  be  restrained,  and  averring  that  but  no  stress  was  laid  on  the  addition  of 

the   sale   was   under    the    proceedings   to  the  last  two.      Trask   v.  Maguire,   infra, 

enforce  a  statutory  mortgage  in  favor  of  was   cited  as  an  authority  for   this  doc- 

the  State.     The  court  held   that,   as  the  trine  ;  but  it  is  clearly  not  in  point,  for 

question  was  presented  in  this  manner,  it  the  statute  there  construed  included  the 

could  not,  in  the  absence  of  a  particular  significant  word  '^immunities." 


RAILWAY   BONDS    AND   MORTGAGES.       [CHAP.  XXXVI. 


legislature  has  the  power,  when  the  act  is  passed,  to  exempt 
railroad  property  from  taxation. ^ 

So  also  in  the  same  light  the  Supreme  Court  of  the  United 
States  has  viewed  an  act  incorporating  a  company  and  empower- 
ing it  to  acquire  by  purchase  all  the  "property,  rights,  privi- 
leges, franchises,  and  immunities. "  ^ 

So,  where  a  statute  empowers  a  new  company  to  take  a  con- 
veyance from  an  old  one  of  "all  its  franchises,  rights,  powers, 
privileges,  and  immunities,"  the  conveyance  will  operate  as  a 
transfer  of  any  immunity  from  taxation  possessed  by  the  old 
company.^ 

In  Kentucky  the  same  construction  has  been  placed  upon  a 
statute  providing  that  the  purchaser  or  lessee  of  a  road  should 
be  vested  with  all  the  "rights,  privileges,  franchises,  and 
immunities"  of  the  mortgagor  company.* 


1  Trask  v.  Maguire  (1873),  18  Wall. 
391.  In  this  case  such  an  exemption  was 
held  to  be  unconstitutional.  The  theory 
adopted  by  the  court  was  that  when  the 
State  purchased  the  railroad,  the  immunity 
necessarily  ceased,  so  that  the  validity  of 
the  grant  of  exemption  was  to  be  tested 
by  the  constitution  in  force  at  the  time 
when  the  new  companj'  acquired  its  rights. 
That  such  a  merger  of  the  exemption  may 
be  prevented  by  a  clear  expression  of  the 
legislature  to  that  effect  has  been  held  in 
First  Div.  of  St.  Paul  &  Pac.  R.  Co.  v. 
Parcher  (1869),  14  Minn.  297,  decided  in 
view  of  the  contemporaneous  policy  of 
encouraging  railroad  building  in  thinly 
peopled  districts.  The  court  deemed  itself 
justified  in  holding,  for  this  reason,  that 
there  was  no  merger  of  the  exemption 
when  the  State  acquired  the  property, 
and  that  its  grantees  were  not  affected  by 
a  constitutional  provision  forbidding  such 
exemptions  which  had  been  passed  since 
the  rights  of  the  first  company  had  become 
vested. 

2  Louisville  &  Nashville  R.  Co.  v. 
Palmes  (1883),  109  U.  S.  244,  252;  s.  c. 
13  Am.  &  Kng.  R.  R.  Cas.  380.  The  court 
said:  "  The  language  is  comprehensive  and 
unequivocal,  and  the  word  'immunity'  is 
apt  to  describe  the  exemption  claimed." 
In  this  case,  however,  the  ([uestion  was 
whetlicr  the  company,  whose  powers  and 
rights  were  thus  defined  by  the  statute, 
could,  hy  a  conveyance  descriliing  the 
subject-matter   of  the   assignment  in   the 


same  words  as  the  statute,  carry  to  its 
grantee  this  immunity  from  taxation,  and 
the  court,  on  the  authority  of  Morgan  v. 
Louisiana,  held  that  the  conveyance  had 
no  such  effect. 

3  Nichols,  Treasurer,  etc.  v.  New  Haven 
&  Northampton  Company  (1875),  42  Conn. 
103.  The  court  pointed  out  that  the 
people  of  the  State,  owing  to  the  insol- 
vency of  the  first  company,  had  not  as  yet 
received  the  benefit  from  the  canal  which 
had  induced  the  legislature  to  grant  the 
original  exemption.  The  inevitable  infer- 
ence, therefore,  was  that  the  intention  of 
the  legislature  was  to  continue  the  exemp- 
tion in  the  new  company  in  order  to  do 
justice  to  the  creditors  whose  money  had 
been  expended  in  the  enterprise,  and  to 
induce  persons  to  subscribe  to  the  cash 
capital  of  the  corporation.  And  such  wr.s 
the  import  of  the  provision,  that  the  new 
corpiorations  should  have  "all  the  immu- 
nities of  the  old  corporations."  This  lan- 
guage could  have  no  other  meaning  than 
that  the  immunity  from  taxation  to  be 
enjoyed  by  the  new  company  should  be 
coext(;nsive  with  that  enjoyed  by  the  old. 
Phi]i[)s,  .].,  dissented,  on  the  ground  that 
"the  extinction  of  the  stock  of  the  old 
company  carried  with  it  the  extinction  of 
the  privilege." 

*  Commonwealth  v.  Owensboro  &  Nash- 
ville K.  Co.  (1884),  81  Ky.  572  ;  s.  c.  17 
Am.  &  Eng.  R.  R.  Cas.  428. 

The  court  distinguished  Morgan  v. 
Louisiana,  but  it  is  not  very  clear  from 


810.] 


RIGHTS    OF   PURCHASERS    AT   SALE. 


789 


So  also  in  Tennessee  it  has  been  held  that,  where  the  legis- 
lature by  a  special  act  invested  a  certain  chancery  court  with 
exclusive  jurisdiction  to  determine  all  questions  arising  out  of 
the  foreclosure  proceedings  instituted  to  enforce  the  lien  of  the 
State  upon  the  railroads  which  had  received  its  aid,  and  a 
decree  of  that  court  adjudged,  in  the  words  of  the  act,  that  the 
property  of  one  of  the  delinquent  companies,  and  also  "  all  its 
rights,  franchises,  privileges,  and  immunities,"  should  pass  to 
the  purchasing  company,  the  latter  acquires  the  same  ])rivile<'"e 
of  exemption  from  taxation  which  was  enjoyed  by  the  old 
company.  ^ 

The  Supreme  Court  of  Minnesota  has  also  declared  that 
exemption  from  taxation  passes  to  purchasers  who,  by  statute, 
are  invested  with  the  "  privileges,  grants,  franchises,  immuni- 
ties, and  advantages  "  of  the  mortgagor.  Such  an  exemption,  it 
was  said,    was  not   distinguished  from  any  of  the  other  rights 


the  opinion  what  the  precise  ground  of 
the  decision  was.  Neither  Trask  v.  Ma- 
guire  nor  Louisville  &  Nashville  R.  Co. 
V.  Palmes,  siopra,  were  cited,  though  ex- 
actly in  point.  The  essence  of  the  ruling 
is  contained  in  the  following  sentence  : 
"  We  find  in  this  case  not  only  legislative 
authority  to  make  the  transfer,  but,  as  an 
inducement  to  the  purchasers  to  make 
their  bids,  it  is  expressly  provided  that 
the  immunity  from  taxation  shall  follow 
the  road  in  the  hands  of  those  who  buy 
it."  The  words  "from  taxation"  are  not 
found  in  the  statute  as  quoted,  and  we 
are  left  to  assume  that  the  court  regarded 
the  word  "immunities"  as  wide  enough 
to  include  "immunity  from  taxation." 
Yet  the  same  court,  a  few  years  later, 
without  referring  to  this  case,  ruled  that  a 
statute  incorporating  purchasers,  and  in- 
vesting them  with  the  "  powers,  rights, 
privileges,  immunities,  and  franchises  "  of 
the  mortgagor  company,  did  not  exempt 
the  new  corporation  from  taxation,  or  carry 
to  it  the  privilege  of  having  its  stock  as. 
sessed  in  a  peculiar  manner.  Kentucky 
Central  R.  Co.  v.  Commonwealth  (1888), 
87  Ky.  661  ;  s.  c.  10  S.  W.  Rep.  269 ;  5 
Ry.  &  Corp.  L.  J.  293.  It  is  not  easy  to 
see  how  these  two  cases  can  be  reconciled. 

1  Knoxville  &  Ohio  R.  Co.  v.  Hicks 
(1877),  9  Baxt.  (Tenn.)  442  ;  s.  c.  15  Am. 
Ry.  Rep.  197.  In  this  case,  however,  the 
court  did  not  lay  any  special  stress  on  the 


use  of  the  word  "immunities,"  as  it  took 
occasion  to  dissent  from  the  ruling  of 
Morgan  v.  Louisiana,  then  recently  de- 
cided. The  broad  ground  was  taken  that 
the  exemption  was  a  part  of  the  charter, 
and  could  not  be  repealed  by  the  legisla- 
ture, whether  the  road  was  in  the  hands 
of  the  original  company  or  its  successor. 
This  court  adhered  to  its  opinion  in  State 
V.  Nashville,  Chattanooga,  &  St.  Louis  Ry. 
Co.  (1883),  12  Lea  (Tenn.),  583;  s.  c.  17 
Am.  &  Eng.  R.  R.  Gas.  420.  But  in  this 
latter  case  express  reference  was  made  to 
Trask  v.  Maguire  (1873),  18  Wall.  405,  as 
an  authority  for  the  proposition  that  "im- 
munity" includes  exemption  from  taxa- 
tion, —  a  consideration  not  relied  upon  in 
the  first  case,  but,  as  we  venture  to  think, 
the  only  one  on  which  that  decision  can 
be  sustained.  The  simple  question  in- 
volved in  all  -such  cases  is,  What  was  the 
intention  of  the  legislature  ?  If  the  pur- 
chasers suffer  by  wrongly  interpreting  that 
intention,  they  are  merely  in  the  position 
of  any  one  else  who  is  mistaken  about  the 
meaning  of  the  law.  The  point  raised  as 
to  the  inability  of  the  legislature  to  with- 
draw the  privilege  seems  quite  irrelevant 
so  far  as  the  purchasers  are  concerned,  for 
they  take  exactly  what  the  law  allows 
them,  —  no  more,  no  less.  If  there  is  any 
impairment  of  the  contract,  that  is  a  mat- 
ter between  the  State  and  the  original 
company. 


790  RAILWAY   BONDS   AND   MORTGAGES.       [CHAP.  XXXVI, 

granted,  and  was  certainly  comprehended  in  the  descri|)ti(;n 
contained  in  the  statute.  Even  if  the  immunity  were  not  a 
franchise,  in  the  legitimate  sense  of  the  word,  it  was  a  right,  a 
contract  right,  to  hold  the  property  exempt  from  taxation  until 
the  same  were  sold  and  conveyed.  Not  being  a  personal  or 
inalienable  right,  there  was  no  reason  why  it  should  not  pass 
with  the  property,  and  as  appendant  thereto,  to  the  purchaser. 
When  the  company  lost  the  property,  it  lost  that  right,  for  it 
lost  that  to  which  the  right  related.^ 

In  South  Carolina  the  broad  ground  has  been  taken  that  a 
statutory  exemption  from  taxation  is  not  a  mere  personal  privi- 
lege which  ends  with  the  first  taker,  provided  the  property  is 
continued  in  the  same  use  on  account  of  which  the  exemption 
was  granted.  2 

§  811.  Vested  Rights  of  Purchasers  cannot  be  impaired  by  Sub- 
sequent Legislation.  —  If  the  purchasers  at  a  trustees'  sale  acquire, 
by  virtue  of  the  laws  in  force  at  the  time  of  the  sale,  a  valid 
title  to  the  corporate  property  without  liability  for  any  of  its 
debts  which  were  not  a  prior  lien  on  that  property,  their  rights 
cannot  be  taken  away  or  impaired  by  subsequent  legislation.^ 

Article  III.  —  Liabilities  of  Purchasers  at  Foreclosure 

Sales. 

§812.  Generally. — In  the  absence  of  some  enactment  by 
which  the  purchasers  at  a  foreclosure  sale  of  the  rights,  privi- 
leges, franchises,  and  other  property  of  a  railroad  company 
become,  by  virtue  of  such  purchase,  a  corporation,  they  are 
regarded  merely  as  joint  owners  of  the  property  so  acquired. 
The  immunity  of  the  members  of  the  corporation  from  liability 
for  its  debts  beyond  the  amount  of  stock  which  they  individually 
hold  does  not  pass  by  such  a  sale,  and  the  purchasers  are,  there- 
fore, subject  to  whatever  responsibility  the  law  attaches  to  the 
joint  ownership  of  railroad  property.     Thus  it  has  been  held  in 

1  First  Div.  of  St.  Paul  &  Pacific  R.  2  yjand  v.  Savannah  &  Charleston  R. 

Co.    V.   Parcher    (1869),    14    Minn.    297.  Co.    (1881),    17   S.  C.  219,  280 ;  s.  c.   12 

Ilei-ft,   it  will  be  observed,   the  reasoning  Am.  &  Kng.  K.R.  Cas.  495.    The  court,  cu- 

is  finite  general,  and  not  made  to  depend  riotisly  enough,  does  not  refer  to  Morgan 

on   any  si)ecial  signification   of  the  word  v.    Louisiana,   or  any  other  of  the  cases 

"  immunities."     The  case  was  decided  be-  previously    decided     in    regard     to     this 

fore    Morgan    v.    Louisiana,    as   was   also  point. 

Chicago,  Milwaukee,  k  St.  Paul  R.  Co.  v.  a  Hatcher  i-.  Toledo,  Wabash,  &  Wcst- 

Pfaender  (1877),  23  Minn.  217,  reiterating  ern  R.  Co.  (1872),  62  111.  477. 
the  same  doctrine. 


§  812.]  RIGHTS    OP   PURCHASERS    AT    RALE.  791 

Louisiana,  where  the  law  makes  oljligors  engaged  in  carrying 
personal  property  for  hire  liable  in  solido,  only  when  it  is  carried 
on  ships  or  other  vessels,  such  stockholders  of  the  company  as 
may  become  purchasers  of  a  railroad  arc  liable  individually  for 
a  proportionate  share  of  a  debt  evidenced  by  the  making  of  a 
promissory  note  purporting  to  be  executed  as  an  obligation  of 
the  former  company.  The  fact  that  the  instrument  is  drawn  in 
this  shape  does  not  protect  them,  for  obligors  are  bound,  not  by 
the  style  which  they  give  to  themselves,  but  by  the  consequences 
they  incur  by  reason  of  their  acts.  Nor  can  their  liability  be 
modified  by  an  act  of  incorporation  passed  after  the  issuance  of 
the  instrument,  for  the  rights  of  the  holder  are  then  vested  and 
cannot  be  effected  by  legislation.' 

(a)  Purchaser  takes  free  from  Subsequent  Liens.  —  A  purchaser 
takes  the  property,  real  and  personal,  free  from  all  subsequent 
liens  and  incumbrances,  and  his  title,  for  the  purpose  of  cutting 
off  such  liens,  will  relate  back  to  the  date  of  the  record  of  the 
mortgage.  2 

Thus  one  who  purchases  the  property  before  the  rendition  of 
a  judgment  against  the  latter  takes  it  free  from  the  lien  of  such 
judgment,  although  the  judgment  creditor  obtains  no  part  of  the 
proceeds  of  the  sale,  because  of  his  failure  to  make  proper  appli- 
cation to  the  court  for  payment.^ 

The  practical  application  of  this  principle  will  be  determined 
not  merely  by  the  date  of  the  execution  and  registration  of  the 
mortgage,  but  by  the  extent  of  the  lien  established  by  the  after- 
acquired  property,  as  a  lien  upon  property  which  comes  under 
the  protection  of  that  clause  does  not  attach  to  that  property  in 
the  hands  of  the  purchaser.*  What  property  is  covered  by  that 
clause  has  been  fully  discussed  in  a  previous  chapter. 

(b)  Purchaser  sometimes  takes  free  from  Liens  held  hy 
Persons  not  Actual  Parties.  —  A  purchaser  of  railroad  property 
on  foreclosure  takes  it  discharged  of  all  liens  and  interests 
acquired  pending  the  suit  by  persons  charged  with  constructive 
notice  thereof,  although  they  were  not  made  parties  to  the  suit; 
and  the  latter  must  seek  satisfaction  out  of  the  proceeds  of  the 
sale.^ 

1  Chaffe  V.  Ludeling  (1875),  27  La.  Louis,  &  New  Orleans  R.  Co.  (18S2),  34 
Ann.  607.  La.  Ann.   785,  where  the  purchaser  was 

2  Cooper  V.  Corbin  (1883),  105  111.  held  to  take  property  of  this  description 
224  ;  s.  c.  13  Am.  &  Eng.  R.  R.  Cas.  394.     free  from  the  apparent  incumbrance  of  a 

3  Brockert   v.    Iowa    Central    R.    Co.     registered  judgment  lien. 

(Iowa,  1895),  61  N.  W.  Rep.  405.  ^  Stewart  v.  Wheeling  &  L.  R.  Ry.  Co. 

4  See,  for  example,  Bell  o.  Chicago,  St.     (Ohio,  1895),  41  N.  E.  Rep.  247. 


792  RAILWAY   BONDS   AND   MORTGAGES.         [CHAP.  XXXVI. 

(c)  Purchaser  takes  free  from  Liens  which  he  had  a  Right  to 
suppose  discharged.  —  Where  the  trustee  enters  a  release  of  the 
trust  deed,  in  pursuance  of  an  arrangement  by  which  there  is  to 
be  another  issue  of  bonds  in  lieu  of  those  secured  by  the  deed, 
the  presumption  is  that  all  the  former  bonds  are  cancelled,  and 
a  purchaser  of  the  property  at  a  subsequent  assignee's  sale  in 
bankruptcy  will  take  it  free  from  the  incumbrance  of  a  bond  not 
exchanged,  unless  he  has  notice  that  it  was  not  paid  and  the 
release  was  wrongfully  executed,  or  knew  of  facts  suilicient  to 
put  him  on  inquiry,  ^ 

(d)  Purchaser  takes  free  from  Tax  Lien  sometimes.  —  lu 
Illinois,  under  the  statute  which  provides  that  "the  taxes 
assessed  upon  personal  property  shall  be  a  lien  upon  the  personal 
property  of  the  person  assessed  from  and  after  the  tax  books  are 
received  by  the  collector,"  it  has  been  held  that  the  tax  lien 
does  not  attach  to  the  property,  unless  it  belongs  to  the  debtor 
at  the  time  the  tax  books  came  into  the  hands  of  the  collector. 
That  lien  will,  therefore,  be  defeated  by  a  valid  mortgage  or 
sale  made  before  that  time,  and  proceedings  to  enforce  it  will 
be  enjoined  at  the  instance  of  the  person  holding  under  such 
mortgage  or  sale.^ 

(e)  Purchaser  takes  subject  to  Liens  absolutely  paramount  hy 
Statute.  —  Where  the  effect  of  a  statute  conferring  special  rights 
on  a  contractor  is  to  give  him  a  paramount  lien  on  the  property, 
as  long  as  his  debt  remains  unsatisfied,  the  lien  will  not  be 
divested  by  a  subsequent  foreclosure  sale,  "  subject  to  any  law 
claims  or  rights  which  may  exist  prior  or  paramount  to  the 
mortgage. "  ^ 

So  also  the  purchasers  will  be  liable  for  the  amount  of  a  judg- 
ment for  personal  injuries  which  is  a  paramount  lien  by  virtue 

1  Burt  V.  Batavia  Paper  Mfg.  Co.  105  III.  224,  the  same  doctrine  was  again 
(1877),  86  111.  66.  It  was  here  held  that,  announced,  the  court  holding  that  where 
even  if  some  of  the  members  of  the  new  the  capital  stock  of  a  railroad  company, 
company  formed  from  the  purchasers  did  at  the  time  when  the  tax  became  a 
know  that  one  of  the  bonds  had  not  been  lien  thereon,  was  already  subject  to  the 
paid  when  the  new  organization  was  prior  lien  of  a  mortgage,  the  tax  lien 
effected,  yet  if  they  also  knew  that  a  new  would  attach  only  to  the  company's 
bond  was  issued  in  place  of  the  former,  equity  of  redemption,  and  that  when  that 
and  interest  paid  thereon  after  the  adjudi-  equity  was  cut  off  by  a  foreclosure  sale, 
cation  in  bankruptcy,  there  being  nothing  the  purchaser  took  the  property  free  from 
to  show  but  that  it  was  paid  on  the  new  any  lien  from  the  tax. 

bond,  this  was  not  sufficient   to  put  the  »  Fox  v.   Seal    (1874),   22  Wall.    424. 

new  company  on  inquiry  as  to  the  exist-  The  statute  here  uTider  consideration  was 

ence  of  the  lien  of  the  bond.  the  Pennsylvnnia  Resolution  of  1S43,  the 

2  Binkert  v.  Wabash  Ry.  To.  (1881),  substance  of  which  is  given  in  Cliapter  V. 
98  111.  205.     In  Cooper  v.  Corbin  (1883), 


§  813.]  RIGHTS   OF   PURCHASERS   AT   SALE.  703 

of  a  statute  prohibiting  railroad  companies  from  creating  mort- 
gage liens  which  shall  be  superior  to  such  judgments,^  or  to 
maintain  highway  crossings  in  good  condition. ^ 

(f)  Purchaser  takes  subject  to  Statutory  Obligations  as  to 
Operation  of  Road.  —  Obligations  imposed  by  statute  ujjon  every 
company  operating  a  railroad  as  a  part  of  its  duties  to  the  State, 
or  some  political  division  thereof,  are,  of  course,  binding  on  pur- 
chasers at  a  foreclosure  sale.  Thus  they  are  liable  for  the  non- 
performance of  a  statutory  duty  to  keep  bridges  in  repair.^ 

(g)  Purchaser  takes  subject  to  Obligations  and  Restrictions 
imposed  by  Charter  on  Mortgagor  Company.  —  A  section  in  a 
railroad  company's  charter,  authorizing  a  purchase  of  its  prop- 
erty and  franchises  by  another  company,  and  j)roviding  that 
the  purchase  thus  authorized  shall  "  in  no  way  affect  the  rights 
of  the  creditors  of  the  company,"  is  presumed  to  have  been 
introduced  for  the  benefit  chiefly  of  unsecured  creditors,  persons 
to  whom  such  a  provision  may  be  of  advantage,  rather  than  for 
those  whose  claims  are  protected  by  deeds  creating  specific 
liens.  The  effect  of  the  provision,  therefore,  is  to  create  a 
trust  in  favor  of  the  unsecured  creditors  which  may  be  enforced 
against  the  property,  even  when  it  has  passed  into  the  hands  of 
persons  who  have  purchased  it  at  a  foreclosure  sale,  in  proceed- 
ings taken  to  enforce  a  mortgage  executed  by  the  vendors  of  the 
original  company.^ 

So  also  it  is  held  that  a  restriction  as  to  the  right  to  fix  tolls, 
imposed  upon  the  old  corporation,  as  a  condition  of  obtaining 
State  aid,  inheres  in  its  organic  law  precisely  as  if  incorporated 
therein,  and  is  therefore  binding  u)ion  the  new  corporation.^ 

§  818.  Contracts  of  Mortgagor  Company  are  not,  as  a  General  Rule, 
binding  on  its  Successors.  —  Thus  an  agreement  entered  into  by 
the  mortgagor  not  to  build  through  a  city  so  as  to  connect  with 
another  line  is  a  mere  personal  contract,  and  does  not  bind  its 
successor,  or  prevent  it  from  making  the  connection,  provided 
it  does  not  exceed  its  corporate  powers  in  so  doing.  ^ 

1  Frazier  v.  East  Tennessee,  V.  &  G.  R.  ^  Mobile  &  Montgomery  R.  Co.  v. 
Co.  (1889),  88  Tenn.  138  ;  s.  c.  12  S.W.     Steiner  (1878),  61  Ala.  559. 

Rep.  537  ;  40  Am.  &  Eng.  R.  R.  Cas.  358.  ^  City    of    Menasha   v.    Milwaukee   & 

2  Gage  r.  Pontiac,  Oxford,  &  Northern  Northern  R.  Co.  (1881),  52  Wis.  414; 
R.   Co.  (1895),   105  Mich.    335  ;  .s.  c.   63     s.  c.  5  Am.  &  Eng.  R.  R.  Cas.  300. 

N.  W.  Rep.  318.  For  a  case  in  which  a  contract  of  a 

8  New  York  &  Greenwood  Lake  R.  Co.  somewhat  complicated  character  was  held 

V.  State  (1888),  50  N.  J.  L.  303  ;  s.  c.  13  to  be  a  mere  personal  agreement,  creating 

Atl.  Rep.  1.  no  lien   on   the  property,   see  Peninsular 

♦  Montgomery   &  West  Point  R.   Co.  Iron  Co.  v.  Eells  (1895),  68  Fed.  Rep.  24. 

V.  Branch  (1877),  59  Ala.  139. 


794  RAILWAY    BONDS    AND    MORTGAGES.        [CHAP.  XXXVI, 

Apart  from  those  cases  in  which  a  contract  of  the  mortgagor 
is  assumed  by  the  purchaser,  either  proprio  motu,  or  for  the 
reason  that  his  rights  are  defined  by  a  decree  requiring  its  per- 
formance (see  post),  or  a  trust  is  involved  (see  §  816,  post), 
such  a  contract  is  not  obligatory  on  the  purchaser,  unless  it 
has  either  been  secured  by  a  lien,^  or  runs  with  the  land,^  or  it 
must  have  been  adopted  as  to  its  benefits,  so  as  to  preclude  the 
purchaser  from  declining  its  burdens.*^ 

Where  the  bondholders  were  purchasers  of  railroad  property 
under  a  reorganization  scheme  which  gave  them  all  the  benefits 
of  the  receivership  at  the  time  of  the  filing  as  well  as  after  the 
filing  of  the  bill  to  foreclose,  and  it  expressly  stipulated  in  the 
decree  of  sale,  as  well  as  in  the  decree  confirming  the  sale,  that 
the  purchasers  should  take  the  property  subject  to  all  the 
receivership  debts,  such  purchasers  will  be  held  liable  for  a 
rental  claim  of  a  leased  line,  during  the  operation  of  it  by  the 
receiver.^ 

Where  the  final  decree  in  a  foreclosure  proceeding  provides 
that  the  purchasers  shall  pay  all  subsisting  liens  upon  the 
property  which  have  priority  to  the  mortgage,  the  purchasers 
will  be  held  liable  for  all  those  liens  which  have  been  recognized 
by  the  court  in  the  proceedings ;  and  if,  under  a  decree  of  the 
court,  a  sale  of  any  of  the  property  covered  by  the  mortgage 
takes  place  to  satisfy  a  recognized  prior  lien,  the  same  pur- 
chasers buy  it  in,  they  will  be  considered  as  having  redeemed 

1  Newport  &  Cincinnati  Bridge  Co.  v.  company,   and  cannot  lease  that  part  of 

Douglass  (1877),  12  Bush,  673  ;  s.  c.  18  the  road  to  another  company  so  as  to  sur- 

Am.  Ry.  Rep.  221.  render  the  exclusive  use  thereof,  and  by 

"  Wiggins  Ferry  Co.  v.  Ohio  &  Missis-  ceasing  to  operate  it  deprive  such  town  of 

sippi  R.  Co.  (1892),  142  U.  S.  396  ;  s.  c.  the  benefits  intended  to  be  derived  from 

12  Sup.  Ct.  Rep.   188  ;  94  111.  83  (1879),  such  operation,  when  the  aid  was  voted  to 

where  it  was  held  that  a  covenant  that  a  the   original   company.      This   obligation 

railroad  company  would  always  employ  a  to  operate  the  road  is  more  than  a  debt. 

ferry  company  to  transport  for  it  all  per-  It  inheres  in  the  franchise,  so  to  speak, 

sons  and  property  across  the  Mississipi)i  and  pertains  to  the  right  to  operate  the 

River,  was  not  a  covenant  running  with  road.     It  does  not  pass  by  an  assignment 

the   land.  proper  ;  it  passes  to  the  grantee  as  a  bur- 

So  a  covenant  to  pay  rent  is  one  which  den  or  limitation  upon  the  rights  to  oper- 

binds  the  purchaser.    Frank  ?».  New  York,  ate  the  road.     State  v.  Central  Iowa  Ry. 

Lake  Erie,  &  W.  R.  Co.  (1890),  122  N.  Y.  Co.  (1887),  71  Iowa,  410  ;  s.  c.  32  N.  W. 

197  ;  s.  c.  25  N.  E.  Rep.  332  ;  46  Am.  &  Rep.  409. 

Eng.  R.  R.  Cas.  356.  "  South  Carolina  R.   Co.   v.  Wilming- 

A  railroad  company  that  has  purchased  ton,  Columbia,  &  Augusta  R.  Co.  (1875), 

at  a  foreclosure  sah;  a  road,  a  part  of  which  7  S.  C.  410. 

was  constructed    and   i)ut  into   operation  *  Central  R.  &  BaTiking  Co.  of  Georgia 

with  money  raisecl  by  taxes  voted  by  a  v.  Farmers'  Loan  &  Trust  Co.   (1897),   79 

town,  assumes  the  obligation  of  the  former  Fed.  Rep.  158. 


§§  814-816.]  RIGHTS    OF   PURCHASERS    AT   SALE.  795 

the  property  in  the  interest  of  those  holding  recognized  liens 
upon  it  still  iini)aid  ^ 

§  814.  Trust  availing  against  Purchaser  avails  against  his  Assignee. 
—  A  trust  to  wiiich  the  property  is  subject  in  the  hands  of  u 
purchaser  at  the  foreclosure  sale  will  attach  to  the  property  in 
the  hands  of  an  assignee  with  express  or  implied  notice  thereof. 
Thus  where  the  trustee  has  purchased  the  road  pursuant  to  an 
agreement  with  the  majority  of  the  bondholders  that  they  are 
to  receive  their  proportion  of  the  proceeds  in  the  form  of  bonds 
of  a  reorganized  company  to  be  formed  to  take  over  the  property, 
and  the  president  of  the  company  to  which  the  resale  is  made 
has  knowledge  of  the  trust,  that  company  will  be  directed  to 
execute  and  deliver,  within  a  certain  period,  bonds  such  as  are 
called  for  by  the  original  plan  of  reorganization,  and  upon  its 
refusing  or  neglecting  to  do  so  will  be  ordered  to  pay  the  cestuis 
que  trust  the  money  value  of  the  bonds.  ^ 

§  815.  Purchasers  take  subject  to  Vendor's  Lien,  when.  —  The 
purchasers  take  subject  to  a  vendor's  lien  of  which  they  have 
notice,  such  a  lien  being  regarded  as  an  equitable  mortgage,^  but 
are  not  personally  liable  for  the  mortgage  debt  or  the  interest 
thereon.  Nor  can  they  be  held  for  the  rents  accruing  prior  to 
a  demand  on  them  for  the  possession  of  the  property  or  the 
appointment  of  a  receiver.* 

A  vendor's  lien  in  favor  of  the  trustees  is  not  lost  because  the 
company  organized  by  the  purchasers  consolidates  with  another 
company.  The  consolidated  body  is  not,  under  such  circum- 
stances, a  bona  fide  purchaser.^ 

§  816.  Assumption  of  Obligations  inferred  from  Fact  of  Purchase 
under  a  given  Decree.  —  It  has  been  already  stated  that  the  pur- 
chaser looks  to  the  decree  as  the  measure  of  his  rights.  The 
decree  is  also  the  measure  of  his  liabilities.  So  an  order 
directing  possession  of  a  railroad  to  be  delivered  by  a  receiver 
to  a  purchaser,  subject  to  the  payment  of  such  claims  against 
the  receiver  as  may  be  established  within  a  reasonable  time, 
before  the  court  which  appointed  him,  does  not  make  the  pur- 
chaser liable  for  any  claims  that  are  not  established  in  accord- 
ance with  such  order.  ^ 

1  Sheffieia  &  B.  Coal,   Iron,  &  Ry.  Co.  *  Ibid. 

V.  Newman  (1896),  77  Fed.  Rep.  787.  ^  Schutte   v.    Florida   Central   R.    Co. 

2  Indiana,  Illinois,   &  Iowa  R.  Co.   v.     (1879),  3  Woods,  691. 

Swani\ell   (1895),   157   111.    616;  s.  c.   41  «  Houston  &  T.  C.  R.  Co.  v.  Crawford 

N.  E.  Rep.  989.  (Tex.,  1895),  31  S.  W.  Rep.  176  ;  s.  c.  28 

3  Hall   V.   Mobile  &  Montgomery  Ry.  L.  R.  A.  761. 
Co.  (1877),  58  Ala.  10. 


796  RAILWAY    BONDS    AND    MORTGAGES.         [CHAP.  XXXVI, 

This  general  principle  is  a  protection  to  the  purchaser  in 
those  cases  where  an  attempt  is  made  to  saddle  him  with  the 
payment  of  claims  which  the  decree  does  not  require  him  to 
satisfy.  It  is  held  that  a  foreclosure  sale,  when  confirmed  by 
the  court,  and  its  conditions  met  by  the  purchaser,  creates,  in 
effect,  a  contract  between  the  court  and  the  purchaser,  and  that 
the  court  can  no  more  impose  an  additional  term  or  condition 
on  that  contract  than  an  individual  can.  Hence  if  the  decree 
directs  that  the  property  be  sold,  discharged  of  all  liens  and 
claims  against  the  company  or  its  receivers,  the  court  has  no 
power  to  direct  the  purchaser  to  pay  a  claim  which  was  adjudi- 
cated against  the  receiver  after  the  confirmation  of  the  sale.^ 

Nor  can  the  holders  of  underlying  mortgages  which  are  not 
mentioned  in  the  decree  among  the  preferred  debts  obtain  an 
order  requiring  the  payment  of  their  mortgages  by  the  pur- 
chasers, before  the  latter  enter  into  possession.  To  grant  such 
an  order  would  materially  modify  the  provisions  of  the  decree 
under  which  the  purchasers  bought  the  property,  thus  in  effect 
compelling  them  to  take  it  on  terms  differing  from  those  pro- 
posed at  the  time  of  the  sale,  and  to  do  this,  moreover,  after  the 
contract  of  sale  is  partially  executed. ^ 

So  a  lease  entered  into  by  the  mortgagor  pending  a  fore- 
closure suit  is  not  binding  on  a  company  which  purchases  under 
a  decree  providing  that  it  should  be  at  liberty  to  abandon  any 
contracts  made  by  the  mortgagor  after  the  institution  of  the 
proceedings.  The  right  of  the  purchaser  to  disclaim  such  a 
lease  is  not  affected  by  the  fact  that  the  receiver  appointed  in 
the  suit  has  adopted  the  contract  and  accepted  rent  from  the 
lessee.^ 

Where  the  effect  of  the  final  decree  in  a  foreclosure  suit  is  to 
vest  in  the  purchaser  a  title  free  of  all  liens  for  receiver's  debts, 
it  operates  so  as  to  set  aside  pro  tanto  a  previous  order  making 
receiver's  certificates,  to  be  issued,  a  paramount  lien  on  the 
road,  and  transfer  the  lien,  if  any,  to  the  proceeds  of  the  sale.* 

The  same  principle  also  inures  to  the  disadvantage  of  the 
purchasers.  After  accepting  their  conveyance,  they  have  no 
standing  in  court  for  the  purpose  of  re-litigating  the  liens  sub- 
ject to  which  they  have  taken  their  title. ^ 

1  Chicago  &  0.  R.  Co.  v.  McCainmon  ^  Kariners'  Tjoan  &  Trust  Co.  v.  Cliicago 
(1894),  61  Fed.  Rep.  772.  &  A.  R.  Co.  (1890),  44  Fed.  Rep.  6.^3. 

2  Clentral  Trust  Co.  v.  Wabash,  St.  *  Mci'eautih^.  Trust  Co.  v.  Kanawha  & 
Louis,   &  Pac.    Ry.   Co.    (1887),   30   Fed.  0.  H.  Co.  (1803),  .58  Fed.  Rep.  fi. 

Kep.  332.  ^  Swanu  i;.  Wriglit's  E.\rs.  (1881),   110 

U.  S.  590. 


§  816.]  RIGHTS    OP   PURCHASERS   AT  SALE.  797 

Thus,  the  purchasers  cannot  contest  the  validity  of  receiver's 
certificates  or  the  amount  for  which  they  are  declared  by  the 
decree  to  be  a  lien  on  the  property.^ 

•  So  if  the  decree  makes  them  liable  to  "pay  all  debts  and 
liabilities  of  the  receivership  of  every  kind,"  they  arc  liable  for 
the  death  of  a  horse  caused,  during  the  receivership,  Ijy  the 
defective  condition  of  the  roadway  which  the  receiver  was  bound 
to  keep  safe  for  travellers. ^ 

The  decree,  however,  will  not  operate  as  notice  of  any 
antagonistic  claims  except  those  which  are  designated  with 
reasonable  certainty.  Thus  it  is  verj  doubtful  whether  a  clause 
approving  the  deed  to  the  purchasers,  to  the  effect  tliat  nothing 
therein  "shall  at  any  time  be  construed  to  affect  or  impair  in 
any  way  or  manner  the  rights  of  any  person  or  corporation 
chiiming  to  hold  stock,  whether  common  or  preferred,  in  the 
first-named  (mortgagor)  company,  or  of  any  person  or  corpora- 
tion not  a  party  to  this  suit,"  can  be  deemed  to  affect  the  pur- 
chasers with  notice  of  certain  claims  of  a  minority  of  the 
stockholders.^ 

The  purchaser's  liability  for  certain  debts  may  also  be  predi- 
cated as  a  necessary  implication  from  the  terms  of  the  decree 
without  their  being  expressly  provided  for.  Thus  the  effect  of 
a  decree  which  provides  that  the  creditors  of  the  mortgagor 
company  are  to  receive  the  stock  of  the  new  company  in  pay- 
ment of  their  claims,  is  that  the  latter  company  is  to  be  liable 

for  the  debts  of  its  predecessor.* 

So,  if  the  decree  contains  no  foreclosure  of  a  certain  junior 
mortgage,  the  rights  secured  thereby  are  unaffected  by  the  sale, 
and  the  purchaser  takes  the    property  subject  to  the  holder's 

1  Swann  v.  Wright's  Exvs.  (1883),  110  investigate  the  matter.  Could  they  have 
U.  S.  590  ;  Central  National  Bank  v.  ever  found  that  the  alleged  ownership  of 
Hazard  (1887),  30  Fed.  Eep.  484;  St.  the  second  corporation  had  ever  been  dis- 
Louis  S.  W.  R.  Co.  V.  Stark  (1893),  55  puted  ;  that  anything  had  been  done  to 
Fed.  Kep.  758.  set  aside  the  sale,  or  that  any  person  or 

2  Wabash  R.  Co.  v.  Stewart  (1891),  41  corporation  claiming  to  hold  stocdv,  whether 
111.  App.  640.  conimon  or  preferred,  in  tlie  first  corpora- 

3  Boston  &  Providence  R.  Corporation  tion,  had  in  any  way  during  the  twelve 
V.  New  York  &  Mew  England  R.  Co.  (1881),  years  shown  any  dissent  otherwise  than 
13  R.  I.  260;  s.  o.  2  Am.  &  Eng.  R.  R.  by  the  fact  that  some  had  not  taken  pay 
Cas.  300.  The  court  did  not  pass  directly  for  their  stock  ?  Was  there  any  notice 
upon  the  sufficiency  of  the  notice  ;  as,  that  the  complainant  had  ever  made,  or 
whatever  was  its  effect,  it  had  come  too  intended  to  make,  any  claim  of  ownership 
late,  but  remarked  as  follows:    "  Assum-  in  the  property  ?" 

ing  that  the  provision  in  the  decree  was  a  *  Wood  v.  Dubuque  &  S.   C.  R.  Co.,  1 

notice,    what  could   the  purchasers   have     Ry.  &  Corp.  L.  .J.  68  (1886),  28  Fed.  Rep. 
ascertained   if    they   had    undertaken    to     910  ;  s.  c.  1  Ry.  &  Corp.  L.  J.  68. 


798  RAILWAY    BONDS    AND    MORTGAGES.       [CHAP.  XXXVI, 

right  of  redemption,  especially  when  they  do  not  allege  a  pur- 
chase made  in  ignorance,  and  do  not  offer  to  surrender  the 
property  to  be  resold  for  the  benefit  primarily  of  the  first 
lienholders.^ 

§  817.  Purchaser  affected  with  Notice  of  Proceedings  in  Fore- 
closure Suit.  —  A  purchaser  must  take  notice  of  all  petitions 
filed  during  the  foreclosure  suit  by  those  who  seek  to  establish 
liens  superior  to  the  mortgage.  Thus  where  it  is  decided,  by 
proceedings  in  intervention,  that  the  lien  of  a  mortgage  with 
the  after-acquired  clause  is,  as  regards  certain  rolling-stock, 
subordinate  to  the  lien  reserved  by  the  vendors,  the  bondholders 
cannot  object  either  to  the  restoration  of  the  case  or  to  the 
payment  of  the  price  from  the  fund  in  court,  if  that  course  is 
preferred  by  the  vendor.'^ 

So  also  the  purchaser  is  affected  with  notice  of  proceedings 
to  enforce  a  vendor's  lien  on  real  estate,  whether  those  proceed- 
ings are  had  in  the  same  court  as  that  in  which  the  foreclosure 
suit  was  brought,  or,  by  the  permission  of  that  court,  in  another 
tribunal.^ 

§  818.  Liability  of  Purchaser  by  Reason  of  its  Occupation  of 
Land  acquired  by  Mortgagor.  —  Where  it  is  provided  by  the  con- 
stitution of  a  State  that  the  compensation  for  land  taken  shall 
be  paid  before  the  taking,  a  railroad  company,  with  an  outstand- 
ing mortgage  on  its  property,  which  occupies  hinds  for  which 
damages  have  been  assessed  but  not  paid,  has  no  interest  in 
such  land  for  the  mortgage  to  operate  upon,  and  a  sale  under 
the  mortgage  will  not  convey  the  title  nor  extinguish  the  lien 
for  damages.  The  right  to  the  damages  is  paramount  to  the 
lien  of  the  mortgage,  and  until  the  damages  are  paid  or  secured 
that  right  cannot  be  extinguished  by  a  foreclosure  sale.* 

Such  a  right,  therefore,  is  covered  by  a  decree  which  directs 
the  sale  to  be  made  subject  to  any  legal  claims  or  rights  which 
mav  exist  prior  to  or  paramount  to  the  mortgage.^  In  Massa- 
chusetts also  it  is  held  that  a  person  whose  land  is  taken  by  a 
railroad  corporation,  under  the  right  of  eminent  domain,  has  a 
right  to  compensation  which,  if  not  strictly  a  lien,   is  at  least 

1  Simmons  v.  Taylor  (1885),  23  Fed.  York,  &  Pliiladelphia  R.  Co.  v.  Harvoy 
Rep.  849.  (]884).    10?  Fa.  St.   319  ;  s.  c.  26  Am.  & 

2  Fosdick  V.  Car  Co.  (1879),  99  U.  S.  ¥.nrr.  \l.  R.  Cas.  642;  White  v.  Nashville 
256.  &  N.  W.  R.  Co.  (1872),  7  Heisk.  (Tenn.) 

8  Loomi.s  V.  Davenport  &  St.   Paul   R.  518. 
Co.  (1882),  3  McCrary,  489.  '^  Whcelinrc,  P.  &  B.   R.  Co.  v.  Warrell 

*  W.'stern  Pennsylvania  R.  Co.  r.  Johns-  (1888),   122    Pa.   St.   613;    s.  c.    16  Atl. 

ton  (1868),  59  Pa.  St.  290;  Buffalo,  New  Rep.  20. 


§  818.]  RIGHTS    OF    PURCHASERS    AT    SALE.  799 

in  the  nature  of  a  lien  or  incumbrance  on  the  land;  and  this 
right  may  be  enforced  against  a  corporation  which  succeeds  the 
corporation  taking  the  land.^ 

•The  rule  is  otherwise  where  the  company  has  given  the  statu- 
tory bond  for  payment  of  the  damages  ultimately  assessed.  The 
original  owner  is  then  relegated  to  his  rights  under  the  bond.^ 

But  until  the  damages  assessed  are  i)aid  or  secured  to  the 
land-owner,  he  can  enjoin  the  new  company  from  further  main- 
taining and  operating  its  road  over  the  right  of  way  occu))ied.2 

This  liability  of  the  purchaser  for  the  value  of  the  land  ap])ro- 
priated  by  the  mortgagor  is  not  changed  by  the  fact  that  a  new 
company  organized  after  foreclosure  to  operate  the  line  of  the 
insolvent  mortgagor  company  is  not  liable  for  the  general  debts 
of  the  latter  except  those  which  are  assumed.  If  a  judgment 
for  the  price  against  the  old  company  remains  unsatisfied  at  the 
time  of  the  sale,  and  the  new  company  enters  upon  and  occupies 
the  land,  equity  will  hold  it  liable  for  the  payment  of  the 
price,  on  the  principle  that  it  has  adopted  and  ratified  the 
original  appropriation.  Qui  sentit  commodum  seiitire  debet  et 
onus.  * 

Nor  does  he,  by  suing  for  damages,  concede  that  the  company 
has  acquired  the  easement  of  the  right  of  way,  but  merely  that 
it   is   entitled  to  that    easement,    upon    condition   that   it    pays 

1  Diuiy  V.  Midland  R.  Co.  (1879),  127  absolutely  worthless,  and  unless  the  plain- 
Mass.  571.  titf  can   have  some  relief  against,  at  least, 

2  Fries  v.  Southern  Pennsylvania  R.  &  the  new  company,  either  by  a  suit  in  this 
Mining  Co.  (1877),  85  Pa.  St.  73;  s.  c.  form  or  by  an  action  at  law,  he  is  entirely 
18  Am.  Ry.  Rep.  375.  remediless.      And   the  fact   that  the  old 

3  Gilman  v.  Sheboygan  &  Fond  du  Lac  company  has  ceased  to  exist  is  a  sufficient 
R.  Co.  (1876),  40  Wis.  653  ;  Drury  v.  answer  to  the  objection  that  it  should 
Midland  R.  Co.  (1879),  127  Mass.  571.  have  been  made  a  party  defendant.     We 

*  Lake  Erie  &  Western  Ry.  Co.  v.  are  merely  unable  to  perceive  upon  tlie 
Griffin  (1883),  92  Ind.  487;  Pfeifer  v.  facts  stated  any  grounds  for  saying  that 
Sheboygan  &  Fond  du  Lac  R.  Co.  (1864),  the  plaintiff  has  waived  or  lost  his  right 
18  Wis.  155;  Gilman  v.  Sheboygan  &  to  payment  from  the  defendant  if  it  con- 
Fond  du  Lac  R.  Co.  (1876),  40  Wis.  653  ;  tinues  to  use  his  land.s.  It  is  true  it 
s.  c.  13  Am.  Ry.  Rep.  468.  In  the  last  case  appears  that  the  foreclosure  sale  took 
the  court  said  :  "The  right  of  the  land-  place  about  two  years  after  final  entry  of 
owner  to  compensation  for  his  property  is  judgment  for  damages  against  the  old 
protected  by  the  constitution,  and  must  company.  But  the  purchaser  at  that  sale 
prevail  even  as  against  the  purchasers.  It  took  under  the  purchase  only  such  rights 
appears  from  the  com]ilaint  that  the  old  as  that  proceeding  gave  him.  The  old 
company  is  wholly  insolvent,  has  really  company  had  then  acquired  no  rights  to 
ceased  to  exist  as  an  organized  corpora-  use  the  land  for  its  road,  but  was  in  pos- 
tion,  that  all  its  franchises  and  property  session  simpl}-  as  a  trespasser.  The  plain- 
have  passed  to,  and  are  now  held  by,  the  tiff's  right  to  compensation  is  paramount, 
defendant  as  its  successor.  The  judgment  and  not  affected  or  destroyed  by  the 
against  the   corporation    is   consequently  foreclosure." 


800  RAILWAY   BONDS    AND    MORTGAGES,         [CHAP.  XXXVI. 

him  such  compensatory  damages  as  may  be  assessed  by  the 
court.  ^ 

When  the  purchasers  occupy  and  use  land  which  the  mort- 
gagor company  had  agreed  to  pay  for  by  the  construction  of  the 
road,  the  fencing  of  the  track,  and  the  buihling  of  a  crossing, 
and  the  last  two  conditions  have  not  been  performed  by  either 
company,  the  purchaser  is  liable  in  damages,  measured  by  the 
difference  in  the  rental  value  of  the  property  caused  by  such 
non-performance,  and  the  judgment  for  such  damages  consti- 
tutes a  lien  on  the  portion  of  the  road  located  on  the  land 
covered  by  the  contract.^ 

Similarly  the  purchaser  cannot  claim  the  right  to  use  a  depot 
under  a  contract  made  by  the  mortgagor  after  the  execution  of 
the  mortgage,  without  payment  of  the  rental  provided  for  in  the 
contract.^ 

The  liability  created  in  such  cases  as  the  above  is  to  be  distin- 
guished from  that  which  results  from  the  rendition  of  a  judgment 
in  an  action  of  trespass  to  recover  damages  sustained  by  the  con- 
struction and  operation  of  the  road  on  the  land.  Such  a  judgment 
imposes  no  obligation  on  a  purchaser  who  takes  by  virtue  of  a 
decree  declaring  him  to  be  liable  for  "  all  unpaid  claims  of  land- 
owners for  damages  for  property  taken,  injured,  or  destroyed  by 
the  construction,"  but  stands  on  the  same  legal  footing,  as  re- 
gards him,  with  any  other  judgment  against  the  mortgagor  for  a 
tort.4     (See  §  820,  |?osL) 

Similarly,  where  the  consideration  for  an  agreement  junior  to 
the  mortgage,  whereby  it  is  sought  to  impose  upon  the  land  taken 
for  the  right  of  way  a  burden  not  necessary  for  the  proper  con- 
struction and  operation  of  the  road,  is  merely  a  claim  for  dam- 
ages, such  an  agreement  imposes  no  obligation  upon  the  purchasers 
at  the  foreclosure  salc.^ 

§  819.  Assumption  of  Obligations  inferred  from  Agreements  of 
New   Company   or  its   Transferrers.  —  The    general    rule    as    to   the 

non-liability  of  the  new  company  may  be  superseded  by  special 
contract,  as  where  it  agrees  to  assume  some  or  all  of  the  general 
debts  of  its  predecessor.^ 

1  Rio  Grande  &  E.  V.  K.  Co.  v.  Oitiz  949  ;  46  Am.  &  Enj;.  R.  R.  Cas.  353,  dis- 
(1890),  75  Tex.  602  ;  s.  c.  12  S.  W.  Rep.  tini^uishing  Western  Pennsylvania  Co.  v. 
1129  ;  44  Am.  &  Eng.  R.  R.  Cas.  67.  Jolinston,  59  Pa.  St.  290,  sitpra. 

2  Varner  v.  St.  Louis  &  C.  R.  Co.  ^  Hunter  v.  Burlington,  C.  E.  &  N.  R. 
(1881),   55  Iowa,   677.  Co.  (1889),  76  Iowa,  490;  s.  c.  41  N.  W. 

8  St.  Joseph   Union  Depot  Co.  v.  Chi-  I!c]).  305. 
cago,  R.  I.  &  Pac.  R.  Co.  (1895),  131   Mo.  »  i^ake    Erie    &   Western    Ry.    Co.    v. 

291  ;  8.  0.  31  S.  W.  Rep.  908.  Griffin  (1883),  92  Ind.  487  ;  s.  c.  17  Am. 

*  Campbell  V.  Pittsburgh  k  W.   R.  Co.  &  Eng.  R.  R.  Cas.  235. 
(1890),  137  Pa.  St.  574  ;  s.  c.  20  Atl.  Rep. 


§  820.]  RIGHTS   OP   PURCHASERS    AT   SALE.  801 

So,  also,  a  new  company  which  acquires  title  to  the  property 
by  a  conveyance  thereof  from  the  purchasing  committee  in  return 
for  its  stock,  after  that  committee  has  assented  through  its  ro])re- 
sentatives  to  tlie  creation  of  a  lien  on  the  property,  is  bound  by 
the  lien.  It  is  not  a  purchaser  for  value  being  affected  by  the 
notice  imparted  to  the  committee.^ 

But  an  agreement  which  merely  preserves  to  the  old  unsecured 
creditors  the  right  to  come  in  as  stockholders  of  the  new  company 
will  not  make  the  latter  liable  for  their  claims.^ 

Nor  can  the  principle  that  the  property  of  the  old  company  is  a 
trust  fund  for  its  creditors  operate  so  as  to  fasten  a  litibility  for 
its  debts  upon  the  purchasing  company,  where  the  latter  acquires 
that  property  in  adversary  proceedings  ;  and  an  agreement  by 
which  the  stockholders  of  the  old  company  are  to  be  permitted  to 
become  members  of  the  new  one  is  entered  into  after  the  rights 
acquired  by  the  purchase  have  fully  vested.^ 

Where,  in  a  suit  to  foreclose  two  junior  mortgages,  the  pur- 
chasers buy  the  property  subject  to  the  lien  of  a  first  mortgage 
executed  to  secure  a  county  for  the  loan  of  its  aid  bonds,  and  the 
proceeds  of  the  sale  are  partly  applied  to  redeem  some  of  those 
bonds  which  had  been  hypothecated,  the  purchasers  are  not  enti- 
tled to  such  redeemed  bonds,  unless  they  first  refund  to  the  gen- 
eral creditors  as  much  of  the  proceeds  as  went  to  redeem  thcm.^ 

§  Sl^O.  Purchaser  not  generally  liable  for  Mortgagor's  Torts  in 
Operation  of  Road. — The  purchaser  is  not  liable  for  damages 
caused  by  the  mortgagor's  operation  of  the  road,  unless  there  is 
some  special  statute  which  produces  that  result  (see  §  812/,  ante^ 

1  Vilas  V.  Page  (1887),  106  N.  Y.  439  ;  746.  The  court  said  :  "  Tlie  lien  to  se- 
s.  c.  13  N.  E.  Rep.  743.  cure  bonds  having  been  exjjressly  reserved 

A  party  in    possession  under   the   ex-  at  the  sale,  and  assumed  by  the  pni'chasers, 

press  terms  of  an  order  of  sale,  and  repre-  their  obligation  as  to  all  is  the  same  ;  that 

senting  all  parties  in  interest,  cannot  claim  is,  to  step  into  the  place  of  the  old  com. 

to  be  an  absolute  purchaser  of  the  rights  pany.     In  doing  this  they  are  notreijuired 

of  a   mortgagor,  not   subject   to   account  to  pay  more  than  the  price  they  agreed  to 

for  rents  and  profits.     Compton  v.  Jesup  pay.     They  agreed   to   pay  the   purchase 

(1897),  167  U.  S.  1.  price,  and  assume  the  liabilities,  whatever 

2  Smith  V.  Chicago  &  Prairie  du  Chien  they  were,  as  to  the  preferred  lien,  and 
R)'.  Co.  (1R63),  18  Wis.  17.  this  is  all  they  have  been  required  to  do. 

8  Stewart's  App.  (1872),  72  Pa.  St.  291,  Their  money  was    used   to  redeem    these 

distinguishing    Railroad    Co.    v.    Howard  bonds,  when  they  acquired  the  purchased 

(1868),   7  Wall.   392,   where  there  was  a  property.      The   purchase-money   did   rot 

preliminary  agreement  for  the  benefit  of  belong  to  them.     It  stood  in  the  place  of 

the  stockholders,  and  their  equities  were  the  property  they  had  purchased.     Their 

held  to  be  inferior  to  those  of  the  credi-  agreement  was  to  buy  the  property  of  the 

tors.  first  company,  subject  to  the  obligations 

4  Washington,  0.  &  W.  R.  Co.  v.  Lewis  of  the  first  lien,  and  to  this  alone  they 

(1887),   83  Va.    246  ;  s.  c.  2  S.   E.   Rep.  have  been  held." 

51 


802 


RAILWAY   BONDS   AND    MORTGAGES.       [CHAP.  XXXVI. 


for  an  example  of  such  a  statute),  or  he  has  assumed  these  debts 
with  others.  Thus  a  company  organized  by  the  purchasers  of  a 
boom  company's  property  is  not  liable  for  injuries  caused  by  ob- 
structions placed  in  a  river  by  the  mortgagor  company,  unless  it 
has  notice  of  their  existence,  and  thus  becomes  itself  a  tort  feasor 
in  not  removing  them.^ 

Nor  is  the  purchaser  answerable  for  the  consequences  of  his 
predecessor's  negligence,^  nor  for  a  trespass  committed  by  such 
predecessor.^ 

§  821.  Liability  of  Nevr  Company  for  Damages  caused  by  Opera- 
tion of  Road  by  Trustees.  —  A  claim  for  damages  to  property 
by  fire  communicated  by  a  locomotive,  while  passing  along  its 
track  at  a  time  when  the  road  was  in  possession  of  and  operated 
by  the  trustees,  does  not  depend  upon  proof  of  malfeasance  or 
negligence,  but  is  an  incident  to  the  running  of  the  road,  and 
may  be  considered  a  part  of  the  running  expenses.  It  is,  there- 
fore, an  equitable  lien  on  the  funds  of  the  trustees ;  and  if  they 
convey  to  a  new  corporation,  formed  of  the  bondholders,  any 
funds  subject  to  that  lien,  the  new  corporation  will  be  liable  iu 
equity  to  the  person  suffering  the  damage.^ 

§  822.  Liability  of  Piirchasers  for  Damages  caused  by  Operation 
of  Road  by  Receiver.  —  Where  the  receiver  of  a  railroad  de- 
votes the  income  to  permanent  improvements,  claims  arising 
out  of  the  operation  of  the  road,  whether  in  contract  or  iu  tort, 
and  left  unpaid  because  of  such  diversion  of  the  income,  are  among 
the  liabilities  which  the  purchaser  must  discharge.^ 

Purchasers  at  foreclosure  sale  of  a  railroad  which  has  been 
improved  by  the  receiver  by  the  expenditure  of  money  out  of  its 
earnings  will  be  liable  for  the  obligations  incurred  by  the  receiver 
during  the  receivership  to  the  extent  of  such  improvements.^ 

1  NefT  r.  Wolf  River  Boom  Co.  (1880),  949:  46    Am.    &  En£j.    R.    R.   Cas.  35-3; 

50  Wi.s.  585.  Hammond  v.  Port  Royal  &  Augusta  IJy. 

The  Nebraska  statute  of  1881  as  to  the  Co.  (1880),  15  S.  C.  10  ;  s.  c.    11  Am.  & 

purchase  of  railioads  hy  other  companies  Erig.  R.  R.  Cas.  353. 


expressly  provides  that  the  luirchaser 
"shall  be  subject  to  any  and  all  liens, 
incumbrances,  or  indebtedness "  existing 
against  the  railroad  company  fi-om  which 
the  purchase  is  made.  See  Chicago,  St. 
P.  M.  &  0.  R.  Co.  V.  Lundstrom  (1886), 
16  Neb.  254  ;  s.  c.  20  X.  W.  Rep.  198  ;  21 
Am.  &  Eng.  R.  R.  Cas.  529. 

2  Louisville  &  Nashville  R.  Co.  v.  Orr 
(1891),  91  Ky.  109  ;  s.  c.  15  S.  W.  Rep. 
8  ;  9  lly.  &  Corp.  L.  J.  189. 

»  Campbell  v.  Pittsburgh  &  W.  R.  Co. 
(1890),  137  Pa.  St.  574  ;  8.  c.  20  Atl.  Rej.. 


■•  Stratton  v.  European  &  North  Ameri- 
can Ry.  Co.  (1884),  76  Me.  269  ;  s.  c.  17 
Am.  &  Eng.  R.  R.  Cas.  277. 

6  Houston  &  Texas  Central  R.  Co.  v. 
Crawford  (1895),  88  Tex.  277  ;  s.  c.  28 
L.  R.  A.  761  ;  31  S.  W.  Rep.  176  ;  Rj'an 
V.  Hays  (1884),  62  Tex.  42  ;  s.  c.  23  Am. 
&  Eng.  K.  R.  Cas.  501. 

6  Missouri,  K.  &  T.  Ry.  Co.  of  Texas  v. 
Lncy  cf  nl.  (Tex.  Civ.  App ,  1896),  35  S. 
VV.  Rep.  605. 

Extent  of  purchaser's  linbility  when 
railroad  is  sold  under  foreclosure  proceed- 


§§  823,  824.]  RIGHTS    OF   PURCHASERS    AT   SALE.  803 

Personal  injuries  caused  by  negligence  of  the  employees  of  a 
receiver  operating  a  railroad  constitute  a  cause  of  action  against 
the  receiver,  and  a  judgment  in  such  an  action  will  bind  the 
property  in  the  hands  of  a  purchaser  at  foreclosure  sale,  where 
the  order  of  the  court  confirming  the  sale  orders  such  claims 
paid ;  such  claims  partake  of  the  nature  of  operating  exijcnscs  of 
the  property.^ 

When  a  receiver,  subsequent  to  the  sale  of  a  railroad,  under  a 
decree  of  a  federal  court  has  made  betterments  upon  it  exceeding 
in  value  all  liabilities  imposed  upon  the  purchaser  in  the  decree 
for  sale,  the  purchaser  may  be  held  liable  to  the  extent  of  such 
excess  for  negligence  of  the  receiver  occurring  subsequent  to  the 
sale  of  the  property .^ 

§  828.  No  Liability  attaches  to  Purchaser  until  Sale  is  confirmed. 
—  Until  the  sale  is  confirmed,  no  liability  attaches  to  the  |)ur- 
chasers  for  injuries  caused  by  the  operation  of  the  road,  for,  until 
the  property  is  actually  conveyed  to  them,  they  have  no  right  to 
intermeddle  with  it.  Up  to  the  time  of  the  confirmation  those 
operating  the  road  are  in  no  sense  their  employees,  or  subject  in 
any  way  to  their  control.^ 

§  824.  Purchasers  organizing  as  a  New^  Company  not  liable  for 
Debts  of  Mortgagor.  —  The  principles  illustrated  in  the  preceding 
sections  are  not,  as  a  general  rule,  affected  by  the  statutes  which 
provide  that  the  purchasers  at  a  mortgage  sale  of  the  property 
and  franchises  of  an  existing  company  may  organize  anew,  and 
be  invested  with  all  the  rights  and  powers  of  the  old  company  in 
the  management  of  the  road  and  the  business.  The  new  compa- 
nies are  not,  in  the  absence  of  some  provision  to  that  effect,  or 
some  special  consideration  which  would  impose  an  obligation  on 
a  purchaser  independently  of  statute,  liable  for  the  debts  of  the 
mortgagor.* 

ings  and  left  in  the  hands  of  receiver  to  Civ.  App.  .537  ;  Chicago  &  Erie  11.  Co.  v- 

be   operated    for   torts.      See   Houston    &  Towle  (1894),  10  Ind.  App.  5-10. 
Texas    Central    Ry.    Co.     v.    Strycharski  A  receiver  continuing  to   ojierate   the 

(Tex.    Civ.   App.,   1896),   35  S.   W.   Rep.  road  after  foieclosure  sale  and  conveyance 

851.  to  the  purchaser,  the  latter  has  been  held 

1  St.  Louis  S.  W.  Ry.  Co.  v.  Holbrook  liable  to  a  shij)per  of  goods  for  loss  during 
(1896),  73  Fed.  Rep.  112.  the  operation   of  the  road  by  the  receiver, 

2  Houston  &  Texas  Central  Ry.  Co.  v.  in  Houston  &  Tex.  Central  Ry.  Co.  v. 
Kelly  (Tex.  Civ.  App.,  1896),  35  S.  W.  McFadden  (Tex.  Civ.  App.,  1897),  40  S. 
Rep."  878.     See  Houston  &  Texas  Central  W.  Reii.  216. 

Ry.  Co.  V.  Crawford  (1895),  88  Tex.  277;  3  Metz  r.   Buffalo,  Corry,   &  Pittsburg 

s."c.  31   S.  W.   Rep.   176  ;    Houston.    E.  R.  C.  (1874),  58  N.  Y.  61. 

&  W.  T.  Ry.  Co.  V.  Keller  (Tex.  Civ.  App.,  *  Lake   Erie  &  W.  Ry.   Co.   v.  Griffin 

1896),  36  S.  W.  Rep.  8.59  ;  Houston,  E.  &  (1883),  92  Ind.  487;  Cook  v.  Detroit,  etc. 

W.   T.  Ry.  Co.  V.    Keller  (1894),   8  Tex.  I!y.    Co.    (1882),    43  Mich.    349;  s.  c.    9 


804 


RAILWAY   BONDS   AND    MORTGAGES.       [CIIAP.  XXXVI. 


Such  a  company,  unless  there  is  some  express  provision  to  that 
effect  in  the  statute  under  which  it  is  organized,  does  not  acquire 
the  corporate  entity  of  the  mortgagor.  A  different  doctrine  would 
clearly  render  these  statutes  of  little  utility,  and  entirely  defeat 
the  very  policy  which  the  legislature  has  sought  to  carry  out  by 
their  enactment.^ 

They  operate  not  as  a  revival  of  the  old  corporation,  but  as  the 
creation  of  a  new  one.^ 

Such  statutes  do  no  injustice  to  general  creditors.^ 

This  is  the  effect  even  where  the  enabling  statute  authorizes 
the  purchasers  to  "  reorganize  "  the  former  company  "  as  a  new 
corporation  "  under  the  same  name  as  the  mortgagor.'* 

To  make  the  new  company  liable  for  any  claims  against  the 
old  one,  in  addition  to  those  which  are  paramount  to  the  mort- 
gage, the  act  must  expressly  provide  that  the  stockholders  in  the 


Am.  &  Eng.  E.  R.  Cas.  443  ;  Vilas  v. 
Milwaukee  &  Prairie  du  Chien  Piy.  Co. 
(1863),  17  Wis.  497.  In  the  last  case  the 
court  said:  "The  object  of  the  law  was 
to  enable  railroad  companies  to  borrow 
money,  and  to  mortgage  their  property 
and  franchises  as  security.  To  give  full 
and  perfect  effect  to  such  mortgages  as 
securities  was  the  leading  idea  of  the  law. 
To  accomplish  it,  the  company  was  au- 
thorized to  mortgage  its  franchises ;  and, 
for  the  purpose  of  removing  all  doubt,  it 
was  further  expressly  provided  that  the 
purchasers  at  a  mortgage  sale  might  or- 
ganize anew,  and  be  invested  with  all  the 
rights  and  powers  of  the  old  company  in 
the  management  of  the  road  and  business. 
Without  some  such  provision  a  purchase 
of  the  property  would  be  unavailing.  The 
same  powers  are  conferred  not  with  a  view 
to  a  continuation  of  the  same  corporation, 
but  to  give  full  effect  and  protection  to 
riglits  created  by  the  mortgage  adverse  to 
those  of  the  old  corporation.  To  say, 
therefore,  that  becau.se  the  purchasers 
have  the  same  powers,  they  are  in  effect 
the  sam«i  cori)orations,  would  be  to  defeat 
the  primary  ol)ject  of  the  law,  and  to  de- 
stroy the  interests  of  the  mortgagee.  His 
interest,  and  all  the  proceedings  to  protect 
tho.se  interested,  are  adverse  to  the  origi- 
nal corporation.  And  it  is  this  adverse 
character  which  excludes  the  idea  that  the 
proceeding  has  no  other  effect  than  merely 
to  contiiiue  the  old  corporation,  and  which 


so  plainly  distinguishes  the  case  from  those 
mere  changes  of  corporate  names  or  pow- 
ers, where  the  principle  relied  on  by  the 
plaintiff  has  been  held  applicable,  that  it 
is  difficult  to  imagine  that  they  could  ever 
have  been  confounded.  The  law  shows 
plainly  that  it  was  intended  that  such 
mortgages  should  have  effect  like  other 
mortgages,  according  to  their  priority ; 
and  it  certainly  would  have  been  idle  to 
expect  to  obtain  loans  upon  such  securi- 
ties if  it  had  been  otherwise.  Yet  the 
doctrine  here  contended  for  would  destroy 
all  ])riority,  and  the  purchaser  under  the 
prior  mortgage  could  take  the  property 
and  franchises  of  the  company  with  a  lia- 
bility to  pay  not  only  the  subsequent  mort- 
gages, but  all  its  unsecured  debts." 

1  Metz  V.  Buffalo,  Corry,  &  Pittsburg 
R.  Co.  (1874),  58  N.  Y.  61,"  distinguishing 
Commonwealth  v.  Centi-al  Pass.  Ry. 
(1866),  52  Pa.  St.  506,  decided  with 
reference  to  a  statute  of  a  different  tenor, 
and  following  Wellsboro  &  Tioga  Plank 
Road  Co.  r.  Crriffin  (1868),  57  Pa.  St. 
417,  decided  under  the  law  as  it  was  be- 
fore the  passage  of  that  statute. 

2  Huff  V.  Winona  &  St.  Peter  R.  Co. 
(1866),  11   Minn.   180. 

8  Cook  V.  Detroit,  G.  H.  &  M.  R.  Co. 
(1882),  43  Mich.  349  ;  .s.  c.  5  N.  W.  Rep. 
390  ;  9  Am.  &  Eng.  R.  R.  ('as.  443. 

*  Marshall  v.  Western  North  Carolina 
R.  Co.  (188.-<),  92  N.  C.  322  ;  s.  c.  20  Am. 
&  Eng.  U.  R.  Cas.  578. 


§  825.]  RIGHTS    OF    PURCHASERS    AT    SALE.  805 

old  company  shall  be  stockholders  in  tlic  new  one,  or  that  the 
latter  shall  be  liable  for  the  debts  of  the  former,^  or  use  some 
language  which  indicates  an  intention  that  the  usual  rule  shall  not 
govern  the  rights  of  the  parties.  The  fact  that  the  incorporation 
of  the  new  company  takes  place  under  an  act  which  uses  the 
word  "reorganization"  in  the  title  does  not  create  any  privity 
between  it  and  its  predecessors,  when,  by  the  tei-ms  of  that  act, 
the  new  company  cannot  come  into  existence  except  upon  the 
contingency  of  the  foreclosure  sale.^ 

In  some  States,  as  in  Michigan,  tlie  purchasers  are  expressly 
freed  by  the  terms  of  the  statute  from  liability  for  any  debts 
embraced  in  the  foreclosure,  and  it  is  held  that  such  a  statute 
does  no  injustice  to  general  creditors.^ 

Whei'e  the  statute  providing  for  reorganization  expressly  de- 
clares that  the  new  corporation  formed  from  the  purchasers  of 
the  road  shall  not  be  liable  for  any  debts  except  those  subse- 
quently contracted  by  it,  and  leaves  all  property  not  embraced  in 
the  foreclosure  sale  liable  for  existing  debts,  a  common-law  action 
cannot  be  maintained  against  that  corporation.  If  any  propei-ty 
not  purchased  on  the  foreclosure  is  in  the  possession  of  the  new 
company,  application  for  relief  must  be  made  to  a  court  of  equity.'* 

§  825.  The  Right  of  Redemption.  —  The  right  to  redeem  is  a 
right  incident  to  every  mortgage  and  every  instrument  or  trans- 
action intended  as  a  security,  regardless  of  its  actual  form.  It  is 
a  right  that  exists  independently  of  agreement  between  parties, 
for  it  is  a  creature  of  the  law.^ 

Speaking  generally,  all  equitable  right  of  redemption  is  barred 
by  a  foreclosure  sale,  for  "  the  right  to  foreclose  means  the  right 
to  cut  off  a  right  to  redeem  given  by  equity,  when  by  the  condi- 
tion of  the  mortgage  the  mortgagee's  estate  has  become  absolute 
at  law."  6 

A  statute  which  in  terms  destroys  or  impairs  a  right  of  re- 
demption established  as  a  vested  right  under  the  general  law  is 
un(!onstitutional.'^ 

The  right  may  be  lost  by  laches,  independently  of  the  bar  of 
any  statute  of  limitations.^ 

1  Morgan  County  v.  Thomas  (1875),  76  5  Kerr's  Supp.  to  Wiltsie  on  Mortgage 
111.  120.  Foreclosure,  pp.  1495-1498. 

2  Stewart's  App.  (1872),  72  Pa.  St.  ^  Holmes,  J.,  in  Shepard  v.  Richard- 
291.  son  (1887),  145  Mass.  36. 

3  Cook  V.  Detroit,  G.  H.  &  M.  R.  Co.  ^  The  Ashuelot  Ry.  Co.  v.  Elliot  (1873), 
(1882),  43  Mich.  349  ;  s.  c.  5  N.  W.  Rep.  52  N.  H.  387. 

390  ;  9  Am.  &  Eng.  R.  R.  Cas.  443.  *  Simmons  v.  Burlington,  etc.  Ry.  Co. 

*  Ibid.  (1895),  159  U.  S.  278. 


806  RAILWAY   BONDS   AND    MORTGAGES.        [CHAP.  XXXVI. 

The  right  of  redemption  after  sale  is  regulated  by  statute  in 
many  States.  The  federal  courts  recognize  these  statutes  as 
controlling,  and  a  State  statute,  therefore,  which  allows  any  par- 
ticular period  to  redeem  after  foreclosure  and  sale  is  regarded  and 
treated  in  the  federal  courts  as  a  rule  of  property .1 

But  these  statutes  do  not  apply  to  railroad  mortgages  covering 
all  the  property  in  different  States  as  an  entirety .2 

A  mortgage  is  personal  property,  and  follows  its  owner. 
Wherefore  a  suit  to  redeem  the  land,  which  is  the  suject  of  the 
mortgage,  must  be  brought  where  jurisdiction  in  personam  may 
be  had,  without  reference  to  the  situs  of  the  land.^ 

A  purchaser,  under  an  execution  sale,  of  a  right  to  redeem  a 
portion  of  railroad  property  situated  in  a  particular  State  is  enti- 
tled also  to  redeem  the  whole  road,  including  property  in  another 
State ;  but,  to  save  a  forfeiture,  he  must  pay  all  that  is  presently 
due.  Then  he  will  be  placed  in  the  position  of  the  mortgagors, 
and  the  right  of  redemption  will  not  be  foreclosed.  The  trustees 
of  the  mortgage  will  hold  possession,  but  must  account  for  the 
earnings  ;  and  if  those  earnings,  together  with  the  purchaser's 
payment  to  the  trustees,  are  sufficient  to  discharge  the  bonds,  the 
purchaser  will  be  entitled  to  possession.* 

In  a  suit  to  foreclose,  if  the  decree  orders  a  sale  of  the  property 
to  pay  the  mortgage  debt,  an  express  order  cutting  off  the  equity 
of  redemption  of  a  junior  mortgagee,  although  a  party  to  the  suit, 
is  not  necessary  as  an  invariable  rule, — certainly  not,  where 
there  is  a  prayer  that  he  be  directed  to  redeem,  where  the  pri- 
ority of  the  plaintiff's  mortgage  is  found  or  conceded,  where  a 
sale  is  ordered  in  default  of  payment,  and  where  the  right  of  the 
debtor  to  redeem  is  declared  forever  barred.  The  junior  mort- 
gagee has,  of  course,  a  right  to  redeem  without  such  order ;  but 
if  he  chooses  not  to  assert  it,  standing  by  while  the  sale  is  made 
and  confirmed,  he  must  be  deemed  to  have  waived  the  right.^ 

The  right  of  a  junior  mortgagee,  who  has  not  been  made  a 
party  in  proceedings  to  foreclose  a  prior  mortgnge,  to  redeem  the 
mortgaged  premises  is  barred  within  the  period  within  which  his 
right  to  foreclose  would  be  barred,  —  namely,  ten  years.^ 

A  demurrer  to  a  bill  for  redemption  was  sustained  in  the  Su- 

1  liiine  V.  Ins.  Co.  (1877),  96  U.  S.  *  Wood  v.  Oooilwin  (1861),  49  Me. 
627.  260. 

2  TurniT  V.  Indianapolis,  H.  &  AV.  Ry.  6  Simmons  v.  Bnrlinf^ton,  C.  &  R.  & 
Co.,  8  Biss.  381.  N.  %.  Co.  (189.^)),  16  Sup.  Court  Reporter, 

8  Tlie    Kanawha   Coal  Co.  v.   Tim    Ka-     U.  S."  1. 
nawha  &  Ohio  Coal  Co.  (1870),  7  Blatch.  6  Gower  v.  Winchester  (1871),  33  Iowa, 

415.  303. 


§  825.]  RIGHTS    OF   PURCHASERS    AT   SALE.  807 

preme  Court  of  Maine  upon  the  grounds,  first,  of  a  misjoinder  of 
parties  plaintiff,  the  court  holding  that  stockholders  should  not 
have  been  joined  with  the  corporation  unless  fraud  on  the  jjart  of 
the  latter  was  alleged,  for  so  long  as  the  corporation  is  faithful 
to  its  trust,  the  stockholders,  as  individuals,  have  no  right  (ji* 
standing  to  take  action  to  protect  tlie  corporate  interests  and 
property;  second,  the  bill  was  defective  in  omitting  to  charge 
that  the  defendant  in  possession  held  the  mortgage  title;  and, 
third,  that  the  bill  should  have  averred  an  offer  to  pay  such 
amount  as  might  be  found  due.^ 

A  judgment  in  a  debenture-holder's  action  to  foreclose  should 
provide  that  moneys  accumulated  in  the  hands  of  a  receiver,  who 
had  carried  on  the  business  of  the  defaulting  company  at  a  profit, 
should  be  applied  towards  payment  of  the  amount  due.^ 

1  Kennebec  &  Portland  Ry.  Co.  v.  Port-  2  Cumming  v.  Metcalfe's  Loudon  Hy- 

land  &  Kennebec  Ky.  Co.  (1866),  54  Me.     dro  (1895),  13  Kep.  501. 
173. 


808 


RAILWAY   BONDS   AND   MORTGAGES.       [CHAP.  XXXVII, 


CHAPTER   XXXVII. 


REMEDIES   IN   CASES   OP   OBJECTIONS   TO    SALES. 


Art.  I.  — 
§  826. 

827. 


828. 


829. 


830. 


831. 


832. 


Art. 

II. 

§ 

833 

834 

835 

836. 


837. 
838. 


Stay  of  Sales  by  Injunction. 

When  Injunction  will  be 
granted. 

Sale  not  restrained  merely  be- 
cause Mortgagee  had  no  Right 
to  make  it. 

Sale  not  restrained  if  Defendant 
capable  of  responding  in 
Damages. 

Trustee's  Sale  not  restrained  be- 
cause Amount  of  Bonds  justly 
due  has  not  been  ascertained. 

Sale  under  Power  in  Mortgage 
securing  Bonds  issued  by  Di- 
rectors to  themselves  will  be 
restrained. 

Sale  restrained  if  Default  caused 
by  Misconduct  of  Debtor's 
Agent. 

Sale  when  not  restrained  at 
Instance  of  Junior  Incum- 
brances. 

-  Setting  aside  Foreclosure 
Sales. 

Methods  of  Procedure  to  vacate 
Sales. 

Who  may  except  to  Sale. 

Right  to  Relief  as  affected  by 
Laches  of  Petitioner. 

Errors  in  or  prior  to  Decree  not 
reviewable  on  Motion  to  set 
aside  Sale. 

Remedy  by  Annulment  of  Sale. 

Declaring  Purchaser  a  Trustee 
equivalent  to  Annulment. 


§  839.    Confirmation  of  Fraudulent  Sale 
by  Legislature. 
840.    Effect  of  declaring  Sale  void  for 
Fraud. 
{a)  As  to  Corporation  itself. 
{b)   As  to  Bondholders  and  other 
Creditors. 
Art.  III. — Grounds    for    vacating    a 
Sale. 
§  841.    Inadequacy  of  Price. 

842.  Actual  Fraud. 

843.  Collusion  between  Trustees  and 

Purchasers. 

844.  Collusion  between  Trustees  and 

Corporate  Officers. 

845.  Collusion      between     Corporate 

Officers  and  Combinations  of 
Bondholders. 

846.  Surprise,  Mistake,  etc. 

847.  Breach   of    Professional   Duties 

by  Attorney. 

848.  Sale  not  set  aside  because  same 

Person  is  Trustee  under  both 
Mortgages  foreclosed. 

849.  Extension  of  Benefits  of  Reor- 

ganization to  Bondholders 
after  Time  for  coming  in  has 
passed  not  Ground  for  invali- 
dating Sale. 

850.  Foreclosure  before  Maturity  of 

Principal. 

851.  Excessive     Amount    of    Judg- 

ments. 


Article  I.  —  Stay  op  Sales  by  Injunction. 

§  826.  "When  Injunction  will  be  granted.  —  Whether  an  injunc- 
tion against  a  sale  shall  be  refused  or  allowed  is  often  merely 
another  form  of  the  question  whether  the  mortgage  is  valid  or 
invalid.     (See  Chapter  VII.) 


§§  827-829.]  OBJECTIONS  to  sales.  809 

§  827.  Sale  not  restrained  merely  because  Mortgagee  had  no 
Right  to  make  it.  — The  company  cannot  procure  an  injunction  to 
stay  a  sale  by  virtue  of  a  power  in  a  mortgage  executed  to  a  con- 
tractor to  secure  bonds  issued  to  him  in  payment  of  construction, 
where  the  ground  for  the  application  is  merely  that  the  mortgagee 
has  no  right  to  make  the  sale.^ 

§  828.  Sale  not  restrained  if  Defendant  capable  of  responding 
in  Damages.  — The  fact  that  the  guarantor  of  bonds  who  has  stip- 
ulated to  complete  the  mortgagor's  road  has  not  performed  his 
contract,  is  nut  a  sufficient  reason  for  restraining  the  tiustce  of  a 
mortgage  of  indemnity,  given  to  such  guarantor  to  secure  him 
against  loss,  when  the  latter  is  solvent  and  capable  of  respondiug 
in  damages,  unless  it  appears  that  the  default  for  which  the  sale 
is  impending  will  be  cancelled  by  the  amount  of  the  bonds  still 
on  deposit,  added  to  the  amount  of  the  damages  which  may  be 
awarded.  Especially  will  such  an  application  be  denied  when 
the  mortgagor,  though  bound  to  keep  down  the  interest  on  its 
outstanding  bonds,  has  failed  to  do  so,  and  suffered  the  loss  to 
fall  on  the  guarantor.  The  mortgagor,  under  such  circumstances, 
is  not  in  a  favorable  position  to  complain  of  the  guarantor's  delay 
in  prosecuting  the  work  of  construction.^ 

§  829.  Trustee's  Sale  not  restrained  merely  because  Amount  of 
Bonds  justly  due  has  not  been  ascertained.  —  Where  the  sale  is 
being  made  under  the  power  in  the  mortgage  which  makes  it  the 
duti/  of  the  trustee  to  sell  upon  receiving  a  request  to  that  effect 
from  a  majority  in  interest  of  the  bondholders,  it  has  been  held 
that  the  sale  will  not  be  delayed  until  it  has  been  ascertained  how 
many  of  the  bonds  are  justly  due.  Each  bondholder,  it  is  said, 
holds  his  own  bonds  separately  and  independently  of  all  the 
others  ;  and  when  his  interest  remains  in  arrear,  under  the  cir- 
cumstances mentioned  in  the  trust  deed,  he  ought  not  to  be  de- 
layed by  a  controversy  as  to  the  validity  of  the  bonds  held  by 
other  persons.^ 


1  York  «&  Cumberland  R.  Co.  v.  Myers  of  caveat  emptor  has   lost   its  force   and 

(1856),  4  Me.  109.     The  court  said:  "But  influence." 

the  plaintiffs  say  that  the  deed  gives  him  2  Macon  &  Augusta  R.  Co.  v.  Georgia 

[the  defendant]  no  such  authority.     If  so,  Railroad  &  Bkg.  Co.  (1879),  63  Ga.  103  ; 

then   the  defendant's  deed  would  convey  s.  c.  1  Am.  &  Eng.  R.  R.  Cas.  378. 
nothing,  and  no  injury  could  be  by  them  ^  State  v.  Brown   (188.")),  Oi  Md.  199. 

sustained.    Again,  the  plaintiffs  apprehend  The    court    expressly    distinguished    this 

that  some  innocent  purchaser  may  be  ru-  case   from   proceedings   in  foreclosure,  in 

ined.     It  may  be  so,  but  such  anticipation  which  it  was  declared  to  be  necessary  to 

does  not  enlarge  our  equity  powers,  and  it  ascertain  tlie  amount  of  the  debt,  so  that 

is  not   to   be  presumed   that   the  maxim  the  defendant  may  know  how  much  it  is 


810  RAILWAY    BONDS    AND    MORTGAGES.       [CHAP.  XXXVII. 

§  830.  Sale  under  Po"wer  in  Mortgage  securing  Bonds  issued  by 
Directors  to  themselves  will  be  restrained.  — All  issue  of  bonds  by 
the  directors  to  themselves  as  a  gratuity  being  ultra  vires  and 
void,  an  injunction  will  be  granted  to  restrain  a  sale  under  a 
power  in  the  mortgage  securing  b(Hids  so  issued  and  held  by  one 
\:\\o  knew  that  they  were  not  sold  to  obtain  a  working  capital, 
or  to  pay  a  corporate  debt,  but  as  the  private  property  of  the 
president.! 

§  831.  Sale  restrained  if  Default  caused  by  Misconduct  of  Debt- 
or's Agents.  —  An  injunction  will  be  granted  to  stay  a  sale  for 
arrears  of  interest  on  State-aid  bonds  secured  by  a  statutory  lien, 
where  it  appears  that  the  State  officials  have  neglected  the  duty 
imposed  upon  them  of  investing  a  previous  payment  made  by  the 
company,  and  that  the  amount  which  such  investment  would  have 
realized  exceeds  the  arrears  due  upon  the  bonds.^ 

§  832.  Sale  when  not  restrained  at  Instance  of  Junior  Incum- 
brances.—  A  junior  mortgagee  not  a  party  to  the  suit  cannot 
enjoin  a  foreclosure  sale,  as  it  will  not,  under  such  circumstances, 
affect  his  rights,  and  he  may  at  any  time  exercise  his  right  of 
redemption.^ 

Still  less  will  such  an  injunction  be  granted  where  the  sale  is 
made  in  a  statutory  proceeding,  and  its  effect  is  to  extinguish  the 
rights  of  the  junior  lienors  entirely.'* 

A  State  in  whose  favor  a  statutory  lien  was  declared  upon  a 
railroad,  as  a  security  for  a  loan,  cannot  enjoin  a  sale  under  a 
power  in  a  trust  deed  executed  to  secure  an  issue  of  bonds,  in 
accordance  with  an  act  construed  as  evincing  an  intention  on  the 
part  of  the  State  to  subordinate  its  own  rights  to  those  acquired 
under  the  trust  deed.^ 

The  holders  of  receiver's  certificates,  authorized  during  fore 
closure  proceedings,  are  privies  to  a  decree  on  an  intervention  in 
the  same  proceedings  in  favor  of  the  holder  of  a  mechanic's  lien 
as  a  first  subsisting  lien  against  the  property,  directing  its  pay- 
necessary  for  liiin  to  pay  in  order  to  pre-  seem  that  it  oucfht  not  to  be  a  sufficient 
vent  the  sale.  The  ruling  was  based  reason  for  restraining  a  sale  also, 
strictly  upon  the  fact  that  the  agreement  ^  Virginia  Tide-Water  Coal  Co.  v.  Mer- 

of  the  parties,  as  expressed  in  the  trust  cantile  Trust  Co.  (1890),  58  Hun,  610 
deed,  must  be  carried  out.  The  question  (mem.)  ;  s.  c.  3.5  N.  Y.  St.  Repr.  141  ; 
was  not  considered  with  reference  to  the     12  N.  Y.  Suj)p.  529. 

danger  which  the  uncertainty  as  to  the  2  Ralston  v.  Crittenden  (1882),  13  Fed. 

amount  of  the  claims  would  have  in  de-     Rep.  508. 

terring    bids.     Such    uncertainty    is    con-  »  Searles  v.  Jacksonville,   P.  &  M.  R. 

siilcred  a  good   ground    for  postponing  a     Co.  (1873),  2  Woods,  621. 
foreclo.sure   .sale,   or  a  sale   under   power,  *  Iliid. 

until  controversie.s  are  settled.     It  would  ^  Brown  v.  State  (1884),  62  Md.  439. 


§  833.]  OBJECTIONS   TO    SALES.  811 

ment,  or  in  default  a  sale,  and  arc  not  entitled  to  an  injunction 
restraining  the  carrying-  out  of  such  a  decree.^ 

Nor  will  a  court,  at  the  instance  of  the  trustee  of  a  junior  mort- 
gage, enjoin  a  sale  to  satisfy  a  prior  statutory  mortgage,  or  ap- 
point a  receiver  to  taive  charge  of  the  property,  un<i,  out  of  the 
earnings,  reimburse  the  ti'ustee,  stockholders,  and  bondholders,  in 
case  they  should  pay  the  amount  of  tiie  decree,  when  the  dispro- 
portion between  the  value  of  the  property  and  that  amount  pre- 
cludes the  idea  that  any  one  will  be  permitted  to  jiurchase  the 
property  discharged  from  a  trust  in  favor  of  the  holders  of  stock 
and  bonds.  The  presum[)tion,  in  such  a  case,  is  that  the  directo- 
rate, whose  duty  it  is  to  protect  the  interests  of  the  stockholders, 
will  not  incur  the  liability  which  a  neglect  of  that  duty  will  im- 
pose, and  if  they  are  guilty  of  such  neglect,  the  bondholdei-s  and 
other  parties  in  interest  have  the  means  of  protecting  themselves 
from  any  loss.  Even  if  the  decree  is  not  satisfied,  it  may  be  an- 
ticipated with  certainty  that  the  property  will  be  bought  by  or 
for  the  company,  or  by  or  for  some  one  or  more  of  the  holders  of 
stock  or  b(mds.  Such  a  decree,  therefore,  does  not  menace  the 
interests  of  the  bondholders  with  any  danger  which  warrants  a 
court  in  delaying  the  sale.^ 

Article  II.  —  Setting  aside  Foreclosure  Sales.^ 

§  833.  Methods  of  Procedure  to  vacate  Sales.  —  Under  the 
equity  rules  of  the  federal  courts,  final  decrees  maybe  modified 
or  set  aside  in  one  of  three  modes:  (1)  By  appeal  within  the 
time  prescribed  by  law.  (2)  By  bill  of  review  filed  within  the 
time  allowed  by  law  for  an  appeal  charging  error  apparent  on 
the  record.  (3)  By  original  bill  charging  fraud  or  newly  dis- 
covered evidence.  Bondholders  who  contest  the  validity  of  a 
final  decree  in  a  foreclosure  suit  by  the  second  of  these  methods 

i  Gordon  v.   Newman  (1894),  62  Fed.  tificates  to  be  among  the  liens  to  be  jiaid, 

Rep.    686.     In   this   case,    the   trustee  of  as  against  the  mortgages.     The  holder  of 

bondholders,  named  in  the  trust  deed,  had  certain  of  these  certificates  was  granted  an 

instituted  foreclosure  proceedings.    G.,  the  injunction  restraining  the  enforcement  of 

holder  of  a  mechanic's  lien  upon  a  part  of  the  decree  in  favor  of  G.,  the  holder  of  the 

the  property,  intervened,  and  there  was  a  mechanic's  lien,  in  tlie  Circuit  Court,  but 

decree  in  his  favor,  directing  the  payment  the   injunction    was   dissolved    on    ajipeal 

of  the  amount,  or,  in  default,  a  sale  of  the  in  the  Circuit  Court  of  Appeals  for  that 

property,  recognizing  it  as  a  first  subsist-  circuit. 

ing  lien.     Subsequent  to  the  intervention,  ^  Overton  v.   Memjdiis  &  Little  Kock 

an  issue  of  receiver's  certificates  was  au-  E.    Co.    (1882),    10    Fed.    Eep.    866,    per 

thorizcd.     In    the    final    decree   of    fore-  Caldwell,   D.  J. 

closure,  a  sale  was  ordered,  subject  to  all  ^  See  Rorer  on  Railroads,  921  ;  Wood's 

liens,  and  especially  declaring  these  cer-  Ry.  Law,  1637. 


812  RAILWAY    BONDS    AND    MORTGAGES.       [CHAP.  XXXVII. 

are  concluded  by  adverse  decision  of  the  Supreme  Court,  and 
the  only  course  open  to  them,  if  they  have  any  right  to  assert,  is 
to  seek  relief  by  an  independent  and  original  proceeding;  but 
in  such  a  proceeding  they  cannot  assert  any  rights  in  hostility 
to,  or  inconsistent  with,  the  adjudication  already  had.  ^ 

Ordinarily,  where  bondholders  seek  to  annul  a  decree  and 
sale  on  the  ground  of  the  fraud  of  the  trustees,  the  proper 
practice  is  to  file  a  bill  in  the  nature  of  an  original  bill  or  bill 
of  review,  and  to  apply  to  bo  made  parties  to  the  original  fore- 
closure suit,  and  then  seek  to  controvert  matters  which  were 
errors  in  the   proceedings. ^ 

Under  such  circumstances  the  proceedings  to  obtain  relief 
are  equivalent  to  a  bill  in  equity  to  set  aside  the  decree  on  the 
ground  of  fraud,  and  constitute  a  new  and  original  proceeding.^ 

But  where  the  right  to  make  any  further  orders  has  been 
reserved  in  an  order  confirming  the  sale,  a  bondholder  who 
seeks  relief  against  the  sale  and  its  confirmation  sh(.)uld  be 
admitted  by  petition  to  the  original  suit,  and  have  his  objections 
examined.* 

§  834.  Who  may  except  to  Sale.  —  A  stockholder,^  or  any  one 
who  had  an  interest  in  the  subject-matter  at  the  time  of  the 
sale  and  its  confirmation,  has  a  standing  in  court  to  object 
afterwards  to  the  validity  of  the  proceedings;  but  those  who  had 
no  such  interest  cannot  be  permitted  to  disturb  what  the  parties 
who  were  interested  have  acquiesced  in.^ 

Decrees  ordering  sales,^  therefore,  cannot  be  assailed  by 
persons  who  have  purchased  bonds  after  the  completion  of  sale. 
Such  an  assignment  does  not  carry  with  it  a  right  of  action  to 
impeach  the  proceedings.'^ 

1  Huntington  v.  Little  Rock  &  Fort  time  that  if  it  was  the  latter,  it  was  clearly 
Smith  Ry.  Co.  (1882),  16  Fed.  Rep.  906  ;  bad,  because  filed  too  late,  and  also  because 
s.  c.  3  McCrary,  581.  filed  without  the  leave  of  the  court. 

2  Wetmore  v.  St.  Paul  &  Pacific  R.  Co.  3  Sahlgaard  v.  Kennedy  (1880),  2  Fed. 
(1880),  3  Fed.  Rep.  177,  182  ;  Richter  v.  Rep.  295. 

Jerome  (1887),  123  U.  S.  247  ;  Meyer  v.  *  Wetmore  v.  St.  Paul  &  Pacific  R.  Co. 

Utah  &  Pr.  Ky.  Co.  (1883),  3  Utah,  280.  (1880),  3  Fed.  Rep.  177. 

In  Pacific  R.  Co.  v.  Mi.ssouri   Pac.  Ry.  &  Graham  v.  Boston,  Hartford,  &  Erie 

Co.  (1881),  2  McCrary,  231,  .stockholders  R.  Co.  (1886),  118  U.  S.   161  ;  Foster  v. 

brought  suit  to  have  a  decree  .set  aside  on  Man.sfield,  C.  &  L.   M.  R.  Co.  (1888),   36 

the  ground  that  the  corporate  officers  had  Fed.  Rep.  627.      In  the  last-named    case 

been  guilty  of  bad  faith  in  the  conduct  of  relief  was  refused  on  the  ground  of  the 

the  suit.     The  court  remarked  that  it  was  petitioner's  laches. 

either  an  original  bill  to  impeach  a  decree  ^  Kr,  parte   Fleming  (1864),   2    Wall, 

for  fraud,  or  a  bill  of  review  on  newly  dis-  759,  762. 

covered  facts  and  evidence  ;  but  considered  ''  Sahlgaaiil    v.    Kennedy    (1882),    13 

it  to  be  the  former,  saying  at  the  same  Fed.   Rep.   249. 


§  835.]  OBJECTIONS   TO    SALES.  813 

Nor  will  the  sale  be  opened  at  the  instance  of  a  purchaser  at 
a  receiver's  sale,  who,  on  the  ground  of  the  interest  thereby 
ac(][aired,  was  admitted  a  defendant  in  a  suit  to  foreclose  a  first 
mortgage,  with  no  right  but  that  of  appearing  at  the  taking  of 
the  account  of  the  sum  due  on  the  mortgage,  and  of  being  noti- 
fied of  the  taking  of  such  account;  but  who,  before  the  master's 
report  was  made,  had  lost  all  his  interest  in  the  mortgaged 
premises,  by  reason  of  a  sale  thereof  under  foreclosure  of  a 
second  mortgage,  where  the  sole  ground  of  his  application  is 
that  he  was  not  notified  of  the  taking  of  the  account.  Any 
interest  which  such  a  person  may  have  by  reason  of  his  owner- 
ship of  bonds  secured  by  the  mortgage  foreclosed  can  be  pro- 
tected by  proceedings  to  prevent  injustice  in  the  distribution 
of  the  proceeds  of  the  sale.^ 

The  effect  of  the  rule  that  the  acts  of  the  trustees  bind  those 
whom  they  represent,  is  considered  in  another  chapter. 

§  835.  Right  to  Relief  as  affected  by  Laches  of  Petitioner.  — 
Want  of  diligence  in  the  petitioner  in  seeking  relief  against  a 
sale  will  sometimes  be  a  decisive  ground  for  denying  application. 

Every  case  is  governed  chiefly  by  its  own  circumstances: 
sometimes  the  analogy  of  the  Statute  of  Limitations  is  applied ; 
sometimes  a  longer  period  than  that  prescribed  by  the  statute  is 
required;  in  some  cases  a  shorter  time  is  sufficient;  and  some- 
times the  rule  is  applied  where  there  is  no  statutable  bar.  It 
is  competent  for  the  court  to  apply  the  inherent  principles  of 
its  own  system  of  jurisprudence  and  to  decree  accordingly. ^ 

A  delay  of  seventeen  years  in  moving  to  enforce  claims 
embodied  in  an  agreement  of  a  company  with  preferred  stock- 
holders, the  corporate  property  having  in  the  meantime  been 
transferred  to  a  new  company  by  a  foreclosure  sale,  will  fully 
warrant  the  application  of  the  rule  of  laches.^ 

For  the  same  reasons,  where  a  foreclosure  has  become  absolute 
for  seven  years  the  court  will  refuse  to  entertain  an  application 
from  the  stockholders  to  set  aside  the  sale  on  the  ground  of 

1  Ward  V.  Moiitclair  Ry.  Co.  (1875),  time.  Nothing  can  call  forth  this  comt 
26  N.  J.  Eq.  260.  into  activity  but  conscience,  good  faith, 

2  Sullivan  v.  Portland  &  Kennebec  R.  and  reasonable  diligence.  Where  these 
Co.  (1876),  94  U.  S.  806,  citing  the  fol-  are  wanting,  the  court  is  passive,  and 
lowing  familiar  passage  from  Smith  v.  does  nothing.  Laches  and  neglect  are 
Clay,  Ambler,  645:  "A  court  of  equity  always  discountenanced,  and,  therefore, 
which  is  never  active  in  giving  relief  from  the  beginning  of  this  jurisdiction 
against  conscience  or  public  convenience,  there  was  always  a  limitation  to  suits  in 
has  always   refused  its  aid   to  State  de-  this  court." 

mands  where  a  party  has  slept  upon  his  ^  Sullivan  v.  Portlnnd  &  Kennebec  E. 

rights  and  acquiesced  for  a  great  length  of     Co.  (1876),  94  LT.  S.  8(iG. 


814  RAILWAY    BONDS    AND    MORTGAGES,       [CHAP.  XXXVII. 

fraud,  where  everything  which  was  clone  in  the  proceedings 
alleged  to  be  fraudulent  might  at  any  time  have  been  ascertained 
by  them,  if  they  had  seen  lit  to  examine  the  records.^ 

A  petition  of  stockholders  to  have  a  foreclosure  sale  set  aside 
for  fraud  will  be  dismissed  where  it  is  filed  five  years  after  the 
sale,  and  the  petitioners  do  not  allege  when  thoy  discovered  the 
fraud,  nor  give  a  satisfactory  reason  why  their  knowledge  was 
not  sooner  obtained.  ^ 

A  fortiori,  where  all  the  circumstances  alleged  to  constitute 
the  fraud  were  as  well  known  to  the  complainant  at  the  time  of 
the  transaction  on  which  his  rights  are  based  as  they  are  at  the 
time  when  the  petition  is  filed,  a  delay  of  eight  years  in  apply- 
ing for  relief,  the  property  having  been  in  the  meantime  sold, 
will  be  an  absolute  bar  to  the  enforcement  of  a  claim.  ^ 

On  the  other  hand  the  mere  fact  that  the  stockholders  are 
aware  that  the  directors  are  not  faithfully  defending  a  fore- 
closure suit  will  not  conclude  the  corporation  itself  from  seek- 
ing redress  against  a  decree  and  sale  procured  by  such  fraud,  if 
it  acts  promptly  when  freed  from  the  control  of  the  directors. 
That  the  stockholders  have  fruitlessly  requested  the  directors  to 
resign  and  employ  other  counsel,  so  far  from  throwing  on  the 
stockholders  the  peril  of  losing  the  rights  in  which  they  are 
represented  by  the  company,  if  they  do  not  personally  assert 
them  in  place  of  the  directors,  operates  of  itself,  without  more, 
only  to  aggravate  the  wrong.  ^ 

A  railroad  company  which  has  assented  to  a  decree  cannot, 
after  waiting  fifteen  months  or  more,  and  agreeing  to  everything 
done,  be  allowed  to  come  in,  file  an  answer,  and  go  back  on 
their  own  express  assent  without  bringing  forward  good  reasons 
to  account  for  this  laches  in  failing  to  set  up  what  it  asserts  to 
be  good  defences.^ 

A  bill  of  review  filed  a  few  days  before  the  sale  is  advertised 
to  take  place,  and  two  years  after  the  decree  of  foreclosure  was 
entered,  will,  in  the  absence  of  some  special  circumstances  justify- 
ing the  delay,  be  dismissed  on  the  ground  of  laches.^ 

The  taking  of  an  appeal  from  a  decree  of  foreclosure  and  an 
order  confirming  the  sale,  on  the  ground  that  the  court  has  no 

1  Graham  v.  Boston,  Hartford,  &  Erie  Co.  (1884),  11 1  U.  S.  bO^,  overruling  s.  c. 
R.  Co.  (188(5),  118  U.  S.  161.  (18S1),  6  Fed.  Rep.  641. 

2  Harwoo.l  v.  liailroail  Co.  (1872),  17  ^  Central  Trust  Co.  v.  Texas  &  St.  L, 
Wall.  78.  Ry.  Co  (188.5),  23  Fed.  Rep.  846. 

8  Coddington  v.   Railroad  Co.  (1880),  ^  Farmers'  Loan  &  Trust  Co.  v.  Green 

103  U.  S.  409.  Bay   &   M.    R.  Co,   (1881),  6   Fed.   Rep. 

♦  Paeific  R.  Co.  v.  Jlissouri  Pacific  Ry.      100. 


§§  836,  837 


OBJECTIONS    TO    SALES. 


815 


jurisdiction,  and  that  the  sale  was  constructively  fraudulent,  in 
that  the  property  was  bought  by  the  company's  solicitor  as 
trustee,  suspends  the  control  of  every  court  except  the  appellate 
court,  in  respect  to  relief  on  the  ground  of  actual  fraud.  The 
company,  therefore,  is  not  guilty  of  laches  in  seeking  such 
relief  when  it  files  a  bill  for  that  purpose  with  reasonable 
promptitude  after  the  dismissal  of  the  aj)poal.^ 

§  830.  Errors  in  or  prior  to  Decree  uot  reviewable  on  Motion  to 
set  aside  Sale.  —  Upon  an  application  to  set  aside  a  judicial 
sale  made  pursuant  to,  and  in  full  compliance  with,  a  valid 
decree  of  a  court  directing  it,  objections  to  the  sale  based  on 
errors  in  the  decree,  or  committed  by  the  court  ])i-ior  to  its 
rendition,   cannot  be  considered. ^ 

§  837.  Remedy  by  Annulment  of  Sale.  —  If  a  contractor's  lien 
extends  only  to  a  portion  of  the  road,  and  the  purchasers  do  not 
discharge  the  lien  in  money  within  a  reasonable  time  fixed  for 
that  purpose,  the  proper  remedy  is  not  to  annul  the  sale,  even 
if  the  court  has  power  to  do  it,  but  to  order  a  resale  of  the 
entire  property,  or  so  much  thereof  as  may  be  necessary  to  raise 
the  amount  due  to  the  lienholders.^ 


1  Pacific  Railroad  Co.  of  Missouri  v. 
Missouri  Pacific  Ry.  Co.  (1884),  111  U. 
S.  505. 

2  Meyer  v.  Utah  &  Pleasant  Valley  Ry. 
Co.  (1883),  3  Utah,  280. 

8  Farmers'  Loan  &  Trust  Co.  v.  New- 
man (1888),  127  U.  S.  649.  Here  the 
court  had  authorized  the  receiver  to  pur- 
chase, for  the  benefit  of  those  he  repre- 
sented, any  adverse  liens  on  the  property. 
He  made  a  contract  with  the  owners  of  a 
lien  i)aramount  to  that  of  the  mortgage, 
whereby  they  were  to  receive  for  the  same 
a  sum  of  money  secured  by  the  proceeds 
of  the  portion  of  the  road  subject  to  their 
lien,  and  were,  on  their  part,  required  to 
file  a  quit  claim  deed  and  certain  trust- 
deed  notes  in  escrow.  This  stipulation 
they  fulfilled.  Sale  of  the  property  as  an 
entirety  was  made,  and  it  was  purchased 
for  the  bondholders,  the  price  being  paid 
in  bonds,  without  the  transfer  of  anj' 
cash.  The  Circuit  Court  decreed  that 
these  lienors  were  entitled  to  the  amount 
contracted  to  be  paid  them,  and  that  if  it 
was  not  paid  within  a  certain  time  the 
sale  should  be  set  aside,  and  the  receiver 
resume  possession.  The  Supreme  Court 
held  that,  as  the  prior  lien  of  these  parties 


by  the  contract  entitled  them  to  the  pro- 
ceeds of  the  sale  of  this  particular  portion 
of  the  road,  that  agreement  imposed  upon 
the  receiver  and  the  bondholders  the  duty 
of  obtaining  from  the  court  a  modification 
of  the  decree  of  sale  which  would  have 
enabled  the  court  and  the  parties  to  know- 
how  much  was  realized  from  a  sale  of  that 
part  of  the  road  upon  which  this  prior 
lien  rested,  and  that  the  sale  of  the  mort- 
gaged property  as  an  entirety,  withor.t 
having  obtained  such  modification,  should, 
under  the  circumstances,  be  deemed  an 
election  u[)on  the  part  of  the  trustees  and 
those  whom  they  represented,  uot  to  have 
the  mortgaged  property  sold  in  parts  or 
subject  to  this  prior  lien,  and  not  to 
restrict  this  lien  to  that  portion  of  the 
road  embraced  by  the  trust  deed  under 
which  it  was  held.  The  lienors,  therefore, 
had  acquired  a  right  to  be  paid  first  out  of 
tlie  aggregate  proceeds  of  the  sale  of  the 
entire  line.  This  right  was  not  to  be  de- 
feated by  the  fact  that  the  purchase-money 
was  paid  in  bonds.  If  the  purchasers 
failed  to  pay  this  claim,  the  projierty 
would  have  to  be  sold  as  an  entirety,  or  a 
sufficiency  of  it  to  meet  this  prior  lien, 
without  annulling  the  former  sale  or  con- 


816  RAILWAY   BONDS    AND    MORTGAGES.       [CHAP.  XXXVII. 

§  838.     Declaring  Purchaser  a  Trustee  equivalent  to  Annulment,  — 

To  declare  the  purchase i"  a  trustee  of  the  property  bought  is 
practically  an  annulment  of  the  sale,  so  far  as  the  applicant  is 
concerned.  The  relief  given  against  a  fraudulent  sale  often 
takes  this  form,  especially  where  the  fraud  complained  of  is  that 
of  the  directors,^  or  of  the  directors  and  purchasers  jointly, ^  So 
also,  where  a  director  purchases  the  property  of  the  company 
without  actual  fraud,  his  fiduciary  position  renders  the  transac- 
tion a  constructive  fraud  on  the  company,  which  may  maintain 
a  suit  against  him,  or,  after  his  death,  against  his  representa- 
tives, to  enforce  a  trust  in  its  favor,  and  have  the  property 
reconveyed.  The  surrender  is,  of  course,  conditional  upon  the 
company's  paying  the  director  or  his  representatives  the  amount 
of  his  bid,  and  recouping  him  for  his  expenditures  in  operating 
the  road;  and  the  company  will  also  be  required  to  comply  with 
the  terms  imposed  by  the  court  upon  the  director,  as  purchaser. ^ 

But  where  a  director  is  himself  a  bondholder,  and  becomes 
the  purchaser  upon  foreclosure,  an  action  cannot  be  maintained 
to  impress  a  trust  upon  the  property  for  the  benefit  of  the  stock- 
holders, because  of  fraudulent  conduct  on  the  part  of  the 
directors  in  procuring  the  default,  unless,  at  least,  he  is  paid  or 
tendered  the  amount  of  his  bonds.  The  equity  of  the  stock- 
holders, if  any,  is  only  in  the  surplus  after  paying  the  bonded 
debt,   and  the  action  would  be  in  effect  a  bill  to  redeem.^ 

Nor  will  the  mere  fact  that  the  property  is  purchased  by  the 
president  in  his  individual  right  raise  a  trust  relation  between 
him  and  a  bondholder  which  will  entitle  the  latter  to  treat  him 
as  a  trustee  for  the  property  so  purchased.  ^ 

§  839.  Confirmation  of  Fraudulent  Sale  by  Legislature,  —  The 
confirmation  of  a  fraudulent  sale  by  the  legislature  is  no  bar  to 
a  suit  by  the  stockholders  to  vacate  it  on  the  groimd  of  fraud. 
To  validate  a  fraudulent  sale  as  against  those  prejudiced  by  it  is 
be3'ond  the  power  of  any  legislature.^ 

But  such  a  ratification  may  work  an  estoppel  as  regards  the 

firmation,    and    witliout    withdrawing    or  ^  Covin,£:fton    &    T.pxington  "R.    Co.    v. 

cancelling  tlu;  deed,  as  that  sale  was  sub-  Bowler's  Heirs  (1872),  9  Rnsh(Ky.),  468. 
ject  to  the  power  reserved  to  protect  and  *  Harpending   v.    Miinson    (1883),    91 

enforce   by  subseiiuent   orders   any  claim  N.  Y.   650  ;  s.  c.  12  Am.    &  Eng.  R.   R. 

or  lien  tlien  pending,  either  in  court  or  C'as.  448. 
by  its  leave,  in  a  State  court.  5  Credit  Co.    v.   Arkansas  Central    R. 

1  Harpending  v.    Mnnson    (1883),    91  Co.  (1882),  15  Fed.  Rep.  46. 

N.  Y.   050  ;  .s.  c.   12   Am.  &  Eng.  R.   R.  6  White  Mountains  R.    (X    v.   White 

Cas.  408.  .  Mountains  (N.  H.)  H.  Co.    (1870),  50  N. 

2  Dnuy  V.  Cro.ss  (1868),  7  Wall.  299.     "  H.  50  ;  s.  c.  1  Am.  Ry.  Rep.  146. 


§  840.]  OBJECTIOXS   TO    SALES.  817 

State  itself.  Thus  where  the  State,  after  foreclosing  its  statu- 
tory lien  upon  a  railroad,  brings  suit  to  rescind  the  sale,  on  the 
ground  that  there  has  been  a  fraudulent  collusion  between  the 
purchasers  and  the  commissioners  appointed  to  hold  the  sale, 
and  that  the  transferee  of  those  purchasers  acquired  the  property 
with  knowledge  of  the  fraud,  the  fact  that  the  legislature  con- 
firms the  title  of  the  transferee  constitutes  a  bar  to  the  i)art  of 
the  petition  which  demands  a  reconveyance  of  the  property  to 
the  State,  but  will  not  prevent  the  court  from  retaining  juris- 
diction of  the  cause  for  the  purpose  of  compelling  the  commis- 
sioners and  all  who  confederated  with  them  to  refund  whatever 
profits  they  may  have  corruptly  made  out  of  the  transaction.  ^ 

§  840.  Effect  of  declaring  a  Sale  void  for  Fraud.  —  (a)  As  to  Cor- 
poralion  itself.  —  The  provisions  of  a  statute  declaring  that  a 
corporation  shall  be  dissolved  by  a  sale  of  its  franchises  have 
no  application  where  the  sale  is  a  fraudulent  and  illegal  one. 
The  existence  of  the  corporation  still  continues  in  spite  of  the 
sale,  and  a  suit  brought  by  it  for  a  restoration  of  its  property 
cannot  be  objected  to  by  a  new  corporation  which  has  purchased 
the  franchises  on  the  ground  that  such  restoration  will  cause 
a  dissolution  of  the  defendant  corporation. ^ 

But  the  property  will  not  be  restored  to  the  old  corporation 
where  it  has  actually  consented  to  the  sale,  and  the  fraud 
alleged  is  that  the  purchasers  induced  it  to  withdraw  its  oppo- 
sition to  an  application  by  the  trustee  for  an  order  of  sale,  in 
consideration  of  their  agreement  to  account  for  the  property  at 
its  real  value,  and  thereafter,  by  bribing  the  trustee,  acquired 
such  property  at  a  price  much  lower  than  what  it  would  have 
brought  at  an  honestly  conducted  sale.^ 

(b)  As  to  Bondholders  and  other  Creditors.  —  When  a  fore- 
closure sale  at  which  the  property  is  bought  in  for  the  benefit  of 
the  bondholders  is  declared  fraudulent  and  void  as  against  cer- 
tain judgment  creditors,  the  mortgage  is  not  thereby  revived  as 
to  those  bondholders  who  voluntarily  take  stock  in  a  new  com- 
pany organized  by  them.  The  sale  remains  valid  except  so  far 
as  it  prejudices  the  rights  of  the  creditors  who  filed  the  bill  to 
set  it  aside,  and  those  bondholders,  if  any,  who  have  not  come 

1  State  of  Missouri  v.  McKay  (1869),  Mountains  (N.  H.)  R.  Co.  (1870),  50  N". 
43  Mo.  594.  H.  50;  s.  c.  1  Am.  Ry.  Rep.   146.     This 

2  White  Mountains  R.  Co.  v.  White  case  was  decided  on  demurrer,  and  the 
Mountains  (N.  H.)  R.  Co.  (1870),  50  N.  appellate  court  did  not  determine  what 
H.  50  ;  s.  c.  1  Am.  Ry.  Rep.  146.  precise  form  the  relief  should  take.     See 

8  White  Mountains  R.   Co.  v.  White    above. 

52 


818 


RAILWAY   BONDS   AND    MORTGAGES.       [CHAP.  XXXVII. 


into  the  reorganization  scheme  and  converted  their  bonds  into 
stock.  Hence  the  reorganizing  bondholders  cannot  maintain  a 
bill  for  the  foreclosure  of  the  mortgage  on  the  theory  that  it  is 
still  in  force  as  to  them.^ 

By  satisfying  the  judgment  creditors  they  can  keep  the 
property,  and  their  title  is  good  against  all  the  world.  The 
legal  effect  of  the  decree  avoiding  the  sale  is  that,  by  reason  of 
the  frauds  perpetrated  in  such  sale,  the  property  is  subject  to 
the  claims  of  the  creditors.  Hence  they  cannot  maintain  an 
action  to  recover  back  the  purchase-money,  for,  when  they  paid 
it  into  court,  they  were,  in  fact,  paying  off  an  incumbrance  on 
their  own  property. ^ 

Nor  can  they  be  subrogated  to,  and  obtain  the  benefit  of,  the 
decree  of  foreclosure,  upon  which  the  money  was  paid.^ 

Nor  can  they  recover  back  the  purchase-money  on  the  ground 
that  it  was  paid  under  a  mistake  of  fact.  The  mistake,  if  any, 
in  such  a  case  is  a  mistake  of  law.'* 

If  a  judgment  creditor  whose  lien  is  subsequent  to  that  of  a 
trust  deed  becomes  the  purchaser  of  the  property  at  the  fore- 
closure sale,  and  enters  satisfaction  of  his  judgments,  solely  for 
the  purpose  of  clearing  the  title,  and  without  receiving  any  con- 
sideration therefor,  and  the  sale  is  afterwards  set  aside  for 
causes  not  implicating  him,  he  may  maintain  a  bill  to  annul  the 
cancellation  of  his  judgments,  and  re-establish  their  lien.^ 


Article  IH. — Grounds  for  vacating  a  Sale. 

§  841.  Inadequacy  of  Price.  —  To  induce  a  Court  to  set  aside  a 
foreclosure  sale  on  the  mere  ground  of  the  inadequacy  of  the 
price,  it  is  not  sufficient  to  show  that  the  property  has  not 
realized  its  full  value. ^ 

The  price  must  be  so  inadequate  as  to  show  that  it  is  not  the 
result  of  fair  dealing  and  an  honest  purchase.^ 

Or,  as  it  is  sometimes  put,  the  inadequacy  must  be  such  as 


1  Barnes  v.  Chicago,  M.  &  St.  Paul  R. 
Co.  (1879),  8  Biss.  514. 

2  Railroad  Co.  v.  Soutter  (1871),  13 
Wall.  517  ;  followed  in  Barnes  v.  Chicago, 
M.  &  St.  Paul  Ry.  Co.  (1887),  122  U.  S. 
1  ;  8.  c.  7  Sup.  Ct.  Rep.  1043. 

»  Railroad  Co.  v.  Soutter  (1871),  13 
Wall.  517. 


*  Railroad  Co.  v.  Soutter  (1871),  13 
Wall.  517,  526  (Field,  J.,  dissenting). 

^  Hay  V.  Washington  &  Alexandria  R. 
Co.  (1881),  4  Hughes,  327.  See  note  to 
this  case,  1  Am.  &  Eng.  R.  R.  Cas.  517. 

6  Sahlgaard  v.  Kennedy  (1882),  13 
Fed.  Rep.  242,  248. 

■^  Turner  v.  Indianapolis,  B.  &  W.  Ry. 
Co.  (1878),  8  Biss.  350. 


§  842.] 


OBJECTIONS   TO   SALES. 


819 


will  shock  the  conscience,  and  amount  in  itself  to  conclusive  and 
decisive  evidence  of  fraud.  ^ 

Or  the  inadequacy  of  price  must  be  combined  with  additional 
circumstances  against  the  fairness  of  the  sale,  growing  out  of 
fraud,  accident,  or  some  trust  relation  of  the  parties. ^ 

No  sale  will  be  set  aside  for  inadequacy  of  price,  when  the 
sum  obtained  exceeds  the  "upset  price  "  fixed  by  the  court.^ 

A  sale  of  persoiuil  property  under  a  decree  of  foreclosure 
may  be  set  aside  for  an  advance  of  price,  before  the  same  is 
confirmed.^ 

§  842.  Actual  Fraud.  —  Suspicious  circumstances  calling  for 
explanations  are  not  to  be  viewed  in  the  light  of  after  events 
for  a  correct  interpretation.  All  the  facts  and  circumstances 
must  be  considered  as  they  existed  with  respect  to  the  property 
involved  at  the  time  action  was  had  with  regard  thereto.^ 


1  Peck  V.  New  Jersey  &  New  York  R. 
Co.  (1880),  22  Hun,  129  ;  Fidelity  Trust 
Co.  V.  Mobile  Street  Ry.  Co.  (1893),  54 
Fed.  Rep.  26. 

2  Fidelity  Trust  Co.  v.  Mobile  Street 
Ry.  Co.  (1893),  54  Fed.  Rep.  26,  where 
it  was  held  that  the  fact  that  the  bond- 
holders  were  known  to  have  authorized  a 
committee  to  bid  up  to  $400,000,  and  that 
this  deterred  others  from  bidding,  was 
not  a  sufficient  ground  for  setting  aside 
the  sale. 

8  Kropholler  v.  St.  Paul  &  Pacific  Ry. 
Co.  (1880),  2  Fed.  Rep.  302  ;  Wetmore  v. 
St.  Paul  &  Pacific  R.  Co.  (1880),  5  Dill. 
531  ;  s.  c.  3  Fed.  Rep.  177.  The  court 
said  in  the  latter  case :  "  Of  course  the 
court,  in  fixing  an  '  upset  price,'  in- 
tended to  .say  that  it  was  better  that  it 
should  sell  at  that  price  than  not  to  sell 
at  all,  and  the  court  had  taken  the  neces- 
sary means  to  get  all  the  information  on 
the  subject  possible  as  the  case  stood  at 
that  time.  It  is  wrong  to  suppose  that 
the  same  court  will  now  set  aside  the  sale, 
which  brings  a  million  and  a  half  dollars, 
because  of  the  objection  that  now,  in  the 
light  of  a  year  or  two  after  that,  in  the 
improved  circumstances  and  the  prosper- 
ous times,  in  the  value  attaching  to  that 
road,  growing  out  of  the  connections 
newly  made,  we  are  now  to  consider  the 
thing  as  of  the  present  time  in  relation  to 
its  value  at  the  time  the  sale  was  made. 
This  is  one  of  those  constant  every-day 


events  of  people  who  have  let  things  slip 
out  of  their  hands,  coming  back  after- 
wards to  endeavor  to  secure  the  value 
which  they  failed  to  recognize  or  secure 
at   the  time." 

An  elaborate  review  of  the  proper  prac- 
tice when  an  advance  bid  is  tendered  after 
the  sale  and  before  its  confirmation  will 
be  found  in  the  opinion  of  Judge  Ham- 
mond in  Blackburn  v.  Selma  R.  Co. 
(1880),  3  Fed.  Rep.  689. 

See  also  Turner  v.  Indianapolis,  B.  & 
W.  Ry.  Co.  (1878),  8  Biss.  380,  where  it 
was  said  that,  if  parties  desire  to  have  the 
sale  of  railroad  property  set  aside  for  the 
inadequacy  of  the  bid,  they  must  show 
that  some  person  who  is  responsible  will 
make  an  advance  bid.  In  Allen  v.  Mont- 
gomery &  West  Point  R.  Co.  (1847),  11 
Ala.  437,  it  was  said  by  the  court  to  be 
very  questionable  whether  a  judgment 
creditor  could,  upon  the  allegation  that 
the  sale  had  been  made  for  an  inadequate 
price,  have  the  biddings  opened,  unless  he 
off'ered  to  bid  a  larger  sum.  But  the 
point  was  not  directly  ruled  upon. 

*  Blackburn  v.  Selma  R.  Co.  (1880),  3 
Fed.  Rep.  689. 

s  Sahlgaard  v.  Kennedy  (1882),  13 
Fed.  Rep.  248.  In  this  case  the  court 
declined  to  rule  that  the  circumstances 
showed  fraud,  thus  summarizing  the  posi- 
tion of  afi'airs  at  the  time  of  the  fore- 
closure :  "  The  foreclosure  suits  hnd  been 
long  pending.    All  parties  concerned  knew 


820 


RAILWAY   BONDS   AND    MORTGAGES.       [CHAP.  XXXVII. 


S  843«  Collusion  bet-ween  Trustees  and  Purchasers.  —  The  par- 
ticipation of  the  trustee  in  a  scheme  by  which  a  purchasing 
syndicate  acquires  the  property  in  such  a  manner  as  to  defraud 
the  rest  of  the  bondholders  of  their  rights  is  an  actual,  not  a 
constructive,  fraud.  ^ 

A  bill  filed  by  a  bondholder  to  set  aside  a  sale  is  therefore  not 
demurrable  when  it  contains  allegations  tending  to  show  that 
one  of  the  trustees  under  the  mortgage  combined  with  the  pur- 
chasing bondholders  at  the  sale  to  bid  in  the  property  at  a  sacri- 
fice of  the  interests  of  the  rest  of  the  bondholders,  of  whom  the 
complainant  is  one,  and  that  the  trustee  permitted  the  property 
to  pass  into  the  hands  of  such  purchasers.'-^ 

Nor  is  a  bill  filed  by  the  mortgagor  company  for  a  like  pur- 
pose demurrable  which  alleges  that  such  mortgagor,  in  con- 
sideration of  an  agreement  by  the  combination  of  bondholders 
who  were  to  purchase  the  property  that  their  debts  would  be 
credited  to  the  full  value  of  the  property,  whatever  the  price 
actually  realized  at  the  sale  might  be,  withdrew  its  opposition 
to  a  sale  by  the  trustee;  that  the  sale  was  made  to  this  combi- 
nation of  bondholders,  who,  by  bribing  the  trustee,  obtained  the 
property  at  a  low  price;  and  that  the  mortgagor's  debts  were 
credited  only  with  the  price  which  the  purchasers  had  bid  at 
the  sale.  If  the  mortgagor,  upon  ascertaining,  several  years 
afterwards,  the  fact  of  the  bribery,  and  the  failure  of  the  pur- 
chasers to  comply  with  their  agreement  to  account  for  the 
property  at  its  real  value,  applies  for  relief  against  the  title 
thus  fraudulently  obtained  to  its  property,  it  is  entitled  to  relief 
in  some  form.  The  property  will  not  be  restored  to  it,  since  it 
consented  to  the  order  to  sell ;  but  whether  the  auction  sale 
should  be  annulled,  and  a  resale  ordered,  or  the  purchasers 
compelled  to  account  for  the  property  at  a  fair  price,  or  in 
what  precise  form  the  relief  should  be  granted,  was  not  deter- 


that,  without  relief  from  some  unknown 
quarter,  decrees  and  sales  would  eventu- 
ally follow.  The  bondholders,  represented 
by  their  trustees,  were  urging  such  de- 
crees and  sales.  In  the  meantime  the 
depreciated  bonds  were  on  the  market, 
subject  to  the  outcome  of  pending  litiga- 
tion. The  majority  resolved  on  the  course 
deemed  best  for  the  interests  of  all,  and 
urged  all  to  join  them.  The  known  end 
was  reached,  ample  opportunity  for  rescue 
having  been  given  to  the  minority  bond- 


holders to  appear,  if  they  chose  to  incur 
the  needed  responsibility  for  averting  the 
catastrophe.  They  did  not  choose  to  move 
in  the  matter,  although  invited  so  to  do. 
Where,  then,  is  the  actual  fraud  ?  Kone 
appears.  Mere  inadequacy  of  considera- 
tion at  a  judicial  sale  does  not  establish 
a  fraud." 

1  Sahlgaard  v.  Kennedy  (1882),  13  Fed. 
Rep.  242,  249. 

2  Sahlgaard  v.  Kennedy  (1880),  2  Fed. 
Rep.  295. 


§§  844,  845.]  OBJECTIONS  to  sales.  821 

mined  by  the  court  in  overruling  the  demurrer  to  the  bill  in 
question.^ 

§  844.  Collusion  between  Trustee  and  Corporate  GflBcers.  —  A 
trustee  sold  a  railroad,  under  the  power  conferred  by  the  mort- 
gage, acting  as  auctioneer  himself.  In  the  notice  of  sale  it  was 
stated  that  the  mortgage  amounted  to  82,000,000,  and  that  the 
interest  in  default  was  i70,000.  The  trustee  purchased  it  for 
the  directors,  and  organized  a  new  company,  which  went  into 
possession  of  the  property.  The  notice  of  sale  was  a  gross 
misstatement  of  the  real  position  of  the  company's  estatCo  As 
a  matter  of  fact,  less  than  $200,000  of  the  bonds  had  passed  into 
the  hands  of  bona  fide  purchasers,  and  a  large  number  had  been 
cancelled.  Besides  this,  a  considerable  amount  had  been  placed 
by  the  directors  to  secure  small  loans,  their  object  being  to  pur- 
chase the  pledged  bonds  at  a  low  price.  This  they  did,  buying 
them  for  five  cents  on  the  dollar;  and  by  this  device  they 
obtained  control  of  the  great  bulk  of  the  bonds  for  what  was 
practically  no  consideration.  The  notice  of  sale  was  therefore 
such  a  misrepresentation  regarding  the  amount  due  as  would 
preclude  the  possibility  of  any  fair  bidding,  and  indeed  to 
exclude  from  the  purchase  every  one  except  those  engaged  in 
the  perpetration  of  the  fraud.  Upon  this  state  of  facts  it  was 
held  by  the  Supreme  Court  of  the  United  States,  reversing  the 
judgment  of  the  Circuit  Court,  that  the  decree  should  be  set 
aside,  and  the  new  railroad  company  perpetually  enjoined  from 
setting  up  any  right  or  title  under  it,  the  mortgage  to  remain 
as  security  for  the  bonds  held  by  bona  fide  purchasers.^ 

§  845.  Collusion  between  Corporate  OfBcers  and  Combinations  of 
Bondholders.  —  Where  a  minority  of  bondholders  contrive  with 
officers  of  the  company  in  a  fraudulent  manner  to  sell  the 
property  at  an  immense  sacrifice  and  to  buy  it  in  themselves, 
such  sale  will  be  set  aside  at  the  instance  of  the  rest  of  the 
bondholders  and  the  lien  of  the  mortgage  declared  still  to  exist, 
and  a  resale  will  be  ordered  in  the  same  suit  for  the  benefit  of 
all  concerned.  In  another  case  the  directors  of  a  railroad  com- 
pany had  become  liable  as  indorsers  for  121,000,  on  a  contract 
for  iron  rails  furnished  for  the  road,  and  had  given,  as  col- 
lateral, '$42,000  of  an  issue  of  bonds  to  the  vendor.  Similar 
bonds  to  the  amount  of  $280,000,  which  had  never  been  issued, 
were  placed  in  the  hands  of  a  firm,  not  to  be  issued  until  the 

1  White   Mountains   R.  Co.   v.  White         2  james  r.  Railroad  Co.  (1867),  6  Wall. 
Mountains   (N.    H.)    R.    Co.   (1870),    50     752. 
N.  H.  50 ;  s.  c.  1  Am.  Ry.  Rep.  146. 


822  RAILWAY   BONDS   AND   MORTGAGES.       [CHAP.  XXXVII. 

first-named  debt  had  been  paid  and  twenty-seven  miles  of  road- 
way constructed.  When  pressed  as  indorsers  to  pay  this  debt, 
they  conceived  a  plan  to  have  this  debt  bought  in  by  other 
parties  at  a  large  discount,  and  to  have  a  foreclosure  of  the  mort- 
gage on  the  few  miles  of  road,  franchises,  outfits,  etc.,  that 
these  parties  might  buy  it  in.  It  was  foreseen  that,  if  the 
property  should  be  sold  for  this  small  amount  of  bonds,  there 
could  probably  be  an  active  competition  in  the  bids,  and  in 
order  to  deter  bidders  it  was  arranged  to  have  the  $280,000  of 
bonds  on  deposit  which  could  never  be  issued  legally,  as  the 
matter  stood,  forced  fro  forma  upon  the  first-named  creditor, 
though  he  did  not. ask  it  as  additional  collateral,  and  have  a 
sale  of  them  as  pledged  bonds,  with  the  understanding  that  the 
other  party  to  the  fraudulent  arrangement  should  bid  them  in 
at  a  nominal  sum.  They  then  allowed  the  sale  for  the  whole 
amount  of  the  bonds,  and  their  confederates  purchased  the 
property  for  less  than  its  value.  The  vendors  of  certain  loco- 
motives which  had  been  sold  under  this  foreclosure  obtained 
judgment  for  the  amount  due  them  against  the  company,  and 
filed  their  bill  to  set  aside  the  decree  and  sale  as  fraudulent. 
The  Circuit  Court  dismissed  the  bill,  but  on  appeal  the  Supreme 
Court  remanded  the  cause  with  directions  to  the  court  below 
to  hold  these  purchasers  as  trustees  to  the  complainant  creditors 
for  the  full  value  of  the  property,  from  which  they  were  to  be 
allowed  to  retain  the  amount  due  at  the  day  of  sale  on  the 
judgment  against  the  directors.^ 

That  the  directors  were  actuated  by  corrupt  motives  in  suffer- 
ing a  default  is  no  ground  for  setting  aside  the  sale,  even  if  the 
trustee  is  aware  of  the  existence  of  such  motives,  unless  it  is  also 
shown  that  there  was  also  some  collusion  between  them  and  him.^ 

An  agreement  between  creditors  to  combine  and  purchase  the 
property  will  not  of  itself  render  the  sale  fraudulent.^ 

1  Drury  v.  Cross  (1868),  7  Wall.  299.  '  syndicate,'  as  it  was  called  ;  they  were 

2  Harpciuling  v.  Munson  (1883),  91  at  liberty  to  bid;  they  were  at  liberty  to 
N.  Y.  650  ;  s.  c.  12  Am.  &  Eng.  R.  R.  come  in  and  make  themselves  parties. 
Cas.  408.  They  did  nothing  of  the  kind.     Were  the 

8  Kropholler  v.  St.  Paul  &  Pacific  R.  bondholders  who  purchased  the  road  to  be 

Co.  (1880),  2  Fed.  Rep.  302  ;  Wetmore  v.  put  into  the  condition  of  a  single  man  who 

St.  Paul  &  Pacific  R.  Co.  (1880),  5  Dill,  owned  twelve  millions  out  of  fifteen  mil- 

531.     In  the  latter  case  the  court  said  :  lions  of  bonds?     I  can  see  no  rea.son  why 

"  Because  the  men  co-operated   and  put  they  should  not  take   steps  to  have  the 

themselves  into  condition  to  buy  the  road,  road  sold,  and   buy  it  as  cheap  as  they 

it  docs  not  seem  that  they  were  therefore  could   get   it,    provided   they   cheated   or 

acting  in  any  fraudulent  manner.     They  hindered  nobody  in  the  matter."     See  also 

dfj)rived  none  of  the  ])etitioners  of  their  chapter  on  reorganization, 
rights.     They  were  at  liberty  to  join  the 


§§  846-849.]  OBJECTIONS   TO    SALES.  823 

§  846.  Surprise,  Mistake,  etc.  —  A  case  for  relief  on  the  ground 
of  surprise  is  made  out  by  a  showing  that  the  petitioner  did 
not  know  that  a  hirii;er  amount  than  that  mentioned  in  the  com- 
plaint in  the  foreclosure  suit  had  been  found  due  until  two  days 
before  the  sale ;  that  he  thereupon  took  ex  yarte  proceedings  to 
set  aside  the  judgment  and  stay  the  sale;  and  that  the  order 
staying  the  sale  was  set  aside  as  irregular  on  the  day  of  the 
sale,  too  late  to  enable  him  to  take  other  proceedings  or  to 
attend  the  sale  to  protect  his  rights.^ 

§  847.  Breach  of  Professional  Duty  by  Attorney.  —  An  attorney 
is  not  guilty  of  such  a  breach  of  professional  duty  as  will  require 
the  sale  to  be  vacated,  when,  after  appearing  for  a  railroad 
company  to  contest  a  motion  made  by  a  single  petitioning 
creditor  for  the  appointment  of  a  receiver,  he  acts  as  counsel 
for  the  trustees  of  the  bondholders  in  foreclosure  proceedings 
against  the  same  company.  There  is  no  such  conflict  of  duties 
caused  by  assuming  these  positions  successively  as  to  make  the 
two  appearances  an  anomaly  in  chancery  practice  so  great  as  to 
vitiate  the  decree. ^ 

§  848.  Sale  not  set  aside  because  same  Person  is  Trustee  under 
both  Mortgages  foreclosed.  —  The  fact  that  the  same  person  was 
the  trustee  both  of  a  first  and  a  second  mortgage  foreclosed  in 
the  same  suit  is  no  ground  for  invalidating  the  sale  at  the 
instance  of  second-mortgage  bondholders  where  no  evidence  of 
collusion  is  offered,  and  the  complainant  bondholders  had  full 
knowledge  of  the  situation  of  affairs,  and  full  opportunity  to 
intervene  as  parties  to  the  suit.'^ 

§  849.  Extension  of  Benefits  of  Reorganization  to  Bondholders 
after  Time  for  coming  in  has  passed  not  Ground  for  invalidating  Sale. 
—  The  extension  of  the  benefits  of  a  reorganization  agreement 
to  bondholders  after  the  time  for  coming  in  has  passed  is  not  a 
ground  upon  which  one  of  the  bondholders  who  joined  the  com- 
bination of  purchasers  before  that  time  can  have  the  sale  annulled. 
Agreements  of  this  kind  are  apt  to  operate  to  the  disadvantage 
of  the  poorer  and  more  helpless  bondholders,  and  the  extension 
of  their  privilege  to  all  the  bondholders,  regardless  of  the  time 
at  which  they  express  their  adhesion  to  the  scheme,  will  be 
regarded  by  a  court  of  equity  with  complacency,  at  least,  —  cer- 

1  Peck  V.  New  York  &  New  Jersey  Ry.  say  whether  the  petitioner  should  or  should 

Co.  (1881),  85  N.  Y.  246  ;  s.  c.  7  Am.  &  not  be  relieved. 

Eng.  R.  R.  Cas.  422.     But  the  court,  upon  2  ghaw  v.  Bill  (1876),  95  U.  S.  10. 

review  of  all  the  facts,  held  that  it  was  ^  Robinson  v.  Iron  Ry.  Co.  (1889),  135 

within  the  discretion  of  the  trial  court  to  U.  S.  522 ;  s.  c.  10  Sup.  Ct.  Rep.  907. 


824  RAILWAY   BONDS   AND    MORTGAGES.       [CHAP.  XXXVII. 

tainly  not  with  disfavor.  An  application  to  exclude  from  par- 
ticipation in  the  benefits  of  such  agreement,  solely  on  the  ground 
that  they  have  come  in  after  the  time  limited,  lacks  the  essen- 
tial elements  of  equity.^ 

§  850.  Foreclosure  before  Maturity  of  Principal.  —  A  sale  not 
tainted  with  fraud,  and  consummated  by  the  consent  of  the 
creditors  and  the  company,  in  pursuance  of  a  plan  of  reorgani- 
zation, will  not  be  set  aside  at  the  suit  of  some  of  the  stock- 
holders, merely  because  the  principal  of  one  of  the  mortgages 
was  not  yet  due,  when  it  appears  that  the  sums  due  for  interest 
thereon,  for  floating  indebtedness,  and  on  other  mortgages  then 
due,  was  so  great  as  to  render  foreclosure  inevitable,  especially 
when  the  complainants  do  not  offer  to  do  equity  by  paying  the 
floating  debt,  and  have  not  been  diligent  in  opposing  the  plan 
of  reorganization  and  in  attaching  the  decree  objected  to.^ 

§  851.  Excessive  Amount  of  Judgments.  —  The  provision  of  the 
New  York  Code  (§  1207),  providing  that,  "where  there  is  no 
answer,  the  judgment  shall  not  be  more  favorable  to  the  plaintiff 
than  that  demanded  in  the  complaint,"  is  intended  for  the  bene- 
fit of  defendants  who  suffer  default,  and  cannot  be  invoked  in 
an  attack  upon  a  judgment  by  one  not  a  defendant  or  interested 
in  the  defence  of  the  action.  Hence  when  the  complaint  in  a 
foreclosure  suit  states  the  amount  of  outstanding  bonds  at  a  less 
figure  than  that  found  by  the  referee  who  was  ordered  to  find  the 
amount  due,  this  provision  is  not  available  to  a  bondholder 
moving  to  set  aside  the  judgment  entered  on  the  report  and  the 
sale  thereunder.^ 

^  Walker   v.    IMontclair   &  Greenwood         ^  Peck  v.  New  York  &  New  Jersey  Ry. 

Lake  Ry.  Co.  (1879),  30  N.  J.  Eq.  525.  Co.  (1881),  85  N.  Y.  246  ;  S.C.  7  Am.  & 

2  Gary  v.   Houston   &  T.   C.    Ry.    Co.  Eng.  R.  R.  Cas.  422. 
(1892),  52  Fed.  Rep.  671. 


§  852.] 


APPEALS  IN  FORECLOSURE  SUITS. 


825 


CHAPTER  XXXVIII. 


APPEALS   FROM    DECREES   AND   ORDERS   IN   FORECLOSURE   SUITS. 


Art.  I. — Jurisdiction  and  Parties  to 
Appeals. 

Jurisdiction  in  general. 

Jurisdiction  of  Supreme  Court  of 
United  States  as  dependent 
on  Amount  involved. 

Supersedeas  Bonds. 

Who  may  appeal  in  general. 

Who  cannot  appeal  in  general. 

Purchaser  at  Foreclosure  Sale  as 
Appellant. 

Appeals  from  Decrees  against 
Receivers. 

Junior  incumbrancers  as  Appel- 
lants. 

Stockholders  as  Appellants. 

Company  as  Party  to  Appeal. 

Trustee  as  Party  to  Appeal. 
—  Appealable   Decrees     and 
Orders. 

Consent  Decrees. 

Discretionary  Orders. 

Final  Decrees  in  general. 

Decree  dismissing  Cross-bill 
not  final. 


§  852. 
853. 


854. 
855. 
85t3. 
857. 

858. 

859. 

860. 

861. 

862. 

Art.    II. 

§863. 
864. 
865. 
866. 


§  867.    Foreclosure  Decree  final. 

868.  Decrees  final  on  Confirmation  of 

Sale. 

869.  Decrees  setting  aside  Sales  not 

final. 

870.  Finality   of   Decrees    providing 

for  Reference  to  Master. 

871.  Appealability    of    Interlocutory 

Orders. 

872.  Appeal    from    one    of    several 

Decrees. 
Art.  III.  — What  Appeal  brings  up  for 
Review  and  Effect, 
§  873.    What  Rulings  of  Lower  Court 
reviewable. 

874.  Rulings  not  prejudicial  to  Ap- 

pellant not  reviewable. 

875.  Objections     not     presented     to 

Lower   Court    not    reviewable 
on  Appeal. 

876.  Effect  of  Appeal  on  Control  of 

Property. 

877.  Decree  for  Deficiency,  when  not 

appealable. 


Article  I.  —  Jurisdiction  and  Parties  to  Appeals. 

§  852.  Jurisdiction  in  general.  —  For  purposes  of  appeal  to 
United  States  Supreme  Court,  it  is  not  necessary  to  inquire 
when  Circuit  Court  first  obtained  jurisdiction  of  suit.  It  is 
sufficient  if  it  had  jurisdiction  when  decree  appealed  from  was 
rendered,^ 

The  appellate  jurisdiction  of  courts  is  ordinarily,  of  course, 
fixed  without  reference  to  any  particular  case;  but  it  has  been 
held  that  the  legislature  has  power  to  confer  upon  a  court  of 
appeals  already  in  existence  the  right  to  hear  appeals  in  special 


1  Pacific  Railroad  v.  Ketchum  (1879),  101  U,  S,  289. 


826  EAILWAY   BONDS   AND   MORTGAGES.       [CHAP.  XXXVIII. 

cases.  Such  a  law,  however,  is  not  constitutional,  unless  it 
leaves  the  judicial  functions  untrammelled.  The  mere  enumera- 
tion therein  of  the  questions  referred  to  the  court — those  ques- 
tions being  all  necessarily  involved  in  the  decision  appealed 
from  —  neither  enlarges  nor  restricts  the  powers  of  the  court, 
nor  invests  it  with  original  jurisdiction.^ 

§  853.  Jurisdiction  of  Supreme  Court  of  United  States  aa 
dependent  on  Amount  involved.  —  The  matter  in  dispute  on  which 
the  jurisdiction  of  the  Supreme  Court  of  the  United  States 
depends  is  "the  matter  which  is  directly  in  dispute  in  the 
particular  cause  in  which  the  judgment  or  decree  sought  to  be 
reviewed  is  rendered,"  and  it  is  not  allowable,  for  the  purpose 
of  determining  its  value,  to  estimate  its  collateral  effect  in  a 
subsequent  suit  between  the  same  or  other  parties.  Thus  a 
decree  in  a  foreclosure  suit  brought  by  some  of  the  bondholders 
to  enforce  the  payment  of  interest  amounting  in  the  aggregate 
to  less  than  So,  000  is  not  appealable,  the  only  matter  directly 
involved  being  the  right  of  the  complainants  to  have  the  mort- 
gaged property  sold  to  pay  the  several  amounts  due  to  them 
respectively  on  their  bonds.  ^ 

Where  parties  severally  assert  in  the  same  suit  a  separate 
course  of  action,  the  decrees  which  are  rendered  in  favor  of  the 
complainants  cannot  be  joined  to  render  the  amount  sufficient 
to  give  the  Supreme  Court  jurisdiction. ^  If  some  of  the  decrees 
in  such  a  case  are  for  more  than  $5,000,  and  some  for  less,  the 
appeal  will  be  retained  as  to  the  former,  and  dismissed  as  to 
the  latter.* 

If  a  bondholder  sues  in  the  first  place  for  interest  amounting 
to  more  than  -15,000,  and  after  amending  his  complaint  by  per- 
mission of  court  obtains  judgment  for  less  than  $5,000,  the 
result  as  regards  the  jurisdiction  of  the  Supreme  Court  is  the 
same  as  though  he  had  originally  brought  suit  for  an  amount 
below  jurisdictional  limit. ^ 

1  State  of  Maryland  v.  Northern  Cen-  »  Farmers'  Loan  &  Trust  Co.  ?;.  "Water- 
tral  Ry.  Co.  (1861),  18  Md.  193.                      man  (1882),  106  U.  S.  265. 

Upon  a  question  of   priority  of  judg-  *  Hassell,  Trustee,    v.    Wilcox  (1885), 

ment  liens,  an  objection  to  the  jurisdic-  115  U.  S.  598. 

tion  of  the  court  to  ajjpoint  receivers  for  ^  Opelika   City  v.   Daniel  (1883),   109 

a  corporation,  to  include  other  ])roperty  U.  S.  108. 

than    that   upon  which   the    complaining  An  appeal  to  the  Court  of  Appeals  of 

creditors   claim   a   lien  is  waived,  unless  Kentucky  may  be  taken  from  a  judgment 

taken    in    limine.      Temple    v.    Glasgow  placing  a  railroad  in  the  hands  of  a  re- 

(1897),   80  Fed.  Rep.  441.  ceiver,  without  regard  to  the  amount  in 

2  Bruce  v.  Manchester  &  Keene  Rail-  controversy.  Nasliville,  C.  &  St.  L.  Ry.  Co. 
road  (1885),  117  U.  S.  514.  v.  Mattingly  (1897),  40  S.  W.  Rep.  673. 


§§  854,  855.]  APPEALS   IN    FORECLOSURE   SUITS.  827 

§  854.  Supersedeas  Bonds.  —  A  supersedeas  bond  should  not 
be  exacted  by  a  i'edoral  court  from  a  receiver  who  appeals  in 
good  faith  from  judgment  against  him  in  action  brought  in 
iScate  court  under  authority  of  United  States  law  permitting  him 
to  be  sued  in  that  court. -^ 

Appeal  from  a  decree  in  favor  of  an  appellant  suspends  execu- 
tion of  decree.  A  supersedeas  bond  to  suspend  a  decree  is 
required  only  in  cases  from  an  adverse  decree.  Where  the 
defendant  hies  a  cross-appeal,  he  need  not  file  a  Kupersedeas 
bond  if  there  has  also  been  an  appeal  by  complainant,  for  the 
appeal  of  the  latter  from  the  decree  in  his  favor  has  already 
effected  a  stay  of  its  execution.  ^ 

A  supersedeas  in  connection  with  an  appeal  is  a  statutory  rem- 
edy. To  obtain  it,  the  required  conditions  must  be  strictly  com- 
plied with.  Time  is  an  essential  element  in  the  proceedings, 
which  can  be  disregarded  by  neither  court  nor  judges.  There 
was  held  to  be  no  supersedeas  as  to  the  decree  in  case  cited  below, 
as  the  application  and  bond  for  it  were  filed  more  than  sixty 
days  after  the  decree,  the  parties  filing  it  having  been  guilty  of 
the  delay  themselves.  A  court  cannot  enter  a  nu7ie  pro  tunc 
order  to  cure  the  defect,  unless  the  delay  has  been  caused  by  the 
court  itself  for  its  convenience.  ^ 

§  855.  Who  may  appeal  in  general.  —  Any  one  who  is  adversely 
affected  by  a  decree  may,  where  the  matter  in  dispute  involves 
a  sufficient  amount,  appeal.* 

A  bondholder  coming  into  a  reorganization  scheme  which 
includes  the  issue  of  a  new  mortgage  after  the  sale,  and  an 
application  of  part  of  the  proceeds  of  such  mortgage  to  the  pay- 
ment of  expenses  of  trustees,  has  a  right  to  intervene  and  be 
heard  in  regard  to  the  amount  of  the  compensation  to  be  allowed, 
and  to  appeal  from  an  adverse  decision.  Where  a  purchasing 
committee  of  bondholders  has  been  formed  to  carry  out  the 
reorganization  scheme,  the  right  of  appeal  may  be  exercised  by 
that  body  in  behalf  of  all  the  bondholders.^ 

This  privilege  of  appeal  may  sometimes  be  asserted  by  bond- 
holders who  are  allowed  to  intervene  as  defendants  in  a  fore- 
closure suit,  subsequently  to  the  bill's  being  taken  pro  confesso 
and  a  decree  entered  accordingly,  and,  as  defendant  interveners, 

1  Central  Trust  Co.  v.  St.  Louis,  A.  &  *  Ex  parte  Railroad  Company  (1877), 
T.  Ry.  Co.  (1870),  41  Fed.  Rep.  551.  95  U.  S.  221. 

2  Bronson  v.  La  Crosse  &  Milwaukee  ^  Williams  v.  Morgan  (1883),  111  U.  S. 
R.  Co.  et  al.  (1863),  1  Wall.  405.  684. 

^  Sage  ct  al.  v.  Central  Railroad  Co.  of 
Iowa  et  al.  (1876),  93  U.  S.  417. 


828  RAILWAY    BONDS    AND    MORTGAGES.       [CHAP.  XXXVIII. 

take  exceptions  to  the  report  of  a  master  in  regard  to  tlie  con- 
firmation of  that  decree.  In  such  a  case  leave  to  appeal  from 
injurious  parts  of  decree  cannot  be  refused  on  ground  that  bill 
has  been  taken  pro  co7ifesso,  when  decree  entered  thereupon 
does  not  end  the  case,  the  final  decree  being  only  rendered  after 
a  number  of  orders,  references,  and  reports  have  been  made, 
and  at  a  time  when  the  petitioners  for  leave  to  appeal  have 
become  actual  parties.^  The  right  of  the  bondholders  to  prose- 
cute an  appeal  from  a  foreclosure  decree  through  the  trustees  is 
not  affected  by  the  fact  that,  after  the  rendition  of  that  decree, 
certain  lien  creditors,  who  are  joined  as  parties  defendant,  file  a 
cross-bill,  seeking  to  invalidate  a  prior  lien  set  up  by  another 
defendant.  Such  a  proceeding  cannot  in  any  wise  abridge  the 
right  of  trustees  to  enforce  the  mortgage,  and  has  no  bearing 
upon  questions  presented  for  consideration  by  the  bill  asking 
for  foreclosure. 2 

Where  a  decree,  for  instance,  on  a  petition  in  intervention  by 
the  holder  of  a  judgment  for  personal  injuries  against  a  railroad 
company,  under  §  1528,  Gen.  St.  S.  C.  1882,  in  a  foreclosure  suit, 
claiming  priority  of  lien  to  the  mortgage,  adjudicates  priority  to 
the  judgment,  finds  the  amount  due,  and  decrees  that  the  priority 
must  be  secured  in  any  order  of  sale  of  the  railroad  thereafter 
made,  an  appeal  will  lie  from  that  decree,  though  the  main 
suit  may  not  have  reached  a  final  decree. ^ 

§  856.  "Who  cannot  appeal  in  general.  —  One  who  is  neither  an 
original  party  to  the  suit  nor  an  intervener,  whether  in  his 
individual  capacity  or  by  representation,   cannot  appeal.* 

Under  this  rule  no  appeal  can  be  taken  by  one  whose  petition 
to  be  allowed  to  intervene  to  protect  an  alleged  interest  in  the 
bonds  which  are  the  subject  of  the  suit  is  denied.^ 

The  principle  that  no  one  but  an  actual  party  to  the  suit  can 
appeal,  involves  the  corollary  that  the  administrator  of  one 
who  was  not  a  party  cannot  acquire  the  right  to  prosecute  an 
appeal  already  in  progress  simply  by  filing  letters  testamentary. 
He  must  first  be  admitted  as  a  party  in  the  lower  court. ^ 

1  Ex  parte   Jordan  (1876),    94    U.    S.  578  ;  Guion  v.  Liverpool,  London,  &  Globe 

248.  Ins.  Co.  (1883),  109  U.  S.  173  ;  Farmers' 

«  Bronson  v.  La  Crosse  R.  Co.  (1863),  Loan  &  Trust  Co.  v.  Waterman  (1882),  106 

2  Black,  528.  U.  S.  269. 

8  Central  Trust  Co.  of  New  York  v.  *  Indiana  Southern  R.  Co.  v.  Liver- 
Madden  (1895),  70  Fed.  Rep.  451  ;  s.  c.  pool,  London,  &  Globe  Ins.  Co.  (1883), 
17  C.  C.  A.  31.  109  U.  S.  168. 

*  Ex  parte  Cutting  (1876),    94  U.  S.  «  State  jj.  Florida  Central  R.  Co.  (1876), 

14;  Ex  parte  Cockcroft  (1881),  104  U.  S.  15  Fla.  690. 


§  856. J  APPEALS   IN    FORECLOSURE   SUITS.  829 

Nor  can  an  appeal  be  taken  from  a  decree  by  one  who,  though 
a  party,  is  in  no  way  affected  by  what  is  decreed.  Thus  a 
trustee  who  has  sold  the  mortgaged  property  pursuant  to  a 
decree,  providing  that  the  purchasers  shall  pay  such  back  claims 
as  may  finally  be  adjudged  proper,  has  no  interest  in  the  contro- 
versy afterwards  conducted  between  the  holders  of  those  claims 
and  the  purchasers,  and  cannot  be  a  party  to  an  appeal  from  the 
decree  determining  that  controversy.^ 

Nor  can  one  who  is  a  party  merely  in  a  representative  capac- 
ity appeal,  unless  he  appeals  for  the  whole  body  of  those  whom 
he  represents.  A  petition  by  a  trustee  to  be  allowed  to  take  an 
appeal  for  a  small  minority  of  the  bondholders,  against  the 
interests  of  a  large  majority  who  had  agreed  upon  the  decree, 
may  be  properly  denied.^ 

The  representative  character  of  the  trustee  need  not  be  stated 
expressly  in  the  order  to  the  clerk  to  enter  the  appeal.  In  a 
case  in  which  this  objection  was  raised  the  court  said :  "  [The 
trustee]  in  his  character  as  trustee,  was  a  party  to  the  proceed- 
ings, and  it  was  against  him  in  that  character  that  the  decree 
appealed  for  was  made.  It  would  be  hypercritical  to  construe 
the  order  to  the  clerk  to  enter  the  appeal  as  having  been  intended 
to  assert  the  right  of  appeal  in  any  other  character  or  relation 
than  that  in  which  he  was  party  to  the  case,  and,  as  such, 
entitled  to  take  the  appeal. 

"The  order  should  be  fairly  construed  with  reference  to  the 
relation  of  the  appellant  to  the  proceeding,  and  the  nature  of 
the  decree  against  him.  Construing  the  order  thus,  he  is  here 
on  the  appeal,  as  trustee,  representing  the  first-mo7'tgage  bond- 
holders. "  ^  The  only  party  who  can  assign  as  error  the  refusal 
of  the  court  to  dismiss  a  bill  for  failure  to  reply  to  a  plea  to  the 
jurisdiction  is  the  party  who  submits  the  plea.  Hence,  when 
one  defendant  pleads  to  the  jurisdiction  and  another  answers 
setting  up  an  independent  controversy,  and  a  final  decree  is 
entered  sustaining  the  rights  set  up  in  the  answer,  no  notice 
having  been  taken,  while  the  suit  was  in  progress,  of  the  plea 
to  the  jurisdiction,  the  complainant  cannot  have  his  bill  dis- 
missed for  failure  to  reply  to  that  plea,  especially  after  an  appeal 

1  Farmers'  Loan  &  Trust  Co.  v.  Water-  view  to  appealing  in  their  own  names  from 
man  (1882),  106  U.  S.  269.  the  decree,  and  such  an  appeal  was  consid- 

2  Sage  V.  Central  R.  Co.  of  Iowa  (1876),     ered  properly  taken. 

93  U.  S.  417.     In  this  case  these  minority  8  Tome  v.   King  (1885),  64  Md.  166  ; 

bondholders  were  allowed  afterwards  to  he     s.  c.  21  Atl.  Eep.  279. 
made  parties  to  the  proceedings,  with  a 


830  RAILWAY   BONDS   AND    MORTGAGES.       [CHAP.  XXXVIII. 

has  been  taken  and  the  defendant  who  submitted  the  plea  is  not 
a  party  thereto.  ^ 

§  857.  Purchaser  at  Foreclosure  Sale  as  Appellant.  —  A  pur- 
chaser at  a  foreclosure  sale,  although  not  a  party  to  the  suit, 
will  in  some  cases  be  allowed  to  appeal  from  decree,  upon  prin- 
ciple that,  as  he  subjects  himself  by  his  purchase  to  the  juris- 
diction of  the  court,  in  so  far  as  the  purchase  itself  is  concerned, 
and  can  be  compelled  to  perform  his  agreement  specifically,  he 
acquires  a  right  to  appear  and  claim  such  relief  as  he  is  entitled 
to  by  the  rules  of  equity  procedure.^ 

§  858.  Appeal  from  Decrees  against  Receivers.  —  A  receiver 
cannot,  as  a  general  rule,  question  a  decree  rendered  for  or 
against  him  by  the  court  which  appointed  him,  but  a  person 
aggrieved  by  such  a  decree  may  appeal,  in  a  proper  case,  to  a 
higher  court.  ^ 

An  appeal  by  the  receiver  himself  is  allowable  whenever  he 
occupies  the  position  of  a  real  party  in  interest  with  regard  to 
the  subject-matter  of  the  decree.  He  may  appeal  from  a  decree 
rendered  after  the  sale  of  the  premises,  directing  him  to  pay 
into  court  a  certain  sum  of  money,  the  balance  found  to  be  due 
from  him  on  the  settlement  of  his  accounts.* 

If  a  person  is  not  only  receiver,  but  also  a  bondholder,  and  in 
the  latter  capacity  will  be  obliged,  as  the  result  of  the  decree 
fixing  the  amount  of  the  commissions  of  the  several  receivers 
and  trustees,    to  pay  his  co-receivers  and  the  trustees  a  large 

^  ChifaQ:o   &   Alton    R.    Co.   v.   Union  Sureties  signing  appeal  bonds,  stay  bonds, 

Rolling  Mill  Co.  (1884),  109  U.  S.  702.  delivery  bonds,  and  receipts  under  writ  of 

2  Blossom  V.  The  Milwaukee,  etc.  Rail-  attachment,   become  quasi  parties  to  the 

road  Co.  (1863),  1  Wall.  655.    In  the  course  proceedings,  and  subject  themselves  to  the 

of  the  argument  leading  up  to  the  prin-  jurisdiction  of  the  court,  so  that  summary 

ciple   enunciated   in  the   text,    the   court  judgments  may  be  rendered  on  their  bonds 

used  the  following  language:  "He  can-  or  recognizances.     So  in  case  of  a  creditor's 

not   appeal    from    the   original    decree   of  bill  or  other  suit  by  which  a  fund  is  to  be 

foreclosure,  nor  from  any  other  order  or  distributed  to  parties,  some  of  which  are 

decree  of  the  court  made  prior  to  his  bid.  not  before  the  court  ;  these  are  at  liberty 

It,  however,  seems  to  be  well  settled  that  to  come  before   the  master  after  the  de» 

after  a  decree  adjudicating  certain  rights  crees,  and  establish  their  claims  to  share 

between  the  parties  to  a  suit,  other  per-  in  the  distributions."     To  the  same  effect 

sons  having  no  previous  interest  in  the  liti-  is  Central  Trust  Co.  v.  Grant  Locomotive 

gation  may  become  connected  with  the  case  Works  (1890),    135  U.  S.    207;  s.  c.  43 

in  the  course  of  the  subsequent  proceed-  Am.  &  Eng.  R.  R.  Cas.  504. 
ings  in  such  a  manner  as  to  subject  them  ^  Melandy  v.  Barbour  (1884),   78  Va. 

to  the  jurisdiction  of  the  court  and  render  544;    s.  c.    25  Am.   &  Eng.  R.    R.    Cas. 

them   liable  to  its  order  ;  and  that  they  622. 

may  in  like  manner  acquire  rights  in  re-  *  Hinckley     v.     Gilman,     Clinton,    & 

gard  to  the  subject-matter  of  the  litiga-  Springlield  R.  Co.  (1876),  94  U.  S.  467. 
tion,  which  the  court  is  bound  to  protect. 


§§  859-862.]  APPEALS   IN    FORECLOSURE   SUITS.  831 

sura  above  what  he  is  entitled  to  as  a  receiver,  he  is  entitled  to 
appeal,  1 

§  859.  Junior  Incumbrancers  as  Appellants.  —  A  junior  incum- 
brancer cannot  contest  the  propriety  of  a  judgment  against  the 
foreclosing  mortgagor  who  did  not  appeal,  without  showing  that 
he  was  or  might  be  aggrieved  by  it,  if  allowed  to  stand.  But 
where  it  appears  from  the  complaint  that  the  mortgagor  is  an 
insolvent  corporation,  that  executions  against  it  are  being 
returned  unsatisfied,  that  proceedings  by  sequestration  and 
creditors'  bills  have  been  instituted  against  it,  and  that  the 
creditors  are  struggling  against  each  other  to  save  themselves, 
the  court  will  assume  that  a  junior  incumbrancer  has  sufficient 
interest  in  the  amount  of  the  judgment  against  the  mortgagor  to 
enable  him  to  contest  it.'^ 

§  860.  stockholders  as  Appellants.  —  As  a  corporation  is  an 
artificial  being  reprcseniing  the  whole  body  of  stockholders, 
no  individual  stockholder  can  prosecute  an  appeal  from  a  judg- 
ment against  the  corporation. ^  On  the  other  hand,  it  has  been 
suggested  by  a  court  which  denied  a  stockholder  permission  to 
become  a  party  defendant,  and  make  answer  and  defence 
after  the  rendition  of  the  final  decree  in  a  foreclosure  suit, 
that  he  might  possibly  be  made  a  party  for  the  purpose  of 
appealing.^ 

§  861.  Company  as  Party  to  Appeal.  —  Where  the  proceeds  of 
the  sale  are  less  than  one-half  the  indebtedness,  the  company  is 
not  a  necessary  party  to  an  appeal  taken,  after  the  confirmation 
of  the  sale,  from  a  decree  declaring  certain  receiver's  certificates 
to  be  a  lien  on  such  proceeds,  unless,  perhaps,  where  the  law 
makes  the  stockholders  individually  liable  for  a  deficiency  in 
the  proceeds.^ 

§  862.  Trustee  as  Party  to  Appeal.  —  If  a  decree  is  entered  in 
a  State  court  against  a  railroad  company  and  the  trustees,  and 
an  appeal  is  thereupon  taken  to  the  appellate  court  of  the  State 
by  the  company  alone,  the  trustees  having  no  interest  in   the 


1  Tome  V.  King  (1885),  64  Md.  166  ;  ings  Bank  v.  Pacific  Ry.  Co.  (1896),  47 
s.  c.  21  Atl.  Rep.  279.  Pac.  Rep.  60. 

2  Jesnp  V.  City  of  Racine  (1861),    14  ^  State  t).  Florida  Central  R.  Co.  (1876), 
Wis.  331.  15  Fla.  690,  725. 

An  adjudication  as  to  the  rights  of  sub-  *  Ex  parte  Brown  (1877),  58  Ala.  536  ; 

sequent  lienors  will   not  be  reviewed  on  s.  c.  21  Am.  Ry.  Rep.  101. 
appeal  where  the  proceeds  of  a  foreclosure  ^  Mercantile  Trust  Co.  v.  Kanawha  & 

sale  were  not  more  than  sufficient  to  satisfy  C.  Ry.  Co.  (1893),  58  Fed.  Rep.  6;  s.  c. 

two  superior  liens.     Illinois  Trust  &  Sav-  7  C.  C.  A.  3. 


832  RAILWAY    BONDS    AND    MORTGAGES.       [CHAP.  XXXVIII. 

result,  the  company,  upon  affirmation  of  the  decree,  can  bring  a 
writ  of  error  to  the  Supreme  Court  of  the  United  States  without 
joining  the  trustees  as  parties.^ 

Article  II.  —  Appealable  Decrees  and  Orders. 

§  863.  Consent  Decrees,  —  A  consent  decree  cannot,  as  a  gen- 
eral rule,  be  appealed  from.^  But  section  692  of  the  Revised 
Statutes,  providing  that  an  appeal  shall  be  allowed  from  all 
final  decrees  in  the  Circuit  Courts,  when  the  matter  in  dispute 
exceeds  15,000,  and  that  the  Supreme  Court  "shall  receive, 
hear,  and  determine  such  appeals,"  has  been  held  to  make 
appeals,  within  the  prescribed  limits,  a  matter  of  right.  The 
Supreme  Court  will  not  consider  any  errors  assigned  which  were 
in  law  waived  by  the  consent,  but  it  must  still  receive  and 
decide  the  case.  If  all  the  errors  complained  of  come  within 
the  waiver,  the  decree  below  will  be  affirmed,  but  only  after 
hearing.^ 

§  864.  Discretionary  Orders  not  reviewable.*  —  The  action  of  a 
lower  court  in  denying  relief  from  the  sale,  asked  for  by  bond- 
holder on  ground  of  mistake  and  surprise,  is  not  subject  to 
reversal  on  appeal,  where  it  appears  that  the  sale  was  duly 
advertised;  that  petitioner  obtained  no  stay;  that  he  offered  no 
proof  of  value  of  bonds,  or  even  that  he  owned  them ;  that  the 
property  may,  so  far  as  the  evidence  goes,  have  been  sold  at  an 
adequate  price ;  that  petitioner  did  not  offer  any  definite  sum 
which  he  would  pay  upon  resale,  or  show  that  he  was  able  to 
bid  off  the  property;  and,  finally,  that  he  was  allowed  to  come 
into  a  reorganization  on  same  footing  as  other  bondholders.^ 

Nor  does  an  appeal  lie  from  order  of  lower  court  denying 
motion,  in  pending  suit,  to  permit  a  person  to  intervene  and 
become  a  party  ;^  nor  from  an  order  granting  a  stay  of  sale,  if, 
in  view  of  facts  before  court,  the  order  directing  the  sale  was 
an  exercise  of  discretionary  powers.  Having  the  power,  in  the 
exercise  of  its  discretion,  to  vacate  the  order  of  sale  absolutely, 
or  to  modify  it,  the  court  can  attach  any  conditions  it  sees  fit 

1  Norwicli  &  AVorcester  R.  Co.  v.  John-  *  Central  Trust  Co.  v.  Grant  Locomo- 

son  (1872),  U,  Wall.  8.  tive  Works  (1889),   135  U.  S.  207  ;  s.  c. 

■•^  State  of  Tennessee  v.  McMinnvillo  &  43  Am.  &  Ya\^.  R.  R.  Ca.s,  503. 

Manchester  R.  Co.  (1880),  6  Lea  (Tenn.),  ^  Peck  v.  New  York  &  New  Jersey  Ey. 

369  ;  s.  c.  4  Am.  &  Eng.  R.    R.  Cas.  95  ;  Co.  (1881),  85  N.  Y.  246. 

Hayne  on  New  Trial  and  Appeal,  §  282.  8  Ex  parte   Cutting  (1876),  94    U.  S. 

8  Pacific  Railroad  v.   Ketchuin  (1879),  14. 
101  U.  S.  289. 


§§  865-867.]  APPEALS    IN    FORECLOSURE    SUITS.  833 

to  the  affirmance  of  the  order,  and  can  therefore  grant  a  stay, 
and  give  leave  to  review  any  a})plication  to  vacate  the  order 
which  may  previously  have  been  rejected.^ 

The  refusal  of  the  lower  court  to  grant  leave  to  file  a  cross- 
bill constitutes  no  ground  of  appeal,  when  it  is  discretionary.  ^ 

No  appeal  lies  from  order  amending  pleadings  in  an  equity 
proceeding.  3 

An  order  authorizing  the  issue  of  receiver's  certificates  is  in 
one  sense  a  matter  within  the  discretion  of  the  court,  but  not  in 
such  a  sense  as  to  prevent  an  appeal  from  the  order.  As  such 
action  necessarily  raises  the  question  whether  the  court  has 
invaded  established  rights  of  the  lien  creditors,  contrary  to  law, 
the  latter  are  entitled  to  take  an  appeal  on  the  point  whether 
the  discretionary  power,  if  it  is  such,  has  been  exercised  in  a 
manner  which  cannot  be  reviewed  in  the  appellate  court. ^ 

§  865.  Final  Decree  in  general.  —  A  decree  is  final  for  the 
purposes  of  appeal,  when  it  terminates  the  litigation  between 
the  parties  on  the  merits,  and  leaves  nothing  to  be  done  but  to 
enforce  by  execution  what  has  been  determined.^ 

§  866.  Decree  dismissing  Cross-bill  not  Final.  —  The  original  bill 
and  cross-bill  constitute  one  suit.  A  decree  dismissing  a  cross- 
bill disposes  of  a  proceeding  simply  incidental  to  the  principal 
matter  in  litigation,  and  is  therefore  interlocutory,  and  not 
reviewable  except  upon  appeal  from  final  decree.*^ 

§  867.  Foreclosure  Decree.  —  A  decree  of  foreclosure  in  the 
ordinary  form,  declaring  nature  and  extent  of  default,  the 
breach  of  condition  which  justifies  foreclosure,  and  amount  due 
on  account  of  the  breach,  and  ordering  a  sale  of  the  property  in 
the  event  of  money  not  being  paid  at  a  certain  date,  is  the  final 
decree  which  determines  and  fixes  the  rights  of  the  parties,  and 
from  which  an  appeal  lies.'^ 

1  Syracuse  Savings  Bank  v.  Syracuse  Appellate  Proc,  §  90.  See  also  Central 
R.  Co.  (1882),  88  N".  Y.  110  ;  s.  c.  9  Am.  Trust  Co.  v.  Grant  Locomotive  Works 
&  Eng.  R.  R.  Cas.  585.  (1889),  135  U.   S.   207  ;  s.  c.   43  Am.  & 

2  Southern    Indiana   R.    Co.  v.  Liver-  Eng.  R.  R.  Cas.  503. 

pool,   London,    &  Globe  Ins.   Co.  (1883),  A  decree,  as  a  rule,  is  not  regarded  as 

109  U.  S.  168.  absolutely  final  until  the  end  of  the  term  ; 

3  State  V.  Brown  (1885),  64  Md.  199  ;  but  its  finality  becomes  fixed  before  that 
s.  c.  1  Atl.  Rep.  54  ;  6  Atl.  Rep.  172  ;  time,  if  the  party  against  whom  it  is 
24  Am.  &  Eng.  R.  R.  Cas.  192.  rendered   makes  a  motion  to   rescind  it, 

*  Farmers'    Loan    &    Trust   Co.,    Peti-  and  the  motion  is  denied.     Railroad  Co. 

tioner  (1888),  129  U.  S.  206  ;  s.  c.  9  Sup.  v.  Bradleys  (1868),  7  WaU.  575. 
Ct.  Rep.  265.  6  Ex  parte    Railroad   Co.    (1877),    95 

s  St.  Louis,  Iron  Mountain,  &  Southern  U.  S.   225. 
R.  Co.  V.  Southern  Express  Co.  (1882),  108  ''  Chicago,   D.   &  Vincennes  R.  Co.   v. 

U.  S.  24  ;  s.  c.  2  Sup.  Ct.  Rep.  6  ;  Elliot's  Fosdick  (1882),  106  U.  S.  47,  70. 

53 


834  RAILWAY    BONDS   AND    MORTGAGES.       [CHAP.  XXXVIII. 

The  merits  of  the  controversy  are  then  finally  settled,  and 
subsequent  proceedings  are  simply  a  means  of  executing  the 
decree.  1 

For  like  reasons,  an  order  made  in  obedience  to  mandate 
from  the  Supreme  Court,  ascertaining  amount  of  interest  due  on 
the  mortgage  bonds,  directing  payment  within  one  year,  and 
providing  for  an  order  of  sale  in  default  of  payment,  is  a  final 
decree^  to  the  extent  that  any  person  aggrieved  by  supposed 
error  in  finding  the  amount  of  interest,  or  in  court  having 
omitted  to  carry  out  the  entire  mandate  of  the  Supreme  Court, 
may  appeal  from  it.^ 

A  decree  of  sale  of  mortgaged  premises  is  a  final  decree.^ 

It  is  essential  to  the  appealability  of  a  foreclosure  decree  that 
it  should  determine  the  amount  of  the  debt  which  must  be  paid 
in  order  to  stop  the  sale,  and  the  amount  of  the  mortgaged 
property  which  is  to  be  sold,  if  that  amount  is  not  paid.'*  But 
it  is  none  the  less  final  because  the  priorities  of  conflicting 
liens  and  the  amount  of  bonds  to  be  paid  off  are  left  to  be  settled 
by  subsequent  decrees,^  or  because,  at  the  time  of  the  decree, 
there  are  still  left  undetermined  some  exceptions  to  a  master's 
report,  not  relating  to  the  trustee's  claim,  but  collateral  to  the 
suit,  and  concerning  the  defendants  alone. ^ 

A  decree  dissolving  a  temporary  injunction  restraining  a 
foreclosure  sale,  and  directing  the  sale  to  proceed,  simply 
relegates  the  rights  of  the  parties  to  the  position  in  which  they 
were  before  the  injunction,  and  is  necessarily,  therefore,  a  final 
decree. ''^ 

So  also  a  decree  dissolving  a  temporary  injunction,  obtained 
by  bondholders  to  restrain  an  execution  sale,  no  relief  besides 
the  injunction  being  asked  for,  is  a  final  decree.^ 

1  Bronson  v.  Railroad  Co.  (1862),  2  257.  Tlie  court  said:  "The  only  relief 
Black,  524,  531.  sought  by  the  bill  was  to  enjoin  the  sale 

2  Milwaukee  &  Minnesota  R.  Co.  v.  of  the  property  under  the  executions,  and 
Soutter  (1864),  2  Wall.  440.  when  the  defendants  entered  tlieir  motion 

3  Whiting  V.  Bank  of  the  United  States  to  dissolve  the  temporary  injunction,  it 
(1835),  29  Fed.  Cases,  1058 ;  .s.  c.  1  was  for  the  want  of  equity  appearing  on 
McLean,  249.  the  face  of  the  bill.     The  motion  operated 

*  Railroad  Co.  v.    Swasey    (1874),    23  precisely   as   a   demurrer,   and   by  it  tlie 

Wall.  405.  defendant  admitted  the  truth  of  all  the 

6  First  National   I'.ank  of  Cleveland  v.  allegations  relied  upon  to  entitle  the  com- 

Shedd  (1886),  121  IJ.  S.  74.  plainants  to  an  injunction.     The  practice 

8  Bronson    v.   Railroad  Co.    (1862),    2  is  to  allow  either  a  demurrer  to  the  bill 

Black,   524,   528.  or  a  motion   to  dissolve   the    injunction, 

^  Railroad    Co.   v.    Bradleys  (1868),  7  and  either  course  has  precisely  the  same 

Wall.   575.  n^sult,  so  far  as  the  injunction  is  concerned. 

8  Titus  V.  Mabee  (1861),  25  111.   232,  On  sustaining   the   demurrer  or  allowing 


§§  868-870.]  APPEALS   IN    FORECLOSURE   SUITS.  835 

Where  the  only  matter  before  the  court  for  consideration  is 
the  accounting  of  the  receiver,  an  order  made  and  entered  finally 
disposing  of  that  question  is  a  hnal  order  in  the  nature  of  a 
final  judgment,   and  appealable.  ^ 

§  868.  Decrees  on  Confirmation  of  Sale.  —  A  decree  confirming 
a  sale  made  in  puisuancc  of  the  order  of  the  court  is  final, ^  even 
though  it  contains  the  clause,  "and  the  right  to  make  any 
further  order  is  reserved.  "^ 

§  869.  Decrees  setting  aside  Sales  not  final.  —  Except  in  juris- 
dictions where  appeals  are  allowed  from  interlocutory  decrees, 
a  decree  setting  aside  a  judicial  sale  and  ordering  another  is 
not  appealable.  Such  a  decree  is  not  final  any  more  than  a 
judgment  of  reversal  with  directions  for  a  new  trial  or  a  new 
hearing.^ 

§  870.  Finality  of  Decrees  providing  for  a  reference  to  Master. 
—  This  rule  has  been  thus  stated  by  the  Supreme  Court  of  the 
United  States  in  a  recent  case :  "  If  the  court  make  a  decree 
fixing  the  rights  and  liabilities  of  the  parties,  and  thereupon 
refer  the  case  to  a  master  for  a  ministerial  purpose  only,  and 
no  further  proceedings  are  contemplated,  the  decree  is  final ;  but 
if  it  refer  the  case  to  him,  as  a  subordinate  court,  and  for  a 
judicial  purpose,  — as  to  state  an  account  between  the  parties,  — 
upon  which  a  further  decree  is  to  be  entered,  the  decree  is  not 
final.  "5 

Thus  an  appeal  does  not  lie  from  a  decree  which  merely  deter- 
mines the  validity  of  the  mortgage,  and,  without  ordering  a 
sale,  directs  the  cause  to  stand  continued  for  further  order  and 
decree  upon  the  coming  in  of  the  master's  report;^  nor  from 

the  motion  the  temporary  injunction  is  in  ^  McGourkey  v.   Toledo  &  Ohio  Cen- 

either  case  dissolved,  and  if  no  other  re-  tral  Ry.  Co.  (1892),  146  U.S.  536,  giving 

lief  is  sought,  the  case  is  virtually  at  an  a  full  review  of  the  cases  ;  see  p.  545.     In 

end.     If  other  relief  were  sought  by  the  this  case  a  decree  was  held  not  to  be  final 

bill,  the  decree  dissolving  the  injunction  which    ordered   a   receiver    to   turn   over 

could  not,  however,  be  regarded  as  final."  certain   rolling-stock   to  a  car  trust,   but 

1  Chandler  v.  Gushing- Young  Shingle  directed  a  master  to  determine  the  rental 
Company  et  al.  (1895),  13  Wash.  89  ;  s.  c.  of  the  same,  etc.,  and  "  to  determine  and 
42  Pac.  Rep.  548.  report  upon  all  questions  and  matters  of 

2  Sage  V.  Railroad  Co.  (1377),  96  U.  S.  difference  between  the  receiver  and  the 
712.  petitioner,    growing   out   of  the  use  and 

8  WetTnore  v.  St.  Paul  &  Pac.  R.  Co.  restoration  of  the  rolling-stock." 

(1880),  3  Fed.  Rep.  181.  ^  Burlington,  etc.  Ry.  Co.  v.  Simmons 

*  Butterfield  v.  Usher  (1875),  91  U.  S.  (1887),  123  U.  S.  54,  following  Parsons  v. 

246.     In  this  case  the  sale  had  been  con-  Robinson  (1886),  122  U.  S.  112,  and  dis- 

firmed  bv  the  Special  Term  of  the  Supreme  tinguishing  First  Nat.  Bk.   of  Cleveland 

Court  of  the  District  of  Columbia,  and  va-  v.  Shedd  (1886),  121  U.  S.  74. 
cated   by  the  General   Term,    tlie   appeal 
being  taken  from  the  latter  decree. 


836  RAILWAY    BONDS    AND    MORTGAGES.       [CHAP.   XXXVIII. 

a  decree  which,  while  finding  the  amount  due  and  ordering  it  to 
be  paid  by  a  certain  day,  leaves  certain  liens  and  priorities  to 
be  ascertained  by  a  master,  and  which,  while  it  declares  the 
intention  of  the  court  to  direct  a  sale  at  a  future  time,  leaves 
the  master  to  inquire  into  and  report  upon  certain  facts  and 
report  to  the  court  an  order  of  sale  of  the  mortgaged  properties, 
and  a  form  of  advertisement  therefor.^ 

§  871.  Appealability  of  Interlocutory  Orders.  —  No  order  is 
final  in  such  a  sense  as  to  constitute  a  final  judgment  unless  it 
disposes  of  the  main  case  so  far  as  there  is  power  in  the  trial 
court  to  decide  upon  the  questions  presented  by  the  issues,  no 
matter  how  clearly  and  decisively  the  order  may  indicate  what 
the  judgment  may  be.^ 

Any  order  is  appealable  which,  if  unreversed,  will  have  the 
effect  of  finally  establishing  the  property  rights  of  the  parties  in 
regard  to  its  subject-matter.  Such  is  the  case  with  respect  to 
an  order  made  after  final  decree  of  foreclosure,  providing  that 
the  receiver  may  borrow  money  and  issue  first-lien  certificates.^ 

When  in  passing  the  accounts  of  a  receiver  the  court  charges 
or  refuses  to  allow  items,  and  he  claims  that  the  action  of  the 
court  does  him  wrong  personally,  he  may  appeal.* 

1  Parsons  v.  Robinson  (1886),  122  U.  and   subsistence   of  the   lien,  but  not  as 

S.  112.  to  right  of  resale,  holding  plaintiff's  only 

Upon   the   question  of  finality  of  de-  remedy  was  to  redeem.     Plaintiff  appealed 

cree   in   railway  foreclosure,   the   case   of  to  Circuit  Court  of  Appeals,  and  upon  the 

Compton  V.  Jesup  (1897),  167  U.  S.  1,  is  certificate  of  that  court,  propounding  ques- 

important  and  instructive.     ^Yith  a  view  tions  concerning  which'  instructions  were 

to  reorganization,  several  foreclosure  suits  asked,  the  Supreme  Court  decided  that  a 

were  brought   to  foreclose  railway   mort-  resale  should  have  been    allowed,  as  the 

gages   in   different   circuit  courts   of   the  decree  under  which  the  sale  was  made  was 

United  States  having  jurisdiction  over  the  "in  all  essential  respects  the  final  decree 

respective  railways  composing  the  Wabash  in  the  case,  the  questions  reserved  being 

system.      Decrees  were  rendered  in  each  merely  incidental  to  carrying  the  decree 

suit  simultaneously,  directing  the  sale  of  into  full  effect.     And,"  said  the  court,  "it 

the  entire  system  as  a  unit,  but  protecting,  may  well  be  doubted  whether  it  was  com- 

by  express  j)rovision,  a  lien  upon  one  of  petent  for  the  Circuit  Court  at  a  subsequent 

the  constituent  railways,  existing  at  and  term   to   disturb   the    right    of    Compton 

prior  to  the  consolidation,  and  to  which  (plaintiff),  defined  and   adjudicated   at   a 

the  plaintiff  had  been  adjudged  entitled  in  previous    term     in    the    final    decree    of 

a  State  court.     After  the  sale  and  con-  sale." 

firmation,    it    was    referred    to    a    special  2  KHjot  on  Appellate  Proc,   §  83  and 

master  to  determine  whether  the  lien  con-  following  sections. 

tinned  in  full  force  and  effect.    lie  reported  ^  Farmers'    I^oan    «Sr.    Trust   Co.,   Peti- 

affirmatively,  and  also  that  plaintiff  was  tioner  (1888),  129  U.  S.  206. 

entitled  by  the  decree  to  a  resale  of  the  *  Chicago  Title  &  Trust  Co.,  Receiver, 

portion  of  the  road  upon  which  his  lien  etc.  v.  Caldwell  (1894),  58  111.  App.  219, 

rested  if  the  purchaser  failed  to  pay  his  upon    authority    of    Hinckley  v.  Oilman, 

bonds,   including   interest,    in    full.     The  etc.    R.    (1876),   94   U.   S.    467;   How  v. 

court  sustained  the  report  as  to  the  validity  Jones  (1882),  60  Iowa,  70. 


§  872.]  APPEALS   IN    FORECLOSURE   SUITS.  837 

An  order  authorizing  the  issue  of  certificates  by  a  receiver  of 
a  railroad  corporation,  making  them  a  lien  upon  the  corpus  of 
the  property,  and  the  proceeds  to  be  used  in  maintenance  of  the 
railroad,  is  appealable.^  So,  also,  an  order  made  upon  a  com- 
plaint in  intervention  by  preferred  creditors,  directing  the  sale  of 
the  rolling-stock  to  satisfy  their  claims;''^  an  order  granting  a 
petition  for  compensation  for  services  out  of  the  fund  in  court  ;2 
and  also  an  order  that  all  further  proceedings  in  the  cause  shall 
be  stayed  until  the  further  order  of  the  court,  being  equivalent 
to  injunction,  within  the  purview  of  a  statute  allowing  an  appeal 
in  such  cases.* 

On  the  other  hand,  orders  which  determine  no  right  are  not 
appealable.  To  this  class  belong  orders  discharging  a  receiver;^ 
unless  in  those  States  in  which  proceedings  as  to  appointment 
and  removal  of  receivers  are  held  to  be  "special  proceedings," 
within  the  purview  of  a  statute  providing  that  an  order  made  in 
such  proceedings,  which  affects  a  substantial  right,  is  appealable.^ 

It  has  been  held  that  the  Code  of  Maryland,  art.  5,  §  21, 
authorizes  a  decree  from  an  order  directing  a  sale,  but  not  from 
an  order  refusing  to  authorize  a  sale  before  final  decree,  or  from 
an  order  suspending  or  rescinding  an  interlocutory  order  of 
sale.'^ 

§  872.  Appeal  from  one  of  several  Decrees.  —  Where  several 
decrees  are  rendered,  the  appeal  is  properly  taken  from  that 
which  finally  settles  the  matters  in  regard  to  which  the  opinion 
of  the  appellate  court  is  asked.  If,  for  example,  after  a  fore- 
closure sale  by  a  junior  mortgagee,  subject  to  a  first  mortgage, 
an  order  is  made  allowing,  as  commissions  to  receiver  and 
trustees,  an  amount  in  excess  of  sum  bid  at  sale,  and  then,  after 
a  report  of  the  master  and  a  ratification  of  the  sale,  a  second 
decree  is  rendered  that  the  deficiency  in  these  allowances  shall 
be  made  up  by  holders  of  first-mortgage  bonds,  an  appeal  against 
the  ruling  of  the  court  in  regard  to  the  commissions  is  properly 
taken  from  the  last  decree.      Until  that  decree  is  rendered,  and 

1  State  V.  Port  Royal  &  A.  Ry.  Co.  ^  Washington  City  &  Point  Lookout 
e<  aZ.  (S.  C,  1895),  23  S.  E.  Rep.  380.  E.    Co.    v.    Southern    Maryland    R.    Co. 

2  Radebaugh  v.  Tacoma  &  Puyallup  R.  (1880),  55  Md.  153  ;  Colegate  v.  Michigan 
Co.  (1894),  8  Wash.  570;  s.  c.  36  Pac.  &  Lake  Shore  R.  Co.  (1873),  28  Mich. 
Rep.  460.  288. 

8  Trustees   v.    Greenough    (1881),   105  «  Cincinnati,  S.  &  C.  R.  Co.  v.   Sloan 

U.   S.    531  ;   Williams  v.  Morgan  (1883),  (1876),  31  Ohio,  1;  .s.  c.  15  Ani.Ry.  Rep. 

Ill  U.  S.  684.  376. 

*  Pennsylvania  Co.  for  Ins.  on  Lives  "^  Washington   City  &  Point   Lookout 

andfor  Granting  Annuities  r.  Jacksonville,  R.    Co.    v.    Southern   Maryland    R.     Co. 

T.  &  K.  W.  Ry.  Co.  (1893),  55  Fed.  131.  (1880),  55  Md,  153. 


838  RAILWAY   BONDS   AND   MORTGAGES.        [CHAP.  XXXVIII. 

the  matter  of  the  reimbursement  thus  put  in  shape  to  be  enforced 
against  the  parties  whose  rights  are  to  be  aifected,  there  is 
nothing  definitely  settled  which  can  be  the  subject  of  appeal.^ 

Where  the  first  decree  determines,  with  regard  to  certain 
claims,  merely  that  they  are  valid  and  constitute  a  lien  on  the 
property  superior  to  that  of  the  mortgage,  and  provides  for  a 
reference  to  a  master  in  respect  to  the  amounts  and  ownership 
of  such  claims,  questions  relating  to  the  claims  are  not  in  a 
position  to  be  passed  upon  by  an  appellate  court,  until  a  second 
decree  is  rendered  declaring  who  are  the  owners  and  what  are 
the  amounts  of  the  claims.  Both  the  existence  and  the  priority 
of  the  claims  are  therefore  open  for  consideration  upon  the 
appeal  from  the  second  decree.^ 

Conversely,  on  the  principle  that,  although  an  act  which 
amounts  to  the  performance  of  a  mere  ministerial  duty  growing 
out  of  a  decree  which  is  being  carried  into  effect  is  not  appeal- 
able, an  appeal  will,  in  some  cases,  be  allowed  from  an  order  of 
the  court,  where  it  affects  important  interests  or  decides  matters 
not  before  the  court,  when  the  first  decree  was  rendered,  it  is 
held  that  the  refusal  of  the  court  to  confirm  or  complete  the 
sale,  on  the  application  of  the  purchaser,  is  reviewable  on 
appeal.^ 

Article  III.  —  What  Appeal  brings  up  for  Review  and 

Effect. 

§  873.  What  Rulings  of  Lower  Court  reviewable.  —  An  appeal 
of  "  this  cause  "  in  general  terms  brings  up  the  whole  cause,  as 
far  as  it  has  progressed,  and,  on  the  appeal,  orders  previously 
made  in  it  can  be  considered.* 

Hence,  although  many  orders  and  decrees,  which  are  made 
in  the  progress  of  the  suit,  affecting  materially  the  rights  of  the 
parties,  —  such,  for  example,  as  the  adjudications  which  the 
court  makes  upon  exceptions  to  the  reports  of  masters,  often 
involving  the  whole  matter  in  litigation,  —  are  not  final  in  the 
sense  in  which  that  word  is  used  in  relation  to  decrees,  the 
court  will  not  confine  itself  to  the  examination  of  the  last  order 
or  decree  which  confers  the  right  of  appeal.     Any  other  rule 

1  Tome  V.  King  (ISSfj),  64  Md.  166.  *  Centviil     Trust    Co.    v.    Seasonfrood 

2  Porter  v.  PittsLurg  Beascnier  Steel  (1888),  130  U.  S.  482;  s.  c.  9  Sup.  Ct. 
Co.  (1887),  120  U.  S.  677.  liep.  575. 

'  P)lo.ssom   r.    Milwaukee,   etc.   R.  Co. 
(1863),  1  Wall.  655. 


§§  874-876.]  APPEALS   IN   FORECLOSURE   SUITS.  839 

would,  ill  many  cases,  deprive  the  appellant  of  the  entire  bene- 
fit of  his  appeal.  ^ 

But  if  the  appeal  is  taken,  not  from  the  final  decree  of  fore- 
closure and  sale,  but  from  an  order  confirming  the  sale  merely, 
and  the  record  discloses  no  ground  upon  which  the  fairness  of 
that  final  decree  can  be  impeached,  objection  to  the  mode  of 
sale  cannot  be  considered,  for  such  errors  as  exist  must  neces- 
sarily inhere  partly  in  the  final  decree  itself  and  partly  in  the 
interlocutory  orders.  The  authority  of  the  court,  therefore, 
extends  no  further  than  to  the  examination  of  the  exceptions 
filed  to  the  report  of  the  sale.^ 

§  874.  Rulings  not  prejudicial  to  Appellant  not  reviewable.  — 
When  the  only  appeal  taken  from  a  decree  in  foreclosure  is  by 
the  debtor  company,  the  appellate  court  will  not  inquire  as  to 
whether  the  creditor  should  not  have  been  awarded  a  larger  sum 
than  that  found  to  be  due.^ 

§  875.  Objections  not  presented  to  Lower  Court  not  reviewable 
on  Appeal.  —  The  sole  exception  to  this  rule  is  that  objections 
to  the  jurisdiction  of  that  court  may  be  examined  at  any  time.* 

The  appellate  court  will  not  review  an  alleged  error  in  the 
proof  of  bonds,  and  the  allowance  of  amounts  due  holders,  if  no 
objection  to  proof  was  raised  below,  and  the  evidence  presented 
to  the  master  was  not  before  it.^ 

§  876.  Effect  of  Appeal  on  Control  of  Property.  —  After  the 
appeal  has  been  allowed  and  perfected  by  the  filing  of  the  appeal 
bond,  jurisdiction  as  to  all  matters  affecting  the  property  — 
certainly  as  to  all  matters  of  substance  —  is  transferred  to  the 
appellate  court.  Consequently  the  lower  court  has  then  no 
power  to  take  the  property  from  the  hands  of  the  receivers  and 
place  it  in  the  hands  of  the  trustees,  to  be  operated  in  accordance 
with  the  terms  of  the  mortgage  and  in  the  interest  of  the 
bondholders.^ 

But,  on  the  other  hand,  when  a  receiver  is  appointed  at  the 

1  Milwaukee  &  Minnesota  R.  Co.  v.  ^  Indiana  Southern  R.  Co.  w.  Liverpool, 
Souttev,  Survivor  (1864),  2  Wall.  521.            London,   &   Globe   Ins.   Co.   (1883),    109 

2  Turner  v.  Farmers'  Loan  &  Trust  Co.     U.   S.   168. 

(1882),  106  U.  S.  557.  *  Elliot  on  Appellate  Proc.  §  470. 

Where   from    the  evidence  it  appears  ^  Indiana  Southern  R.  Co.  v.  Livei^pool, 

that  the  plaintiff  in  an  ejectment  suit  was  London,    &  Globe    Ins.    Co.    (1883),    109 

one    of    certain    corporations    afterwards  U.  S.  168. 

consolidated,  the  objection  that  the  new  ®  Morgan's  La.  &  Tex.  R.  &  St.  Ship 

corporation   had   succeeded   to   plaintiff's  Co.  v.  Texas  Central  Ry.  Co.   (1887),  32 

right  may  be  first  raised  on  appeal.     Wig-  Fed.  Rep.  525. 
gins  Ferry  Co.  v.  Illinois  &  St.  L.  R.  Co. 
(1896),  45  N.  E.  Rep.  285. 


840  EAILWAY   BONDS   AND   MORTGAGES.       [CHAP.  XXXVIII. 

request  of  a  plaintiff  for  a  purpose  ancillary  to  the  main  object 
of  the  action,  and  judgment  is  afterwards  rendered  in  favor  of 
the  defendant,  an  appeal  by  the  plaintiff  from  the  judgment 
does  not  deprive  the  lower  court  of  jurisdiction  to  hear  and 
determine  a  motion  made  by  the  defendant  for  the  discharge  of 
the  receiver.^ 

§  877.  Decree  for  Deficiency,  •when  not  appealable.  —  An  appeal 
may  lie  from  a  decree  in  an  equity  court,  notwithstanding  it  is 
merely  in  execution  of  a  prior  decree  in  the  same  suit,  for  the 
purpose  of  correcting  errors  which  originated  in  it;  but  when 
such  decrees  are  dependent  upon  the  decree  to  execute  which 
they  were  rendered,  they  are  vacated  by  its  reversal;  in  which 
case  the  appeal  which  brings  them  into  review  will  be  dismissed 
for  want  of  a  subject-matter  on  which  to  operate.  A  decree  in 
personam  for  the  amount  remaining  due  upon  a  mortgage  debt 
after  the  execution  of  a  decree  of  foreclosure  and  sale  is  of  this 
description;  but  when  rendered  in  favor  of  other  parties  than 
the  complainant,  it  will  be  reversed  for  the  same  error  that 
required  the  reversal  of  the  decree  of  foreclosure  and  sale.^ 

1  Baughman,  Petitioner,  v.  Superior  Ct.  ^  Chicago,  D.  &  Vincennes  R.  Co.  v. 

(1887),  72  Cal.  572.  Fosdick(1882),  106  U.  S.  47. 


CHAP.  XXXIX.]  RAILWAY   REORGANIZATIONS,   ETC. 


841 


CHAPTER   XXXIX. 

•RAILWAY  REORGANIZATIONS,    RECONSTRUCTIONS,    AND   COMPROMISE 

AGREEMENTS. 


Art.  I. — 
§  878. 
879. 

880. 

881. 

882. 


883. 

884. 

885. 

886. 

Art.  II.  - 

§  887. 

888. 
Art.  III. 


889. 
890. 


State  Statutes  governing 
Reorganizations. 

Ret'ereuces  to  General  Statutes 
governing  Reorganizations. 

Purchasers  organize  subject  to 
certain  Constitutional  Pro- 
visions. 

Distinction  between  Incorpora- 
tion and  Organization  of  New 
Company. 

Existing  Companies  not  pre- 
vented by  General  Reorganiza- 
tion Statutes  from  purchasing. 

Special  Statutes  governing  Re- 
organizations. 

(a)  As   affected  by  the    United 

States  Constitution. 

(b)  Rule    in     Countries     where 

there     is     no     Provision 
against  impairing  the  Ob- 
ligation of  Contracts. 
Statutory    Provisions    must    be 
strictly  complied  with  by  any 
one     taking      Advantage     of 
them. 
Statutes    prohibiting   Fictitious 

Increase  of  Stock. 
Statutes  fixing  Rate  of  Interest 

on  Loans. 
Statutory  Powers  of  a  Majority 
of  Bondholders. 

-  Mortgage   Provisions   Gov- 

erning Reorganizations. 
Mortgage  Provisions  as  to  Dis- 
tribution  of    Stock    in    New 
Company. 
Rights  of  Majority  under  Mort- 
gage or  Debenture  Provisions. 

—  Agreements  between  Par- 
ties having  Interests  in 
Mortgaged  Property  gov- 
erning Reorganizations. 

General  Considerations. 
Reorganization  Agreements   are 

favorably     viewed     by      the 

Court. 


§  891.    Power    of    Majority    of    Bond- 
holders under  Agreement. 

892.  Subscribers   to   Agreement    not 

bound  unless  carried  out  sub- 
stantially as  inatle. 

893.  When  Right  to  share  in  Benefits 

of  Scheme  terminates. 

894.  Rights  of  Parties  to  Agreement, 

when  complete. 

895.  Reorganization :    Trustee's  Con- 

trol of  Scheme. 

896.  Power  of   Reorganization  Com- 

mittee to  fix  Date  for  Maturity 
of  New  Issue  of  Bonds. 

897.  Discretion      of     Pieorganization 

Trustees  as  to  Issue  of  Stock 
in  New  Company. 

898.  Discharge  of  Liens  of  Creditors 

participating  in  Schemes, 
when  inferred. 

899.  Bondholders  accepting  Preferred 

Stock  in  New  Corporation 
give  up  their  Rights  as 
Creditors. 

900.  Restoration  of  Bondholder  to  his 

Rights  as  Creditor,  when  prop- 
erly refused. 

901.  Who  estopped  to  object  to  Re- 

organization Scheme. 

902.  Plans    held    Equitable,    or    the 

Contrary, 
(rt)  Bondholders. 
(6)  Stockholders. 
(c)  Unsecured  Creditors. 

903.  Rights  of  Stockholders  after  Re- 

organization. 

(a)  Right  to  take  Part  in   the 

Management  of  the  Prop- 
erty. 

(b)  Right  to  join  in  Division  of 

Earnings. 

904.  Effect   of    Reorganization    upon 

Liabilities  of  Old  Company. 

905.  Costs  in  England  on  Reconstruc- 

tion. 

906.  In  Conclusion. 


842 


RAILWAY   BONDS   AND   MORTGAGES.      [CHAP.  XXXIX. 


Article  I.  — State  Statute  Provisions  governing 
Reorganizations. 

§  878.  References  to  General  Statutes  governing  Reorganizations. 
—  The  legal  difficulties  attendant  upon  the  purchase  of  a  railroad 
under  foreclosure  sale  by  a  number  of  scattered  owners  were  at 
first  obviated  by  special  enactments  conferring  the  legal  status 
of  a  corporation  upon  the  purchasers.  But  in  this  country  and 
England  this  difficulty  is  now  as  a  rule  provided  for  by  statutes 
of  general  application,  which  in  many  instances  give  the  stock- 
holders and  unsecured  creditors  an  opportunity  to  share  with 
bondholders  in  the  advantages  and  benefits  of  the  reconstruction. 

A  list  of  these  statutes  will  be  found  in  the  subjoined  note, 
together  with  a  reference  to  some  cases  in  which  they  have  been 
construed.^ 


1  Alabama.  —  Code  1886,  §§  1596, 
1598.  Mobile  &  Montgomery  Ry.  Co.  v. 
Steiuer  (1878),  61  Ala.  559. 

Arkansas.  —  Dig.  of  Stats.  (1894), 
§§  6178-6187.  See  Shaw  v.  Railroad  Co., 
100  U.  S.  605,  608  ;  Memphis  k.  Little 
Rock  R.  Co.  V.  Dow  (1886),  120  U.  S.  287  ; 
Memphis  &  Little  Rock  R.  Co.  v.  Railroad 
Commrs.  (1884),  112  U.  S.  609,  614,  618. 

Colorado.  —  Mills'  Ann.  Stats.,  1891, 
§§  614,  615. 

Delaware.  —  Wilmington  R.  Co.  v. 
Downward  (Del.,  1888),  4  Ry.  &  Corp. 
L.  J.  234. 

Florida.  — ^ev.  Stats.  1891  (67), 
§  2241,  subd.  10. 

Georgia.  —  Code  1895,  Subsections  11 
and  12  of  §§  2167,  2168. 

Illinois. —Rev.  Stats.  1895,  p.  1907, 
ch.  exiv.,  §  1. 

Indiana.  —  Statutes,  1896,  Horner's 
Annotated  Ed.,  pp.  3946  et  scq.  See  Lake 
Erie  &  W.  Ry.  Co.  v.  Griffin,  92  Ind.  487  ; 
17  Am.  &  Eng.  R.  R.  Cas.  285  ;  107  Ind. 
464  ;  27  Am.  &  Eng.  R.  R.  Cas.  394  ; 
Board  v.  State,   ex  rel.,  115  Ind.  64. 

lovja.  —  Code  1880,  §  1089  ;  and  see 
McLain's  Annotated  Code,  Statutes  Supple- 
ment, 1888-1892,  p.  99. 

Kansas. — Gen.  Stats.  1889,  pp.  1277 
et  seq. 

Kentucky.  —  Pp.  562,  Kentucky  Stats. 
(1894). 

Loidsifina.  —  Mars.  Index  (1895),  p. 
435;   Laws  of  1877,  ch.   xxxviii.,  p.  48. 


See  Vicksburg,  S.  &  P.  Ry.  Co.  v.  Elmore, 
46  Ann.  Rep.  (La.)  1237;  New  Orleans 
R.  Co.  V.  Harris,  27  Miss.  517;  2  Am. 
&  Eng.  R.  R.  Cas.  328. 

Maine.  —  Rev.  Stats.  1883,  ch.  51 , 
§§  93,  94,  105,  107. 

Maryland.  —  Pub.  Gen.  Laws,  1888, 
art.  23,  §  187. 

Massachusetts.  —  Acts  1886,  ch.  142. 

Michigan.  —  1  Annot.  Stats.,  1882, 
§§  3314,  3351.  See  Mackintosh  v.  Fiint 
&  P.  M.  Co.,  32  Fed.  Rep.  350  ;  .s.  c.  34 
Fed.  Rep.  582 ;  Dexter  v.  Ross,  85  Mich. 
370. 

Act  No.  96  of  Feb.  10,  1859  (Comp.  L. 
2373).  See  Cook  v.  Detroit  Ry.  Co.,  43 
Mich.  349  ;  9  Am.  &  Eng.  R.  R.  Cas.  443. 

Some  special  statutes  are  discussed  in 
Att.-Gen.  v.  Joy,  55  Mich.  94  {\^\^.  107, 
108);  16  Am.  &  Eng.  R.  R.  Cas.  643  (pp. 
651,  652). 

Minnesota.  —  Stats.  1894,  pp.  2727- 
2738.  See  Wetmore  v.  St.  Paul,  etc.  R. 
Co.,  3  Fed.  Rep.  170  (p.  179). 

Mississippi.  —  Thomson,  Dillard,  & 
Campbell's  Annotated  Code,  1892,  pp. 
2566  et  seq. 

Nebraska.  —  Act  of  March  1,  J881, 
Comp.  Stat.,  ch.  Ixxii.,  art.  4.  See 
Chicago  &  St.  Paul  R.  Co.  v.  Lindston,  16 
Neb.  254  ;  21  Am.  &  Eng.  R.  R.  Cas.  528  ; 
Cliicago  Kansas  R.  Co.  v.  Hazels,  26  Neb. 
375. 

Neio  Jersey. —Gen.  Stats.  1709-1895, 
p.  2690.     See  State  of  New  Jersey  v.  Mont- 


§  879.] 


RAILWAY   REORGANIZATIONS,   ETC. 


843 


§  879.  Purchasers  organize  subject  to  the  Constitutional  Provi- 
sions in  Force  when  the  Reorganization  is  effected.  —  Purchasers 
organize  subject  to  certain  constitutional  provisions  and  not 
merely  to  those  provisions  by  which  the  rights  of  the  original 


olair  R.  Co.,  43  N.  J.  L.  524;  13  Am.  & 
Eng.  R.  R.  Cas.  390 ;  Boylau  v.  Kelly,  9 
Stewart,  335. 

New  York.  —  Stock  Corporation  Law, 
1890,  1892,  §  3,  and  amending  acts  ;  Busi- 
ness Corporation  Law,  1892,  par.  4,  and 
eh.  565,  pars.  83,  84,  Laws  of  1890.  For 
rulings  in  these  statutes,  see  Metz  v. 
Buffalo  R.  Co.,  58  N.  Y.  81  ;  Abbott  v. 
Jewell,  25  Hun,  603;  Thorntons.  Wabash 
Ry.  Co.,  81  N.  Y.  462  ;  6  Am.  &  Eng. 
R.  R.  Cas.  602  ;  Pratt  v.  Munson,  84  N.  Y. 
582  ;  Harpending  Co.  v.  Munson,  91  N.  Y. 
650  ;  People  v.  Brooklyn,  F.  &  C.  I.  R.  Co., 
89  N.  Y.  75;  Vatable  v.  N.  Y.,  L.  E.  & 
W.  R.  Co.,  96  N.  Y.  499  ;  9  Am.  &  Eng. 
R.  R.  Cas.  454,  reversing  11  Abb.  N.  C. 
133  and  31  Hun,  316. 

People  V.  O'Brien,  111  N.  Y.  43,  47  ; 
James  v.  Cowing,  82  N.  Y.  449  ;  2  Am. 
&  Eng.  R.  R.  Cas.  336. 

People  ex  rel.  Schwarz  v.  Cook,  110 
N.  Y.  443,  affirming  47  Hun,  467  ;  Conant 
V.  Nat.  Ice  Co.,  8  J.  &  S.  83,  86. 

The  reorganization  of  a  corporation 
under  the  provisions  of  chap.  691,  Laws 
of  New  York,  1892,  known  as  "Business 
Corporations'  Law,"  "cannot  be  deemed 
the  formation  of  a  new  corporation,  but 
should  be  regarded  as  the  continuation  of 
the  existing  one."  Putnam,  J.,  in  the 
matter  of  the  application  of  The  Consoli- 
dated Kansas  City  Smelting  and  Refining 
Co.,  etc.  (1897),  13  App.  Div.  50. 

In  Fernschild  v.  D.  G.  Yuengling 
Brewing  Co.  (1896),  40  N.  Y.  Supp.  1119, 
the  reorganized  company  was  held  to  have 
assumed  all  the  debts  and  liabilities  of  the 
old  company,  including  its  bonds,  upon  a 
construction  of  the  whole  agreement. 

North  Carolina.  —  Laws  1883,  ch.  49, 
§  1936.  See  Matthews  v.  Murcheson,  15 
Fed.  Rep.  691,  p.  692. 

Ohio.  —  Bates'  Annotated  Stats.,  1897, 
ITII  3393  et  seq.  McHenry  v.  N.  Y.,  P. 
&  0.  R.  Co.,  25  Fed.  Rep.  65,  m  ;  State 
V.  McDaniel,  22  0.  S.  354. 

In  the  absence  of  statutory  authority  a 
corporation  cannot  make  its  preferred  stock 


a  lien  upon  its  property.  Continental 
Trust  Co.  V.  Toledo,  St.  L.  &  K.  C.  R.  Co. 
(1896),  1  Ohio,  7  D.  321. 

The  obligations  of  a  railroad  company 
to  the  public  cannot  be  discharged  by  a 
transfer  of  its  franchises  to  another  com- 
pany, except  by  legislative  enactment 
authorizing  such  transfer,  and  a  release  to 
the  public  from  the  obligations  of  the 
company.  Fisher  v.  B.  &  0.  Ry.  Co. 
(1897),  6  Ohio  Dec.  67. 

Pennsylvania.  —  April  17,  1876  (Pam- 
phlet L.,  33),  Act  of  March  14,  1861.  See 
Wellsborough  &  Plank  Road  Co.  v.  Griffin, 
57  Pa.  St.  417;  Commonwealth  v.  Central 
Passenger  Ry.,  52  Penn.  St.  506. 

Act  of  March  24,  1865.  See  Pittsburg, 
etc.  Ry.  Co.  v.  Fierst,  96  Pa.  St.  144  ;  9 
Am.  &  Eng.  R.  R.  Cas.  437  ;  Landis  v. 
West  Pennsylvania  Ry.  Co.,  133  Pa.  St. 
579. 

South  Carolina.  —  Rev.  Stats.  1893, 
pp.  1610  et  seq. ;  Columbia,  etc,  Ry.  Co. 
V.  Gibbs,  24  S.  C.  70. 

Tennessee.  —  Code  1896,  pp.  1513a  et 
seq.  See  Mayor  of  the  City  of  Knoxville 
V.  Knoxville  &  Ohio  Ry.  Co. ,  22  Fed.  Rep. 
758. 

Texas. —  FaachaVs  Dig.  1866,  p.  820, 
4912,  4916  ;  Tex.  Rev.  Stats.,  art.  4260, 
4264.  See  as  to  the  constructions  of  this 
statute,  Withei'spoon  v.  Texas  Pacific  R. 
Co.,  48  Tex.  309  ;  Carey  v.  Houston  T.  C. 
Ry.  Co.,  45  Fed.  Rep.  438,  441  ;  Acres  v. 
Mayne,  59  Tex.  623,  625,  626  ;  Houston 
R.  Co.  V.  Shirley,  54  Tex.  125,  139  ;  4  A. 
&  E.  443. 

Utah.  —  2  Corp,  Laws,  1888,  §  2573. 
Vermont.  —  R.  L.  1880,  §§  3461,  3475. 
Statutes,    1894,  Reorganization  of  street- 
railway   companies   after   foreclosure,  pp. 
3950-3976. 

Virginia.  —  Code  1887,  §  1233,  amend- 
ing acts  1891-1892,  p.  623. 

The  provisions  of  the  Code  of  Virginia, 
§  1234,  respecting  reorganization,  do  not 
impose  on  a  new  compan)'  any  duty  to 
maintain  branch  roads  unless  the  old  com- 
pany was  bound  so  to  do  prior  to  the  mort- 


844 


RAILWAY   BONDS    AND    MORTGAGES.       [CHAP.  XXXIX. 


company  were  governed.  This  rule  prevails  even  though  the 
statute  authorizing  the  mortgage  contemplates  the  formation  of 
a  new  body  to  exercise  the  franchise  of  the  mortgagor  after  they 
have  been  transferred  by  a  foreclosure  sale.  "  A  statutory  pro- 
vision for  becoming  a  corporation  in  futuro  does  not  become  a 
contract  in  the  sense  of  that  clause  of  the  Constitution  of  the 
United  States  which  prohibits  impairing  its  obligation,  until 
it  has  become  vested  as  a  right  by  an  actual  organization  under 
it ;  and  then  it  takes  effect  as  of  that  date,  and  subject  to  such 
laws  as  may  then  be  in  force.     The  stipulation,  whatever   its 


gage,  the  foreclosure  whereof  brought  about 
the  succession.  Sherwood  v.  Atlantic  & 
D.  R.  Co.  (1897),  26  S.  E.  Kep.  943. 

West  Virginia.  —  Code  1887,  ch.  54, 
§§  72,  73.  See  Chesapeake  &  Ohio  Ey. 
Co.  V.  Miller,  114  U.  S.  176. 

Wiscmisin.—?,&v.  Stats.  1878,  §  1828. 
See  Smith  v.  Chicago  &  N.  W.  Ry.  Co.,  18 
Wis.  18  ;  Neff  v.  The  Wolf  River  Boom 
Co.,  50  Wis.  585  ;  City  of  Menasha  v. 
Milwaukee  &  North  R.  Co.,  52  Wis.  414, 
421  ;  5  Am.  &.  Eng.  R.  R.  Cas.  300 ; 
Oilman  \\  The  Sheboygan,  etc.  R.  Co.,  37 
Wis.  317,  319. 

England  Joint  Stock  Companies  Arrange- 
ment Act,  1870.  —  In  England  reorganiza- 
tion, or  as  it  is  there  termed,  reconstruction, 
is  accomplished  chiefly  under  the  provisions 
of  the  above  act. 

Under  this  act,  with  the  consent  of  the 
court,  a  company  has  the  same  power  to 
compromise  as  an  individual.  Re  Albert 
Life  Assn.  Co.  (1871),  6  Ch.  App.  381. 

A  perfected  scheme  of  reconstruction 
under  the  English  act  of  1870  has  the 
effect  of  discharging  the  company  from  all 
liability.  In  re  London  Chartered  Bank 
of  Australia  (1893),  3  Ch.  540. 

Cornpnnics  Act  of  1862.  —  Under  this 
act,  a  sale  of  the  company's  assets  and  a 
compromise  of  its  debts  and  liabilities 
may  be  effected.  Re  Albert  Life  Assn. 
(1871),  6  Ch.  App.  381  ;  In  re  Alabama, 
N.  Y.  &  P.  J.  Ry.  Co.  (1891),  1  Ch.  236. 

In  arriving  at  the  meaning  of  the  word 
"  reorganization  "  or  "  reconstruction,"  tlie 
question  to  be  asked  is  whether  the  new 
company  is  practically  the  same  as  the  old 
even  though  in  law  it  is  a  separate  cor- 
poration. It  does  not  include  "  amalgama- 
tion." Hooper  v.  Western  Counties  Tel. 
Co.  (1892),  41  W.  R.  84. 


Winding-up  Proceedings.  —  In  a  wind- 
ing-up proceeding  with  a  view  to  recon- 
struction it  is  not  competent  for  a  majority 
of  shareholders  to  give  a  benefit  to  one  class 
of  shareholders  over  the  other.  Simpson  v. 
Palace  Theatre,  Limited  (1893),  W.  X.  91. 

Debentures  become  payable  immedi- 
ately upon  a  resolution  taking  effect,  for  a 
voluntary  winding  up,  when  it  is  condi- 
tioned that  "  if  the  company  commences 
to  be  wound  up  otherwise  than  for  the 
purposes  of  reorganization  or  reconstruc- 
tion" the  principal  shall  become  im- 
mediately payable.  Hooper  v.  Western 
Counties  Tel.  Co.  (1892),  4  W.  N.  84. 

A  winding-up  order  may  be  limited  to 
a  particular  purpose,  as  for  the  collection 
of  assets,  payment  of  debts,  etc.  In  re 
Western  of  Canada  Oil  Co.  (1874),  W.  N. 
148. 

The  court  will  discharge  a  winding-up 
order  where  there  has  been  a  compromise 
effected  satisfactory  to  the  large  majority 
in  amount  of  the  creditors.  In  re  Patent 
Automatic  Knitting  Co.  (1882),  W.  N.  97. 

Other  Methods  of  Reconstruction.  —  Be- 
sides the  proceedings  under  the  Arrange- 
ment Act  of  1870,  reconstruction  may  be 
accomplished  in  pursuance  of  the  provi- 
sions of  the  agreement  of  association  ;  or 
under  section  161  of  the  Companies  Act  of 
1862.  Cotton  v.  Imperial  Agency  (1892), 
67  L.  T.  R.  392. 

See  also  30  &  31  Vict.  127  (1867),  §§  6- 
16  ;  London  Financial  Assn.  v.  Wre.xhaiu 
Ry.  Co.,  L.  R.  18  Eq.  566;  In  re  Devon 
R.  Co.,  L.  R.  6  Eq.  610  &  615  ;  In  re 
Bristol  &  N.  S.  Ry.  Co.,  L.  R.  6  Eq.  448  ; 
In  re  Cambrian  Ry.  Co.'s  Scheme,  L.  R.  3 
Ch.  278  ;  Munns  v.  Isle  of  Wight  Ry.  Co. 
L.  R.  8  Eq.  653  ;  Stevens  v.  Mid.  Harts 
Ry.  Co.,  L.  R.  8  Ch.  1064. 


§  880.] 


RAILWAY   REORGANIZATIONS,    ETC. 


845 


form,  must  be  construed  as  subject  and  subordinate  to  the  para- 
mount policy  of  the  State,  and  to  the  sovereign  prerogative  of 
deciding  in  the  mean  time  what  shall  constitute  the  essential 
characteristics  of  corporate  existence.  The  State  does  not  part 
with  the  franchise  until  it  passes  to  the  organized  corporation, 
and  when  it  is  thus  imparted,  it  must  be  what  the  government  is 
then  authorized  to  grant  and  does  actually  confer, "  ^ 

§  880.  Distinction  bet'ween  Incorporation  and  Organization  of 
New  Company.  —  Irregularities  in  the  organization  of  a  corpora- 
tion under  the  Pennsylvania  Statute  of  April  8,  1861,  are  not 
necessarily  fatal  to  its  being.  Organization  is  but  the  creation 
of  an  agency  by  which  the  corporate  body  can  act.     It  presup- 


1  Memphis  &  Little  Rock  Ry.  Co.  v. 
Railroad  Commrs.  (1884),  112  U.  S.  609, 
per  Matthews,  J.,  citing  with  approval  the 
following  passage  :  "  The  real  transaction, 
in  all  such  cases  of  transfer,  sale  and  con- 
vej'ance,  is  nothing  more  or  less,  and 
nothing  other  than  a  surrender  or  abandon- 
ment of  the  old  charter  by  the  corporators 
and  a  grant  de  yiovo  of  a  similar  charter  to 
the  so-called  transferees  or  purchasers.  To 
look  upon  it  in  any  other  light,  and  to  re- 
gard the  transaction  as  a  literal  transfer  or 
sale  of  the  charter,  is  to  be  deceived  by  a 
mere  figure  or  form  of  speech.  The  vital 
part  of  the  transaction,  and  that  without 
which  it  would  be  a  nullity,  is  the  law 
under  which  the  transfer  is  made.  The 
statute  authorizing  the  transfer  and  de- 
claring its  effect  is  the  gi-ant  of  a  new 
charter  couched  in  few  words  and  to  take 
effect  upon  condition  of  the  surrender  or 
abandonment  of  the  old  charter  ;  and  the 
deed  of  transfer  is  to  be  regarded  as  mere 
evidence  of  the  surrender  or  abandonment." 
State  V.  Sherman  (1872),  22  Ohio  St.  411, 
428.  In  Jlemphis  &  Little  Rock  Ry.  Co. 
V.  Railroad  Commrs.,  supra,  it  was  held 
that  the  purchasers  not  having  become  a 
corporate  body  until  after  the  Arkansas 
Constitution  of  1874,  prohibiting  the  legis- 
lature from  surrendering  or  suspending  the 
right  to  tax  corporate  property,  took  effect, 
did  not  succeeil  to  the  privilege  of  immu- 
nity from  taxation  enjoyed  by  the  original 
company.  To  the  same  effect  as  regards 
the  general  effect  of  the  enactment  of  a 
new  constitution,  see  Central  Railroad 
Bk.  Co.  V.  Georgia  (1875),  92  U.  S.  665. 
As  to   the  effect  of  the  enactment  of 


new  constitutional  provisions  upon  the 
right  to  claim  the  same  exemption  from 
taxation  as  was  enjoyed  by  the  mortgagor 
company,  see  Chap.  XXXIV. 

A  "  reincorporation,"  to  use  the  statu- 
tory term,  under  the  4th  section  of  the 
Business  Corporation   Law  of  New  York 
(chap.  691,   Laws  of  1892),  of  a  concern 
incorporated  originally   under  the  general 
manufacturing  act  of  1848,  is  not  the  crea- 
tion of  a  new  corporation  liable  to  pay  an 
organization   tax.     It   is   a   corporate  act 
effected  by  a  vote  of  a  majority  of  the  stock- 
holders, instead  of  the  directors  through 
whom  the  corporation  ordinarily  acts.     A 
"consolidation  "  under  the  8th  section  of 
the  act  of  1892  is  also  a  corporate  act,  also 
to  be  performed  through  the  stockholders 
direct.     But  it  creates  a  new  corporation 
required  by  the  provisions  of  chap.   668, 
Laws  of  1892,  to  pay  an  organization  tax, 
but   only  upon  the  excess  of  its   capital 
stock   over  the   aggregate   amount   of  its 
constituent  corporations.     A  reincorpora- 
tion under  the  4th  section  is  but  the  con- 
tinuance  of  an   existing   corporation  ;    a 
consolidation  under  the  8th  section  is  the 
formation  of  a  new  company.     Both,  how- 
ever,   are   to  be  distinguished  from  a  re- 
organization under  the  reorganization  act 
(chap.   430,  Laws  of  1874,  and  amending 
acts)  of  a  corporation  to  be  composed  of 
new  stockholders  with  a  new  capital  and 
without  provision  for  the  continuance  of 
the  former  corporation  to  whose  property 
and  franchises  it  succeeds.     In  re  the  Ap- 
plication of  the  Consolidated  Kansas  City 
Smelting  &  Refining  Company  (1897),  13 
App.  Div.  50. 


846  EAILWAY    BONDS    AND    MORTGAGES.       [CHAP.  XXXIX. 

poses  the  existence  of  the  artificial  person.  Hence  where  a 
statute  declares  that  the  purchasers  of  a  railroad  at  a  judicial 
sale  are  by  that  purchase  constituted  a  body  politic  and  corpo- 
rate, directions  as  to  subsequent  organization  are  not  conditions 
of  being,  as  they  possibly  might  be  if  the  purchasers  did  not 
take  by  succession.  The  utmost  effect  of  not  following  those 
directions  strictly  can  be  no  more  than  to  work  a  forfeiture  of 
the  franchise.  It  cannot  entitle  the  State  to  a  judgment  that 
the  franchise  has  no  existence.^ 

§  881.  Existing  Company  not  prevented  by  General  Reorgani- 
zation   Statutes    from    purchasing.  —  The    provisions    of    the    Ncw 

York  Railroad  Acts,  authorizing  the  purchaser  at  foreclosure 
sale  of  the  property  and  franchises  to  organize  a  new  corpora- 
tion, are  intended  to  meet  cases  where  there  is  no  corporation  in 
existence  to  take  over  the  road,  and  do  not  prevent  an  existing 
corporation  from  purchasing  the  property  and  exercising  the 
franchises  which  pass  to  purchasers. ^ 

§  882.  Special  Statutes  governing  Reorganizations.  —  (a)  As 
affected  hy  the  United  States  Constitution.  —  Minority  bond- 
holders cannot  be  compelled  to  reorganize  under  a  special  law 
against  their  will.  But  it  is  competent  for  the  legislature  to 
provide  that  the  assent  of  any  bondholder  to  a  reorganization 
scheme  shall  be  conclusively  presumed,  if  he  fails  to  give  notice 
of  his  dissent  within  three  months  or  any  reasonable  period. 
The  principle  by  which  abandonment  of  rights  is  presumed  after 
a  fixed  period  is  analogous  to  that  which  underlies  and  upholds 
the  statutes  of  limitation,  and  in  no  sense  is  there  a  violation 
of  the  constitutional  provision  respecting  the  impairment  of 
contractual  obligations.^ 

The  property  rights  of  persons  holding  bonds  secured  by  a 
mortgage  on  a  railroad  are  subordinate  to  the  right  of  the  public 
to  have  railroad  property  remain  pledged  to  the  public  use  to 
which  it  has  been  once  devoted.  Accordingly,  when  a  railroad 
company  fails  and  a  strict  foreclosure  has  been  had  under  the 
laws  of  Connecticut,  the  legislature  has  full  power  to  authorize 
the  bondholders,  by  a  vote  of  the  majority  and  with  equal  oi)por- 
tunity  to  all,  to  reorganize  as  a  new  corporation  with  the  rights 
of  tlie  old  corporation.  The  action  so  authorized  is  merely  a 
mode  of  securing  the  performance  of  the  public  trust  undertaken 

1  Commonwealth  v.  Central  Passenger  Coney  Island  Ry.  Co.  (1882),  89  N.  Y. 
Ry.  (1866),  52  Pa.  St.  506.  75  ;  k.  c.  9  Am.  &  Eng.  R.  R.  Cas.  454. 

2  P(^o[)lo    V.     Brooklyn,    Flatbush,    &        ^  Gilfillan  t'.  Union  Canal  Co.  of  Penn- 

sylvania (1883),  109  U.  S.  401. 


§  883.]  RAILWAY   REORGANIZATIONS,   ETC.  847 

by  the  mortgagor  company  which  is  superior  to  the  rights  of  the 
bondholders.^ 

(b)  Huh  in  Countries  where  there  is  no  Provision  against  impair- 
ing the  Obligation  of  Contracts.  — There  being  no  constitutional 
prohibition  in  Canada  against  the  passage  of  statutes  impairing 
the  obligation  of  contracts,  and  Parliament  having  exclusive 
legislative  authority  over  the  corporation  and  its  bankruptcy  and 
insolvency,  a  statute  providing  schemes  of  reorganization,  wherein 
the  minority  may  be  bound  in  a  reasonable  way  by  the  majority, 
is  valid.  Bondholders  are  interested  in  the  administration  of  a 
trust  created  for  the  common  benefit,  and  there  may  be  legisla- 
tive supervision  for  the  good  of  all.  Such  regulations  do  not 
deprive  a  person  of  his  property  without  due  process  of  law. 
They  simply  require  him  to  conduct  himself  for  the  general 
good  and  not  unnecessarily  to  injure  others.  International 
comity  requires  that  such  a  scheme  legalized  in  Canada  should 
be  recognized  here. 

Each  bondholder  impliedly  subjects  himself  to  such  foreign 
laws  affecting  the  powers  and  obligations  of  the  corporation 
with  which  he  voluntarily  contracts,  as  the  humane  and  estab- 
lished policy  of  that  government  authorizes. ^ 

§  883.  Statutory  Provisions  must  be  strictly  complied  with  by 
any  one  taking  Advantage  of  them.  —  The  ordinary  rule  is,  that 
unless  some  statute  intervenes,  the  foreclosure  of  a  railroad  mort- 
gage cuts  off  all  the  rights  and  interests  of  the  mortgagor,  and 
leaves  nothing  for  the  general  creditors  and  stockholders  of  the 
company,  except  their  interest  in  any  surplus  that  may  remain 
after  satisfying  the  mortgage.  A  statutory  provision  whereby 
the  purchasers  are  allowed  to  buy,  not  absolutely  for  themselves, 

1  Gates  V.  Boston  &  New  York  Air  Line  corporation.     But  the  decision  seems  to  be 

R.  Co.  (1885),  53  Conn.  333,  347.    In  this  independent  of  this  special  consideration, 
case  the  court  laid  some  stress  on  the  fact  ^  Canada  Southern  Ry.  Co.  v.  Gebhard 

that  in  Connecticut  the  practice  of  selling  (1883),  109  U.  S.  527;  s.  c.  14  Am.  &  Eng. 

property    on    foreclosure    had    not    been  R.  R.  Cas.  581.     The  questions  in  this  case 

adopted,   the    effect   of  foreclosure   being  which   were   passed   upon   by  the    U.    S. 

simply  to  shut  off  the  mortgagor's  equity  Supreme  Court  were  (1)  whether  the  "Ar- 

of  redemption,  and  place  the  mortgagee  in  rangement  Act "  was  valid  in  Canada  and 

the  same  relation  with  regard  to  the  mort-  had   the   effect  of  binding   non-assenting 

gaged  property  as  had  previously  been  oc-  bondholders  within  the  dominion   of  the 

cupied  by  the  mortgagor.    The  title  to  the  terms  of  the  scheme,  and  (2)  whether,  if  it 

property,    therefore,    vested  in    the   trus-  did  have  that  effect  in  Canada,  the  courts 

tee  in  trust  for  the  bondholders,  and  the  of  the  United  States  should   give  it   the 

trustee  and  the  beneficiaries  of  the  trust  same    effect    as    against    citizens    of    the 

continued  to  hold  that  property  subject  to  United  States  whose  rights  accrued  before 

the  same  limitations,   duties,  and  obliga-  its     passage  ;     and     each    was    answered 

tions  that  had  vested  upon  the  original  affirmatively. 


848  RAILWAY   BONDS   AND    MORTGAGES.       [CHAP.  XXXIX. 

but  in  pursuance  of  a  specified  plan  for  the  readjustment  of  the 
respective  interests  of  the  mortgage  creditors  and  stockholders, 
does  not  change  this  principle.  The  property  will  still  pass 
absolutely,  and  all  the  proper  rights  of  the  stockholders  are  cut 
off  by  the  sale.  Such  a  plan  has  reference  only  to  the  new  cor- 
poration to  be  formed  and  to  the  interests  therein.  If  the  stock- 
holders are,  by  the  provisions  of  the  plan,  to  have  the  right  to 
assent  to  it  at  any  time  within  six  months  after  the  formation 
of  that  corporation,  it  is  a  condition  precedent  to  the  exercise 
of  that  right  that  he  shall  signify  his  assent  within  that  time, 
and  equity  cannot  relieve  him  from  the  performance  of  that 
condition.-^ 

Neither  actual  notice  of  the  terms  of  such  a  plan,  nor  any 
legal  proceedings,  are  required  in  order  to  bar  the  rights  of  the 
stockholders  after  the  expiration  of  the  time  fixed  by  the  statute. 
Nor  can  a  provision  in  the  plan  itself,  to  the  effect  that  pay- 
ments by  stockholders  in  respect  to  their  stock  may  be  made 
"before  the  expiration  of  such  time  as  may  be  lawfully  limited  " 
by  the  promoters  of  the  plan,  be  construed  as  meaning  anything 
more  than  that  the  time  should  be  limited  by  a  majority  of  those 
promoters  at  a  meeting  regularly  called,  or  be  fixed  with  refer- 
ence to  the  statutory  period  of  six  months.''^ 

§  884.  Statutes  prohibiting  Fictitious  Increase  of  Stock.  —  The 
common  statutory  or  constitutional  provisions  prohibiting  corpo- 
rations from  issuing  stock  or  bonds,  except  for  money  or  property 
actually  received  or  labor  done,  and  forbidding  all  fictitious 
increase  of  stock  or  indebtedness,  have  no  application  to  a 
transaction  the  effect  of  which  is  that  purchasers  at  foreclosure 
sale  are  to  transfer  to  the  newly  organized  company  the  rights, 
etc.,  of  the  old  company  acquired  by  such  sale,  and  receive 
therefor  a  certain  amount  of  the  stock  and  mortgage  bonds  of 
the  new  company.  The  reason  is  that  the  transaction  is  a  real 
one,  based  upon  a  present  consideration,  and  having  reference  to 

1  Vatable  v.  New  York,  Lake  Ene,  &  1854,  amencling  the  general  Railroad  Act, 
W.  R.  Co.  (1884),  96  N.  Y.  49  ;  s.  c.  17  and  by  the  Statute  of  1874,  "To  facilitate 
Am.  &  Eng.  R.  R.  Cas.  268,  reversing  31  the  organization  of  raih'oads,  etc."  The 
Hun,  316.  The  New  York  Statute  of  latter  statutes  confer  upon  the  purchaser 
1853,  in  reference  to  the  foreclosure  of  rights  so  entirely  repugnant  to  those  be- 
mortgages  providing  that  a  stockholder  stowed  by  the  first  statute  upon  the  stock- 
might,  Vjy  paying  to  the  purchaser  a  pro-  liolders  that  a  repeal  by  implication  has 
portion  of  the  price  equal  to  the  propor-  been  presumed.  Pratt  v.  Munson  (1886), 
tion  his  stock  bore  to  the  entire  corporate  84  N.  Y.  582. 

stock,  acquire  the  same  relative  amount  of         ^  Vatable  v.  New  York,  Lake  Erie,  & 

stock  or  interest  in  the  rond,  has  been  held  W.  R.  Co.  (1884),   96  N.  Y.  49  ;  s.  0.  17 

to  liave   been   repealed  by  tlie  Statute  of  Am.  &  Eng.  R.  R.  Cas.  268. 


§§  885,  88G.]         RAILWAY  REORGANIZATIONS,   ETC.  849 

legitimate  corporate  purposes  and  not  a  mere  device  to  evade 
the  law.  ^ 

§  885.  statutes  fixing  Rate  of  Interest  on  Loans.  —  Bonds  issued 
in  a  transaction  of  the  kind  mentioned  in  the  preceding  section 
will  not  be  invalid  because  made  to  bear  a  rate  of  interest 
higher  than  that  specified  in  an  act  which  authorizes  railroad 
companies  to  borrow  money  and  mortgage  their  property,  etc., 
to  secure  the  loan.  Such  bonds  are  not  executed  for  money 
borrowed,  but  for  property  conveyed  at  an  agreed  price  to  be  paid 
for  in  stock  and  bonds. ^ 

§  886.  Statutory  Powers  of  a  Majority  of  Security  Holders  in 
England.  —  This  power  extends  to  debenture-holders,  although  it 
dej)rives  them  of  their  security. ^ 

This  power  (of  the  majority  to  bind)  must  be  construed 
strictly.  Thus  "the  power  to  release  the  mortgaged  premises 
does  not  include  a  power  to  release  the  defendant  company. 
The  power  to  modify  the  rights  of  the  debenture-holders  against 
the  company  does  not  include  a  power  to  extinguish  all  their 
rights.* 

But  it  has  been  held  that  the  power  "to  sanction  any  modifi- 
cation or  compromise  of  the  rights  of  debenture-holders  against 
its  property  "  authorized  the  issue  of  a  new  loan  to  take  priority 
over  existing  debentures.^ 

In  England,  under  section  15  of  the  Railway  Companies  Act  of 
18GT,  a  three-fourths  majority  is  indispensable  to  bind  a  partic- 
ular class,  as  debenture-holders,  etc.,  unless  the  court  can  say  as 
a  matter  of  law  that  no  rights  or  interests  of  the  class  are  preju- 
dicially affected.^ 

1  Memphis  &  Little  Rock  R.  Co.  v.  In  re  Dominion  of  Canada  F.  &  T.  Co. 
Dow  (1887),   120   U.  S.  287,  followed  in     (1886),  55  L.  T.  R.  347. 

Mackintosh  v.  Flint  &  Pere  Manjuette  R.  A  majority  means  of  those  at  meeting, 

Co.  (1888),  34  Fed.  Rep.  582  ;  s.  c.  36  Am.  not  of  all  creditors.     In  re  Bessemer  Steel 

&  E.ig.   R.  R.  Cas.  340 ;  s.  p.  Cushman  v.  &  0.  Co.  (1875),  1  Ch.  D.  251. 

Benfield  (1889),  36  111.  App.  436.  3  j^  re  Alabama  K  0.,  T.  &  P.  J.  Ry. 

2  Memphis  &  Little  Rock  R.  Co.  v.  Co.  (1S91),  1  Ch.  236;  /re  ?-«  Dominion  of 
Dow  (1887),  120  U.  S.  287.  Canada  F.  &  T.  Co.  (1886),  55  L.  T.  Rep. 

In  England  by  the  Joint  Stock  Com-  317;  /«  re  Empire  Mining^  Co.  (1890),  44 
panies  Arrangement  Act  of  1870  power  is  Ch.  D.  409  ;  In.  re  Dvnevor  D.  &  N.  A. 
given  to  the  majority,  representing  three-  Collieries  Co.  (1879),  11  Ch.  D.  605. 
fourths  ill  value  of  a  company's  creditors         ■*  Investment  &  Gen.  Trust  Co.  v.  Inter- 
to  bind  the  minority  with  the  consent  of  national  Co.  (1893),  1  Ch.  484,  note, 
the  court,     /re  re  Albert  Life  Assn.  (1871),  ^  FoUet  w.  Eddystone  Granite  Quarries 
6  Ch.  App.  381  ;  /re  re  Bessemer  S.  &  0.  (1892),  3  Ch.  75. 
Co.  (1875),  1  Ch.  D.  251.  6  /„  ^e  Neath  &  Brecon  Ry.  Co.  (1892), 

The  reason  of  this  was  the  difficulty  of  Q&  L.  T.  356. 
dealing  with   debenture-holders  as  a  class. 

54 


850  RAILWAY   BONDS    AND   MORTGAGES.       fCHAP.  XXXIX. 

Compare  by  way  of  illustration  the  holding  that  a  deed  of 
arrangement  agreed  to  by  the  statutory  majority  of  life-policy- 
holders,  whose  policies  have  not  matured,  does  not  bind  the 
holder  of  a  policy  which  matured  before  the  date  of  the  deed.^ 

On  the  subject  of  statutory  meetings  of  bondholders  — 

The  court  will  direct  separate  meetings  of  the  several  classes 
of  creditors.  2 

A  creditor  who  is  also  a  shareholder  is  entitled  to  attend  a 
creditors'  meeting.^ 

To  prevent  fraud,  the  holder  of  debentures  which  pass  by  de- 
livery should  produce  their  debentures  at  the  meeting  to  entitle 
them  to  vote.* 

Under  the  Arrangement  Act  of  1870  it  is  not  obligatory  to 
produce  written  proxies.^ 

For  the  purposes  of  a  meeting  of  any  particular  class  of  per- 
sons, proxies  can  only  be  given  to  and  held  by  members  of  that 
class.  Accordingly  proxies  given  to  an  official  liquidator  who 
was  not  of  the  class  were  held  invalid.^ 

On  a  reconstruction  under  the  Joint  Stock  Companies  Arrange- 
ment Act  proxies  must  be  in  the  form  approved  by  the  court. '^ 

Article  II.  —  Mortgage  Provisions  governing  Reorganizations. 

§  887.  Mortgage  Provisions  as  to  Distribution  of  Stock  in  New 
Company.  —  A  mortgage  executed  by  the  New  York  and  New 
England  Railroad  Company  provided  that  the  trustees  might 
take  possession,  for  the  purpose  of  foreclosure,  upon  default  in 
payment  of  principal  or  interest  of  the  bonds,  and  that,  when  tlie 
foreclosure  became  absolute  through  the  continuance  of  the  de- 
fault for  a  certain  time,  the  bondholders  might  form  themselves 
into  a  new  corporation,  with  a  capital  stock  equal  to  the  mort- 
gage debt,  at  a  meeting  at  which  each  bondholder  should  be 
entitled  to  cast  one  vote  for  "  every  one  thousand  dollars  prin- 
cipal sum  of  such  bonded  debt  held  by  him."  It  was  also  pro- 
vided that  the  new  corporation  should  consist  of  the  holders  of 
the  mortgage  bonds  "  at  the  rate  of  ten  shares  for  every  bond 

^  Sovereif]jn    Life    Assn.    Co.    v.    Dodd  ^  In  re  English,  Scottish,  and  Anstra- 

(1893),  4  R.  17.  li.in   Chartered   Bank    (1893),    3   Cli.   D. 

2  Slater  v.  Darlaston  Steel  Co.  (1877),  409. 
W.  N.  165.  6  Tn  re  Madras  I.  &  C  Co.   (1881),  W. 

'  Tn  re  Madras  Irrif^ation  &  Canal  Co.  N.  120. 
(1881),  W.  N.  172.  7  Inter-Oceanic  Ry.  of  Mexico  (1896),  3 

*  Tn  re   Wedf^wood   Coal   &  Iron  Co.  Manson,  162. 
(1877),  6  Ch.  D.  627. 


§  888.]  RAILWAY   REORGANIZATIONS,   ETC.  851 

of  one  thousand  dollars,  as  said  bonds  shall  ))e  surrendered  to 
said  new  corporation  to  be  exchanged  tor  certificates  of  stock  at 
the  rate  aforesaid."  While  the  mortgage  was  in'  force,  aeon- 
tract  was  entered  into  with  another  company,  whereby  the  latter 
agreed  to  pay  the  interest  on  a  portion  of  the  b(jnds  as  it 
matured,  this  contract  to  be  indorsed  on  those  bonds.  The 
contract  also  provided  that  any  interest  which  the  guarantor 
company  was  obliged  to  pay  sliuuld  be  a  valid  lien  on  all  the 
property  secured  by  the  mortgage.  It  was  held  (1)  that  the 
capital  stock  of  the  new  corporation  was  to  be  determined  by 
the  principal  sum  of  the  mortgage  debt,  without  regard  to  the 
unpaid  interest;  (2)  that  a  holder  of  bonds  issued  under  the  con- 
tract with  the  second  company,  and  who  had  received  the  inter- 
est from  that  company,  was  entitled  to  ten  shares  of  stock  for 
each  bond ;  (3)  that  the  guarantor  company  was  not  entitled 
to  any  stock,  and  that  a  person  to  whom  the  guarantor  had 
sold  coupons  when  overdue  had  no  greater  rights  than  his 
transferor.  ^ 

§  888.  Rights  of  Majority  under  Mortgage  or  Debenture  Provi- 
sions. —  If  the  majority  of  the  bondholders  are  by  the  mortgage 
authorized  in  broad  words  to  define  the  "terms,  conditions,  and 
limitations,"  under  which  the  new  company  shall  be  organized, 
a  decree  embodying  the  wishes  of  such  majority  and  reserving  a 
controlling  interest  to  the  class  of  lien-holders  for  whose  benefit 
the  reorganization  is  carried  out,  cannot  be  objected  to  on  the 
ground  that  it  also  concedes  entirely  subordinate  interests  in  the 
new  corporation  to  junior  incumbrancers  and  to  the  stockholders 
of  the  old  corporation.  The  rights  of  the  minority  are  not 
thereby  sacrificed  to  those  of  other  creditors  or  in  any  way  inter- 
fered with.  Such  concessions  are  generally  made  in  reorganiza- 
tions of  railroad  companies,  and  as  they  prevent  the  delay  and 
expenditure  often  ruinous,  arising  out  of  litigation  between  cred- 
itors, and  lessen  the  risk  of  redemptions,  are  regarded  as  benefi- 
cial to  the  whole  body  of  lien-holders.^ 

1  Child  V.  New  York  &  New  England  power,  with  the  requisite  majority,  tosanc- 
R,  Co.  (1880),  129  Mass.  170  ;  s.  c.  2  Am.  tion  a  scheme  of  reconstrnction  whereby 
&  Kng.  R.  R.  Cas.  329  (1880).  the  new  company  should  take  over  the 

2  Sage  ?;.  Central  Hailroad  Co.  (1879),  property  free  from  the  debenture  charges, 
99  U.  S.  334.  the  debenture-holders  receiving  fully  paid 

The  holders  of  debentures  containing  a  shares  in  the  new  company,   where  this 

provision  that  a  majority  of  three-fourths  was  necessary  to  avoid  the  forfeiture  of 

should   have  power  "to  compromise  the  valuable  property.    Snenth  r.  Valley  Gold, 

rights   of    the   debenture-holders   against  Limited  (1893),  2  R.  292. 
the  property  of  the  company "  have  the 


852  RAILWAY   BONDS   AND   MORTGAGES.       [CHAP.  XXXIX. 


Article  III.  —  Agreements  between  Parties  having  Interests 
IN  Mortgaged  Property  governing  Reorganization. 

§  889.  General  Considerations.  —  It  is  well  settled  that  bond- 
holders and  stockholders  may  unite  for  the  purchase  of  the  prop- 
erty, at  a  sale  made  in  good  faith,  to  prevent  a  sacrifice  thereof. 
The  fact  that  the  purchase  is  made  in  pursuance  of  a  reorgani- 
zation agreement  entered  into  prior  to  the  sale  does  not  in  itself 
make  the  sale  a  fraud  upon  the  rights  of  a  non -assenting  creditor, 
nor  entitle  him  to  demand  the  payment  of  his  debt  by  the  new 
company.  1 

An  agreement  was  entered  into  between  stockholders,  bond- 
holders, and  creditors,  of  an  insolvent  company,  to  unite  in  buy- 
ing in  the  property,  and  to  distribute  the  stock  and  bonds  of  the 
new  company  among  all  those  who  signed  the  agreement  accord- 
ing to  a  certain  scheme.  It  was  signed  by  all  the  stockholders, 
nearly  all  the  bondholders,  and  all  the  creditors  except  the  com- 
plainant. It  was  held  that  as  there  was  nothing  hurried  or 
secret  about  the  transaction,  and  the  complainant  had  ample 
opportunity  to  bid  at  the  sale,  he  could  not  maintain  a  bill  to 
establish  a  trust  as  against  the  parties  to  the  agreement,  or 
compel  them  to  pay  the  amount  of  his  judgment,  especially 
where  he  had  lain  by  for  three  and  a  half  years,  and  allowed  the 
new  company  to  be  organized  without  objection. ^ 

The  court  itself  has  no  power  to  fix  a  basis  for  the  common 
action  of  creditors.     It  is  the  subject  of  mutual  agreement.^ 

But  a  reorganization  decree  may  be  treated  as  a  contract  be- 
tween the  bondholders  and  stockholders  who  are  parties  to  it.* 

The  prevention  of  costly  litigation  which  must  ensue,  if  stock- 
holders and  creditors  whose  interests  are  subordinate  to  those  of 
bondholders  persist  in  asserting  their  claims,  is  regarded  as  a 
siilficient  consideration  for  reorganization  agreements  by  which 
bondholders  surrender  a  portion  of  their  paramount  rights  in 
the  property.^ 

An  agreement  by  the  stockholders  to  assent  to  the  foreclosure 
and  surrender  their  certificates  of  stock  is  a  sufficient  considera- 
tion to  support  a  stipulation  whereby  they  are  to  be  given  the 

1  Pennsylvania  Transjiortation  Co.'s  *  Mankintosh  v.  Flint  &  Pere  Mar- 
Appeal  (1882),   101  Pa.  St.  576.                   quette  K.  Co.   (1887),  32  Fed.   Rep.  350. 

2  Ibid.  See  tliis  case  in  34  Fed.  Rep.  582. 

«  Waliash,  St.  Louis,  &  Pacific  R.  Co.  6  Sasje  v.  Central  Railroad  Co.  (1879), 

V.  Central  Trust  Co.  (1884),  22  Fed.  Rep.     99  IT.  S.  334,  per  Strong,  J.  (p.  341). 
138. 


§  890.]  RAILWAY   REORGANIZATIONS,   ETC.  853 

standing  of  common  stockholders  in  the  new  corporation,  espe- 
cially when  the  agreement  provides  an  additional  security  for 
the  bondhulders  by  the  conveyance  to  them  of  certain  surplus 
land  grants  and  land  grant  funds.  ^ 

Under  a  reorganization  agreement  where  bonds  secured  by  a 
prior  mortgage  are  surrendei'ed  to  a  committee  of  bondholders 
who  are  authorized  by  the  agreement  to  hold  those  bonds  as  an 
additional  security  for  those  surrendering  them  for  new  bonds 
secured  by  a  consolidated  mortgage,  such  a  surrender  of  the 
bonds  will  not  amount  to  an  extinguishment  of  them  and  their 
lien,  and  thus  give  non-assenting  bondholders  a  right  to  enforce 
the  first  or  prior  lien  for  their  benefit  at  once.  The  rule  of  law 
in  such  a  case  is  thus  stated  by  Jenkins,  C.  J.  :  "  When  a  nova- 
tion is  thus  sought  to  be  established,  it  must  be  shown  that  the 
substitution  of  the  new  obligation  was  with  design  and  intent 
to  extinguish  the  old  obligation;  and  as  such  an  act  would,  upon 
its  face,  appear  to  be  against  the  interest  of  the  holder  of  tlx; 
bond,  such  intent  will  not  be  presumed  but  must  be  clearly 
established.  A  mere  change  in  the  form  of  the  mortgaged  debt, 
such  as  the  substitution  of  new  bonds  for  those  originally  secured 
by  it,  would  not  extinguish  or  affect  the  lien."^ 

Section  1G28  of  the  New  York  Code  of  Civil  Procedure  which 
prohibits  the  maintenance  of  an  action  to  recover  the  mortgage 
debt  after  foreclosure,  without  leave  of  court,  applies  only  to  the 
original  obligation,  not  to  an  action  based  upon  a  reorganization 
agreement  resulting  from  the  foreclosure.  Such  an  action  may 
be  maintained  without  leave  of  the  court. ^ 

Upon  a  resale  for  a  less  price  of  a  railroad  after  a  reorganiza- 
tion committee  had  failed  to  make  good  its  bid  at  a  former  sale, 
the  committee  is  bound  to  make  up  the  difference  in  the  inter- 
ests of  unsecured  creditors.^ 

§  890.  Reorganization  Agreements  are  favorably  vie^wed  by  the 
Courts.  —  The  courts  favor  reorganization  agreements.     In  de- 

1  Mackintosh  v.  Flint  &  Peie  Mar-  Ketchum  v.  Duncan,  96  U.  S.  659.  In  the 
quette  R.  Co.  (1888),  34  Fed.  Rep.  582  ;  case  of  Union  Trust  Co.  v.  Illinois  Mid. 
s.  c.  36  Am.  &  Eug.  R.  R.  Cas.  340.  Ry.  Co.,  117  U.  S.  434  ;  s.  c.  6  Sup.  Ct. 

2  Mowry  v.  Farmers'  Loan  &  Trust  Co.  Rep.  809,  there  was  no  contingency  and 
(1896),  76  Fed.  Rep.  38,  43  ;  upon  au-  no  reservation  on  the  part  of  those  sur- 
thority  of  Stevens  v.  Railway  Co.,  L.  R.  rendering  bonds.  The  surrender  was  for 
8  Ch.  App.  1064.  See  also  Barry  v.  Mis-  cancellation,  and  there  was  cancellation. 
souri,  K.  &  T.  Railway  Co.  (1888),  34  That  was  a  case  of  novation  pure  and 
Fed.    Rep.    829,    833  ;    Ames   v.   Railway  simple. 

Co.  (1876),  2  Woods,  207  ;  s.  c.  Fed.  Cas.  »  Fernsehild  v.  D.  G.  Yuengling  Brew- 
No.    329;    Fidelity    Ins.    Trust    &    Safe  ing  Co.  (1836),  40  N.  Y.  Supp.  1112. 
Deposit  Co.    V.    Shenandoah    Valley    Ry.          *  Central  Trust  Co.  v.  Cincinnati,  etc. 
Co.,  86  Va.   1  ;  s.  c,  9  S.  E.   Rep.   759  ;  IJy.  Co.  (1892),  58  Fed.  Rep.  501. 


854  RAILWAY   BONDS   AND    MORTGAGES.       [CHAP.  XXXIX. 

ciding  that  general  mortgagees  had  no  right  to  foreclose  the 
prior  underlying  mortgages,  Judge  Baxter  placed  his  decision 
upon  the  theory  that  the  valuable  protective  power  of  a  reorgani- 
zation ap;reement  in  the  case  before  him  would  be  practically 
destroyed  by  permitting  the  property  to  be  sold  as  an  entirety, 
as  no  basis  of  co-operation  could  be  reached  by  the  several 
mortgages.^ 

Combinations  between  creditors,  formed  to  reorganize  insol- 
vent corporations,  ought,  when  legal  and  proper,  to  be  promoted 
and  encouraged,  inasmuch  as  they  are  often  necessary  to  prevent 
the  corporate  property  from  being  sold  at  a  sacrifice. ^ 

There  is  no  reason  why  some  of  the  bondholders  should  not 
take  steps  to  have  the  road  sold,  and  to  buy  it  as  cheap  as  they 
can,  provided  they  do  not  cheat  or  hinder  anybody  in  the 
matter.^ 

Especially  is  there  no  ground  for  regarding  such  action  as 
fraudulent,  where  the  bondholders  who  co-operate  with  a  view 
to  the  purchase  of  the  road  invite  all  the  others  to  join  the 
combination.* 

Such  an  agreement  does  not  deprive  the  other  bondholders  of 
any  of  their  rights.  They  are  at  liberty  to  join  the  combination, 
or,  if  they  decline  to  do  this,  the  combination  still  leaves  them 
free  to  protect  their  interests  by  bidding  at  the  sale.^ 

The  pendency  of  a  reorganization  scheme  looking  to  the 
preservation  of  a  whole  system,  as  an  entirety,  may  sometimes 
be  a  reason  for  refusing  temporarily  an  application  of  the  trus- 
tees of  one  of  the  divisional  mortgages  to  be  put  in  possession.^ 

§  891.  PoTwer  of  Majority  of  Bondholders  under  Agreement."  — 
The  most  that  the  non-assenting  bondholders  can  claim  is  that 
they  shall  not  be  prejudiced  by  the  new  arrangement.  Thus, 
they  are  entitled  to  be  paid  out  of  the  proceeds  of  a  sale  of  the 

1  Wabash,  St.  Louis,  &  Pac.  Ry.  Co.  chase  of  a  road  might  tend  to  defeat  the 
V.  Central  Trust  Co.  (1884),  22  Fed.  Rep.     objects  of  the  sale  contemplated. 

]38;  Central  Trust  Co.  v.   U.  S.   Rolling  s  Wetmore  v.  St.   Paul  &  Pac.  R.  Co. 

Stock  Co.  (1893),  f^&  Fed.  Rep.  5.  (1880),  3  Fed.   Rep.  177  ;     KrophoUer  v. 

2  Central  Trust  Co.  v.  United  States  St.  Paul  &  Pac.  R.  Co.  (1880),  2  Fed. 
Rolling  Stock  Co.  (1893),  56  Fed.  Rep.  5  ;  Rep.  302. 

Rol)inson  v.  Philadelphia  &  Reading  Ry.  *  Wetmore  v.  St.   Paul  &  Pac.  R.  Co. 

Co.  (1886),  28  Fed.  Rep.  340.  (1880),  3  Fed.  Rep.  177. 

In  the  latter  case  the  court  declined  ''  Krnpholler  v.  St.  Paul  &  Pac.  R.  Co. 
to  grant  an  order  to  answer  interrogatoiies  (1880),  2  Fed.  Rep.  302. 
on  the  ground  that  the  intpiiry  tluis  jiro-  ^  Sec   Chap.   XVII.    (Suits  for  Posses- 
posed  to  be  made  as  to  the  private  affair3  sion). 

of    the  organization  formed  for  the  pur-  '  See  also  post  as  to  compromise  under 

statute. 


§  892.]  RAILWAY   REORGANIZATIONS,    ETC.  855 

mortgaged  property  such  part  as  they  would  have  been  entitled 
to  if  the  new  bonds  and  new  trust  deed  had  not  been  executed.^ 

Where  in  England  under  the  Act  of  18t37  the  instrument 
defining  the  powers  of  debenture-holders  provides  that  a  major- 
ity of  three-fourths  in  value  may  compromise  the  rights  of  the 
whole  class  against  the  company  or  the  property,  the  minority 
are  not  bound  by  the  action  of  the  majority,  unless  there  is  an 
actual  difficulty  in  enforcing  the  secured  debt,  which  cannot 
be  got  over  without  some  arrangement,  for  it  is  only  of  such  a 
case  that  the  word  "compromise  "  can  be  properly  used.^ 

§  892.  Subscribers  to  Agreement  not  bound  unless  it  is  carried 
out  substantially  as  made.  —  A  compromise  agreement  Ijetween 
the  company  and  its  creditors,  the  object  of  which  is  to  substi- 
tute a  new  mortgage  for  the  original  ones,  and  thus  place  the 
creditors  on  a  common  footing,  is  not  binding  on  the  subscrib- 
ers, if,  in  carrying  it  out,  there  is  any  substantial  departure 
from  its  terms. ^ 

Where  parties  enter  into  an  agreement  by  which  the  bonds  of 
an  old  railway  company  which  is  insolvent  are  to  be  paid  by 
an  issue  of  bonds  of  a  reorganized  company,  and  an  issue  of 
stock  of  the  latter  in  payment  of  the  other  obligations  of  the 
old  company,  and  the  agreement  is  carried  out  in  the  re- 
organization of  the  company  with  a  full  knowledge  of  all  the 
material  facts  as  to  the  obligations  of  the  old  company,  the  new 
company  is  bound  to  issue  its  stocks  to  a  construction  com- 
pany for  its  full  claim  against   the  old,   and  will  be  estopped 

1  Ames  I'.  Ry.  Co.  (1876),  1  Fed.  Cas.  summoned  to  the  meeting  was  fairly  repre- 
329.  See  an  editorial  in  The  Commercial  sented  by  those  who  attended,  and  whether 
&  Financial  Chronicle  of  July  3,  1897,  the  statutory  majority  who  ajjproved  of 
Vol.  65,  p.  8,  bearing  upon  this  subject.  the  scheme  were  acting  bona  fide,  or  were 

2  Sneath  v.  Valley  Gold  (Limited),  seeking  to  promote  interests  adverse  to 
(1893),  C.  A.,  L.  R.  1  Ch.  477  ;  s.  c.  40  those  of  the  class  whom  they  professed  to 
Am.  &  Eng.  Corp.  Cas.  337,  note.  represent,   and  generally  whether  the  ar- 

The  English  Companies  Act  of  1870,  rangement  is  such  as  a  man  of  business 
autliorizing  a  three-fourths  majority  of  a  would  reasonably  approve.  In  re  Ala- 
meeting  of  the  creditors,  or  of  a  single  bama,  etc.  Ry.  Co.  (1891),  C.  A.,  L.  R.  1 
class  of  creditors,  of  a  company  which  is  Ch.  213,  approving  Tn  re  Empire  Jlining 
being  wound  up,  to  agree  to  a  compromise  Co.,  44  Ch.  Div.  402. 
or  arrangement  which,  if  sanctioned  by  This  act  does  not  authorize  a  majority 
the  court,  is  binding  on  all  the  creditors  of  creditors  to  bind  the  minority  as  in  the 
or  class  of  creditors,  as  the  case  may  be,  is  case  of  an  arrangement  under  the  .Toint 
applicable  to  holders  of  debentures.  In  Stock  Companies  Arrnngement  Act  of 
exercising  its  power  of  sanctioning  a  1870.  In  re  Albert  Life  Assn.  (1871),  6 
scheme  of  arrangement  the  court  will  not  Ch.  App.  381  ;  In  re  Alabama,  U.  T.  & 
only  ascertain  that  all  the  statutory  con-  P.  .1.  Ry.  Co.  (1891),  1  Ch.  236. 
ditions  have  been  complied  with,  but  will  3  Miller  v.  Ruth. rid  &  Washington  R. 
also  consider  whether  the  class  of  creditors  Co.  (1867),  40  Vt.  399. 


856  RAILWAY   BONDS    AND   MORTGAGES.       [CHAP.  XXXIX. 

to  defend  in  an  action  to  compel  the  performance  of  the  agree- 
ment, on  the  ground  tliat  stock  in  the  old  was  issued  to  too  great 
an  amount  for  the  construction  work  done  by  the  construction 
company.  ^ 

A  reorganization  committee  of  bondholders  were  by  their 
agreement  fully  empowered  to  adjust,  compromise,  etc.,  claims 
against  the  company.  The  bonds  of  the  bondholders  were 
surrendered  to  them;  they  entered  into  negotiations  with  the 
holders  of  preferential  claims  and  agreed  that  the  latter  should 
assign  their  claims  to  the  committee  and  receive  from  the  com 
pany  therefor  negotiable  certificates  for  certain  sums  payable  in 
cash  to  be  secured  by  the  bonds  in  the  hands  of  the  committee. 
The  holders  of  the  claims  assigned  them  to  the  committee  as 
they  had  agreed,  but  the  committee  did  not  deliver  the  certifi- 
cates called  for  by  their  contract.  There  was  a  foreclosure  and 
sale.  This  agreement  between  the  claimants  and  the  com- 
mittee was  held  to  be  within  the  authority  of  the  committee,  and 
was  treated  as  a  mortgage  upon  the  bonds  by  the  court,  and  the 
claimants  allowed  to  be  paid  out  of  the  proceeds  of  the  sale, 
upon  the  principle  that  equity  will  consider  that  as  done  which 
ought  to  have  been  done.'^ 

After  progress  in  the  performance  of  a  reorganization  agree- 
ment (which  provided  for  a  first  and  second  mortgage,  the 
second  for  the  security  of  bonds  with  which  the  trustees  were  to 
take  up  the  certificates  they  had  issued  for  surrendered  bonds) 
had  reached  the  point  of  the  formation  of  the  new  company, 
a  majority  of  the  certificate-holders  agreed  to  a  modification  of 
the  agreement  by  which  they  were  to  receive  fifty  per  cent  of 
their  claims  in  first-mortgage  bonds  of  the  new  company  and 
the  balance  in  stock.  It  was  held  in  an  action  by  a  non- 
assenting  certificate-holder  that  the  assenting  certificate-holders 

1  Davidson  v.  Mexican  National  R.  Co.  holders  could  not  be  allowed  an  advantage 
(1896),  11  App.  Div.  28;  s.  c.  42  N.  Y.  over  assenting  bondholders  by  consideiing 
Su))p.  1015.  the  latter's  surrendered  bonds  extinguished. 

2  Central  Trust  Co.  v.  Carter  (1896),  In  the  same  case  tliere  was  an  agreement 
78  Fed.  Rep.  225,  that  a  branch  of  the  road  should  be  sold, 

It  was  held  in  Mowry  v.  Farmers'  Loan  and  the  distribution  of  the  proceeds  of  the 
&  Trust  Co.  (1896),  76  Fed.  Rep.  38,  that  sale  left  with  the  committee  of  bondhold- 
where  a  committee  of  bondholders  had  ers.  For  the  reason  that  certain  bond- 
provided  in  their  plan  of  reoigaiiization  Itolders  failed  to  assent,  the  road  was  not 
that  tlie  holders  of  the  old  bonds  should  sold.  It  was  heUl  that  by  their  action 
surrender  tliein  and  receive  new  bonds  the  lien  of  the  as.senting  bondliolders  was 
instead,  the  surrendered  bonds  not  to  be  not  waived  in  favor  of  the  nou-assenting 
cancelled,  but  held  by  the  trustee  as  an  Ijondholders. 
additional   security,    non-assenting   bond- 


§  893.]  RAILWAY   REORGANIZATIONS,    ETC.  857 

could  not  be  compelled  to  receive  second -mortgage  bonds  accord- 
ing to  the  terms  of  the  first  agreement,  and  that  plaintiff  could 
not  at  this  stage  compel  a  specific  performance  of  that  agree- 
ment as  to  his  bonds ;  but  the  court  would  give  him  judgment 
for  the  value  of  the  bonds  he  was  to  receive.^ 

§  893.  When  Right  to  share  in  Benefits  of  Scheme  terminates.  — 
As  a  general  principle  it  may  be  said  that  those  who  seek  to 
share  in  the  benefits  of  a  reorganization  agreement  must  comply 
strictly  with  its  provisions  as  to  the  time  within  which  they 
must  exercise  their  option  to  come  into  the  scheme.^ 

In  a  decree  providing  in  terms  for  a  purchase  by  the  bond- 
holders it  is  usual  to  insert  a  clause  perm.itting  minority  bond- 
holders to  come  in  after  the  purchase  within  a  limited  time  on 
equal  terms  with  the  purchasing  bondholders.^ 

But  the  court  will  not  revise  a  decree  in  which  such  a  clause 
is  not  inserted,  when  there  is  nothing  to  show  why  it  was  not 
inserted.  Under  such  circumstances,  it  will  be  assumed  that 
there  were  adequate  reasons  for  the  non-insertion.* 

In  an  action  for  damages  brought  by  a  stockholder  of  a  defunct 
railroad  company,  allegations  that  the  road  had  been  purchased 
by  a  committee  of  bondholders,  that  upon  a  question  raised  by 
a  portion  of  the  stockholders  as  to  the  validity  of  the  sale  and  of 
the  bonds,  litigation  ensued  which  was  finally  compromised, 
the  stockholders  agreeing  with  the  committee  to  withdraw  all 
opposition  to  the  sale,  in  consideration  of  being  accorded  the 
right  to  subscribe  for  stock  in  a  new  corporation  to  be  organized 
upon  terms  specified  in  a  circular  addressed  to  the  stockholders 
of  the  original  corporation,  and  that  the  plaintiff  had  no  notice 
of  the  contents  of  such  circular  until  long  after  the  expiration  of 
the  period  fixed  for  the  stockholders  to  come  into  the  scheme, 
held  insufficient  to  support  the  action,  since  the  agreement  was 
not  made  by  the  company  or  in  its  behalf.  Nor  could  the  plain- 
tiff complain  of  the  terms  of  the  agreement,  inasmuch  as  he  was 
not  a  party  to  it,  unless  he  had  elected  to  come  in  and  ratify  it 
in  its  entirety  and  not  simply  the  provisions  favorable  to  him- 
self. All  the  rights  of  the  original  stockholders  having  been 
destroyed  by  the  foreclosure  sale,  they  had  none  except  those 
which  sprang  out  of  the  agreement  with  the  purchasing  com- 

^  Dutenhofer   v.    Adirondack  Ry.   Co.  Rep.   242,  250;  s.  c.  on  demurrer  (1880), 

(1891),  14  N.  Y.  Supp.  558.  3  Fed.  Hep.  302. 

2  The    same    rule   governs   where   the  *  Huntington    v.   Little   Rock  &  Fort 

right  of  participation  depends  on  a  statute.  Smitli  Ry.  Co.  (1882),   16  Fed.  Rep.  906; 

See  post.  s.  c.  3  McCrary,  581. 

8  Sahlgaardi-.  Kennedy  (1882),  13  Tm. 


858  RAILWAY   BONDS   AND   MORTGAGES.      [CHAP.  XXXIX. 

mittee,  and  if  those  rights  were  violated,  they  should  have  looked 
to  the  parties  with  whom  they  contracted.  The  latter  could  be 
held  liable  for  misconduct  in  the  execution  of  their  trust  by  any 
stockholder  who  had  adopted  the  arrangement,  but  there  is  no 
recourse  in  such  a  case  against  the  new  company  itself.^ 

The  position  of  the  stockholders  in  the  old  company  is  still 
weaker,  where  the  agreement  between  the  bondholders  not  only 
fixes  a  time  for  the  payment  of  assessments  on  the  shares  in  the 
new  company,  but  expressly  provides  that,  in  case  any  of  those 
stockholders  neglect  or  refuse  to  pay  the  assessments  at  the  time 
appointed,  the  privilege  of  receiving  the  shares  allotted  to  them 
shall  be  ratably  distributed  among  those  who  have  paid  their 
assessments.  The  residuary  benefits  thus  provided  for  non- 
defaulting  stockholders  become  vested  rights,  as  soon  as  the 
default  occurs,  and  cannot  be  thereafter  disturbed  in  favor  of  a 
stockholder  who  has  made  default.^ 

Similarly  a  subscriber  to  a  reorganization  agreement  who 
agrees  to  surrender  his  bonds  "  when  he  shall  be  required  to  do 
so,"  and  receive  in  lieu  thereof  the  new  bonds  provided  for  by 
the  plan,  cannot  claim  any  benefits  under  it,  or  insist  on  the 
delivery  of  the  new  bonds,  if  he  receives  notice  to  surrender  his 
bonds  from  the  trustee  appointed  to  carry  out  the  agreement, 
but  fails  to  do  so  until  after  the  purchase  of  the  road  and  the 
formation  of  the  new  company.^ 

Where  the  decree  in  a  railroad  foreclosure  suit  instituted  by 
representative  bondholders  provides  that  in  case  any  of  tlie 
holders  of  the  bonds  or  coupons  become  purchasers,  they  may 
pay  the  price  in  bonds  or  coupons  to  a  trustee  who  shall  receive 
a  conveyance  for  them,  and  such  others  "as  may  signify  to  him 
their  desire  to  become  interested  in  said  purchase,  and  jiay  him 
their  due  proportion  of  the  sum  which  may  be  bidden  for  the 
same,  and  the  costs  of  the  suit  and  other  expenses,"  and  it  is 
subsequently  agreed  at  a  meeting  of  the  bondholders  that  the 
holders  of  three-fourths  in  amount  of  the  bonds  "shall  have 
power  to  order  a  sale  by  the  trustee  at  such  time,  plnce,  and 
manner  as  they  shall  think  proper,"  the  contingency  of  a  ])art 
of  the  l)ondholders  refusing  or  neglecting  to  come  in,  being  thus 
expressly  provided  for,  the  inference  is  that  the  parties  intend 
that  the  right  to  come  into  the  agreement  shall  cease  as  soon  as 

1  Thornton  v.  Wabash  Ily.  Co.  (1880),  »  Carpenter  v.  Catlin  (1865),  44  Barb. 

81  N.  Y.  46'J.  "  75. 

'■i  Dow  V.  Iowa  Central  Ry.  Co.  (1893), 
70  Hun,  186. 


§  894.]  RAILWAY   REORGANIZATIONS,    ETC,  859 

the  sale  by  the  trustee  is  consunimated.  This  inference  will  pre- 
vail even  though  the  conveyance  to  the  vendee  is  "  in  trust  for  all 
the  owners  of  the  bonds,"  the  effect  of  such  a  clause  being  lim- 
ited by  the  terms  of  the  decree  and  the  acts  of  the  parties.  After 
the  sale  is  made  by  the  trustee  in  accordance  with  the  directiouf> 
of  the  requisite  majority  of  the  bondliolders,  a  non-participating 
bondholder  is  relegated  to  his  ordinary  right  to  share  in  the  pro- 
ceeds of  the  foreclosure  sale,  and  cannot  claim  any  of  the  stock 
of  a  new  company  organized  by  the  bondholders  under  a  special 
statute  for  the  purpose  of  taking  over  the  road.  What  each 
bondholder  has  throughout  the  proceedings  is  not  an  absolute 
right  of  property  in  the  new  corporation,  irrespective  of  his  own 
action,  but  an  option  to  be  exercised  or  not  at  his  own  choice,  and 
within  such  reasonable  time  as  will  avoid  prejudice  to  the  rights 
of  others.  The  last  moment  for  the  exercise  of  such  option  is 
when  the  deed  is  executed,  transferring  the  property  to  the  new 
corporation. 1 

When  a  reorganization  committee  of  a  railroad,  by  circular 
letter,  requested  the  bondholders  to  deposit  their  bonds  with  a 
certain  designated  trust  company  on  or  before  a  specified  date,  a 
bondholder  who  neglected  so  to  do,  bnt  whose  bond  was  after- 
wards received  by  the  secretary  of  the  committee  for  which  he 
gave  his  individual  receipt,  was  held,  nevertheless,  entitled  to  re- 
lief as  being  a  valid  bondholder,  and  it  was  also  held  that  the 
actual  holder,  namely,  the  secretary,  in  his  individual  capacity 
was  not  under  the  circumstances  a  necessary  party .^ 

§  894.  Rights  of  Parties  to  Agreement,  when  complete.  —  The 
acceptance  of  an  original  bond  by  the  president  and  secretary  of 
a  permanent  committee,  appointed  by  the  projectors  of  a  reorgan- 
ization scheme,  and  held  out  to  the  public  as  their  general  agent 
in  the  matter  of  the  reorganization,  binds  the  new  company, 
when  formed,  and  gives  the  person  surrendering  the  bond  an  irre- 
vocable right  to  the  new  one  which  is  to  be  substituted  therefor. 
If  the  secretary  afterwards  hands  over  the  bond  so  surrendered 
to  the  trust  company  named  in  the  })lan  as  the  depositary  of  the 
bonds,  and  receives  therefor  a  certificate  in  his  own  name,  the 
bondholder  is  in  no  way  responsible  for  his  misconduct.'^ 

A    provision    in    a    reorganization    agreement    empowering   a 

1  Landis  v.  Western  Pennsylvania  R.  ^  Midland  Railroad  Co.  of  New  Jersey 
Co.  (1890),  133  Pa.  St.  579  ;  s."  c.  19  Atl.  v.  Hitchcock  (1884),  37  N.  J.  Eq.  549; 
Eep.  556.                                                            s.  c.  14  Am.  &  Eng.  R.  E.  Cas.  598. 

2  Hitchcock  V.  Midland  Ry.  Co.  of  New 
Jersey  (1880),  33  N.  J.  Eq.  86. 


860  RAILWAY   BONDS   AND    MORTGAGES.      [CHAP.  XXXIX. 

majority  in  value  of  the  holders  of  certificates  issued  in  place  of 
the  bonds  and  stock  of  the  mortgagor  company  to  modify  the 
agreement  in  any  manner  they  may  deem  best  for  the  interests  of 
all  concerned,  will  not  be  construed  so  as  to  prolong  this  right  of 
the  majority  beyond  the  time  when  the  property  passes  into  the 
possession  of  the  new  company,  which  is  to  consummate  the 
scheme  by  issuing  its  bonds  and  stock  to  the  certificate-holders. 
The  rights  and  obligations  of  that  company  become  fixed  by  the 
conveyance  of  the  property  to  it,  and  a  subsequent  change  in  the 
scheme  by  which  it  is  agreed  by  a  mere  majority  of  the  certificate- 
holders  that  one  set  of  bonds  shall  be  issued  instead  of  two,  as 
contemplated  by  the  original  agreement,  is  illegal  as  to  a  non- 
assenting  participant  in  the  reorganization.^ 

An  agreement  was  entered  into  by  the  creditors  of  a  company 
that  they  would  receive  bouds  of  the  new  company  to  be  organ- 
ized to  be  delivered  within  "  six  montlis  "  from  the  "  foreclosure 
sale."  At  the  end  of  six  months  the  sale  had  not  been  con- 
firmed. The  court  construed  that  the  parties  agreeing  to  deliver 
the  bonds  would  be  entitled  to  "  six  months  "  from  the  final  con- 
summation of  the  sale  before  they  could  be  required  to  deliver 
them ;  under  the  circumstances  of  the  case  the  court  intimated 
that  any  other  construction  of  the  agreement  would  be  in  viola- 
tion of  the  principle  that  a  construction  that  would  forfeit  a  right 
is  not  favored  in  law.^ 

§  895.  Reorganization  :  Trustee's  Control  of  Scheme.  - — -  A  trust 
company  does  not  lose  control  of  a  scheme  to  reorganize  a  rail- 
road company  under  which  it  is  empowered  to  ascertain  the  float- 
ing debt  and  expense  of  organization,  and  assess  the  amount  to 
be  paid  by  stockholders  to  entitle  them  to  new  stock,  by  the  mere 
fact  of  an  unauthorized  and  ineffectual  attempt  of  certain  of  its 
officers  to  make  an  assessment  in  its  name,  as  where  their  acts 
were  not  ratified  by  the  directors.^ 

§  89G.  Po-wer  of  Reorganization  Committee  to  fix  Date  for  Matu- 
rity of  New  Issue  of  Bonds.  —  A  committee  to  which  is  intrusted 
the  regulation  of  any  "  matter  of  detail "  which  might,  in  the 
judgment  of  all  or  of  a  majority  of  its  members,  be  necessary  or 
exj)ediont  for  carrying  out  the  plan,  acts  within  the  scope  of  its 
authority    when    it    causes    to    be    inserted    in    certain    "  income 

1  Diitciiliofpr  V.  Adirondack  Ry.  Co.  «  Gernsheim  y.  Central  TrustCo.  (1892), 
(18H1),  38  N.  Y.  St.  Rep.  710  ;  s.  c.  14  40  N.  Y.  St.  Rep.  967  ;  s.  c.  16  N.  Y. 
N.  Y.  Siipp.  558.                                              Supp.  127. 

2  Houston,  E.  &  W.  T.  Ry.  Co.  v.  Keller 
(Tex.,  IH'JG),  37  S.  W.  Rep.  1062. 


§  897.]  RAILWAY    REORGANIZATIONS,    ETC.  861 

bonds,"  for  which  the  plan  provides,  a  clause  giving  the  company 
an  oi)tion  to  pay  the  bonds  before  the  date  at  whicli  they  are  to 
mature.^ 

§  897.  Discretion  of  Reorganization  Trustees  as  to  Issue  of  Stock 
in  New  Company.  — -  A  road  was  purchased  by  trustees  in  behalf  of 
bondholders  in  pursuance  of  an  agreement,  whereby  the  bond- 
holders were  to  surrender  their  bonds,  and  the  road  either  sold  at 
a  given  price  within  a  time  named,  or,  in  case  such  sale  should 
not  be  made,  taken  over  by  a  new  company  to  be  organized  l^y  the 
purchasers  from  the  bondholders.  In  the  latter  event  it  was  pro- 
vided that  "  the  stock  of  the  new  company  should  be  issued  to 
and  divided  among  the  holders  of  the  receipts  for  the  bonds  sur- 
rendered to  the  trustees,  in  proportion  to  the  number  of  bonds  de- 
posited for  which  the  receipts  were  issued,  upou  the  surrender  to 
the  same  trustees  of  such  receipts."  The  new  company  was  or- 
ganized, but  the  trustees  did  not  deliver  the  whole  capital  stock  to 
the  bondholders.  In  an  action  against  them  by  a  bondholder  for 
an  accounting  it  was  asserted  that  they  failed  to  perform  their 
duty  as  trustees.  It  appeared  that  the  trustees  were  vested  with 
large  discretionary  powers  in  regard  to  the  execution  of  the  reor- 
ganization agreement,  and  that  their  determination  as  to  the 
meaning  of  any  provision  therein  was  to  be  conclusive.  It  also 
appeared  that  the  law  of  the  State  in  which  the  company  was 
organized  limited  the  issue  of  capital  stock  to  "  the  original  cost 
of  the  construction  of  the  railroad,  and  the  equipment  purchased, 
and  such  sum  as  might  be  necessary  to  complete  the  same." 
Under  these  circumstances  it  was  held  that  the  trustees  could 
not,  in  the  absence  of  proof  of  positive  bad  faith,  be  held  liable 
for  restricting  the  amount  of  paid-up  stock  to  what  they  deemed 
the  actual  value  of  the  road,  although  it  was  provided  in  the 
articles  of  incorporation  that  other  stock  might  be  issued  by  the 
directors  and  sold  for  money  or  other  consideration.^ 

A  trust  company  authorized  to  determine  the  amount  to  be 
paid  by  the  stockholders  of  an  old  company  to  entitle  them  to 
stock  in  the  new,  on  the  reorgnnization  of  a  railroad,  need  not 
notify  the  stockholders  as  to  when  it  intends  to  begin  the  per- 


*  Lehigh   Coal    &    'N'avigation   Co.    v.  portion  of  the  capital  of  a  company  was  to 

Central  R.  Co.  of  New  Jersey  (1881),  34  be  returned  to  the  shareholders  was  con- 

N.  J.  Eq.  88.  firmed   by   the  court   upon   the   statutory 

2  White  V.   Wood    (1892),  129  N.   Y.  requirements  being  observed,  although  it 

527  ;  s.  c.  29  N.  E.  Rep.  835  ;  51  Am.  &  was  to  be  immediately  borrowed  on  deben- 

Eug.  R.  R.  Cas.  73.  tares.   7/ireNixons  Navigation  Co.  (1S'J7), 

A  scheme  of  reduction  under  which  a  1  Ch.  872. 


862  EAILWAY   BONDS   AND   MORTGAGES.       [CHAP.  XXXIX. 

formance  of  its  task.  But  the  stockholders  may  demand  a 
hearing.^ 

§  898.  Discharge  of  Liens  of  Creditors  participating  in  Scheme, 
when  inferred.  —  When  a  reorganization  scheme  to  which  both 
the  bondliolders  and  certain  judgment  creditors  are  parties 
plainly  shows  an  intention  that  the  new  securities  to  be  issued  on 
a  like  basis  to  them  shall  extinguish  their  debts,  the  consumma- 
tion of  the  scheme  operates  as  payment  of  the  claims  thus  pro- 
vided for,  and  neither  the  bondholders  nor  the  judgment  creditors 
have  any  claim  upon  the  proceeds  of  the  foreclosure  sale.  That 
the  purchasing  committee  are  given  by  the  plan  the  most  ample 
powers  in  regard  to  the  bonds  deposited  with  them,  does  not,  after 
the  plan  is  carried  out,  in  any  sense  imply  that  the  bonds  are  to 
be  considered  as  unpaid.  Nor  has  a  provision  in  such  plan, 
authorizing  the  committee  to  receive  the  proceeds  of  the  sale,  any 
application  to  the  condition  of  affairs  arising  when  the  commit- 
tee becomes  itself  the  purchaser  of  the  wdiole  road.^ 

§  899.  Bondholders  accepting  Preferred  Stock  in  New  Corpora- 
tion give  up  their  Rights  as  Creditors.  —  Bondholders  who  surren- 
der their  bonds  in  pursuance  of  a  scheme  of  reorganization  and 
receive  in  lieu  thereof  preferred  stock  in  the  new  company 
under  an  agreement  entitling  them  to  dividends  "  out  of  the  net 
earnings  of  the  road  (if  earned  in  the  current  year,  but  not 
otherwise)  not  to  exceed  seven  per  cent,  in  any  one  year  payable 
semi-annually,  after  payment  of  mortgage  interest  and  delayed 
coupons  in  full,"  are  to  be  considered  as  having  abandoned  their 
position  as  creditors  for  that  of  stockholders,  entitled  to  claim 
only  dividends  declared  out  of  the  net  earnings  of  any  particular 
year.  Moreover,  in  the  computation  of  those  net  earnings  all  the 
operations  and  business  of  the  company  must  be  viewed  as  a  unit, 
the  main  line  and  auxiliaries  to  be  considered  with  reference  to 
their  interdependent  necessities  and  with  regard  for  the  benefit  of 
all  interested  in  the  property.  Rents,  under  leases  taken  after 
the  issue  of  the  preferred  stock  and  interest  on  a  loan  of  money, 
also  l)orrowed  after  "such  issue  to  equip  the  road,"  are,  therefore, 
properly  paid  ))cfore  such  dividends.^ 

Preferred  st(jck  issued  to  l)ondholdcrs  in  a  reorganization 
scheme,  entitling  them  to  "  non-cumulative  dividends,  at  the  rate 
of  six  per  cent  per  annum  in  preference  to  the  common  stock, 

1  Oernslicim  v.  The  Central  Trust  Co.  ^  st.  John  v.  Erie  Ry.  Co.  (1875),  22 
(1891),  40  N.  Y.  State  Rep.  967.  Wall,  136  ;  affirming  s.  c.  10  Blatch.  271 

2  Central  Trust  Co.  v.  Cineinnati,  J.  &  (1872). 
M.  Ry.  Co.  (1892),  58  Fed.  Rep.  500. 


§  900.]  RAILWAY    REORGANIZATIONS,    ETC.  863 

but  dependent  on  the  profits  of  each  particular  year,  as  declared 
by  the  Board  of  Directors,"  does  not  operate  to  deprive  the  direc- 
tors of  the  discretion  with  which  managing  agents  of  corporations 
are  usually  invested,  when  distributing  ihe  earnings  of  property 
committed  to  their  hands.  The  woids  "  as  declared  by  the  Board 
of  Directors"  in  this  provision  refer  to  "dividends,"  not  to  "pro- 
fits," and  the  directors  therefore  have  the  power  to  devote  the 
profits  of  any  given  year  to  improvements  of  the  property  to  the 
exclusion  of  any  dividend  to  the  preferred  stockholders.^ 

If  income  bonds  are  issued  under  a  reorganization  plan, 
instead  of  preferred  stock,  the  interest  thereon  is  regarded  as 
dividends,  in  so  far  that  it  cannot  be  paid  before  the  floating  debt 
incurred  in  each  interest  period.^ 

Preferred  stockholders  in  a  reorganized  company  cannot  claim 
a  priority  of  payment  for  their  dividends,  unless  a  specific  lien  is 
shown  beyond  all  doubt  to  exist  in  their  favor,  and  whether  or  not 
such  a  lien  exists,  must  depend  upon  what  actually  occurred,  and 
upon  the  stipulations  affecting  the  property  which  were  entered 
into  by  parties  who  had  the  right  to  encumber  it,  and  not  upon 
what  might  have  been  in  the  minds  of  the  stockholders  at  the  time 
these  various  transactions  took  place.^ 

§  900.  Restoration  of  Bondholder  to  his  Rights  as  Creditor,  vrhen 
properly  refused.  —  When  the  question  is  merely  as  to  the  proper 
distribution  of  the  proceeds  of  a  foreclosure  sale  under  a  mortgage 
designed  to  secure  new  bonds  issued  in  exchange  for  old  ones  of 
several  classes,  and  not  the  settlement  of  general  rights  and 
equities  between  the  parties,  the  court  will  not  entertain  a  petition 
by  a  bondholder  to  be  allowed  to  share  in  such  proceeds  when  his 
right  to  do  so  is  placed  upon  the  existence  of  a  special  equity  in 
his  favor,  the  fund  being  insufficient  to  satisfy  the  bonds  of  a  class 

'  New  York,  L.  E.  &  W.  R.  Co.  v.  stock  was  to  be  a  first  claim  on  the  prop- 
Nickals  (18S6),  119  U.  S.  296  ;  s.  c.  7  erty  of  the  eori)oration  after  its  indebted- 
Sup.  Ct.  Rep.  209,  referring  to  St.  John  ness,  and  that  the  holder  was  to  receive  a 
V.  Erie  R.  Co.,  supra,  and  Warren  v.  King  certain  rate  of  interest  from  the  net  earn- 
(1883),  108  U.  S.  389,  and  overruling  the  ings,  before  any  payment  of  dividends  on 
decision  of  the  lower  court  in  Niekals  v.  the  common  stock. 

N.  Y.,  L.  E.  &  W.  R.  Co.  (1883),  15  Fed.  It  was  held  that  the  effect  of  the  agree- 

Rep.  575  ;  s.  c.  13  .\m.  &  Eng.  R.  R.  Gas.  nient  was  to  provide  a  mode  by  which  a 

139.  preference  should   be  given  to  a  particular 

2  Lehigh  Coal  &  Navigation  Co.  i'.  class  of  stockholders,  and  that  the  parties 
Central  R.  Co.  of  New  Jersey,  34  N.  J.  did  not  contemplate  that  the  "indebted- 
Eq.  88.  ness  "  referred  to  was  only  tliat  indebted- 

3  King  V.   Ohio  &  Mississippi  R.   Co.  ness  which  existed  against   the  company, 
(1880),  2  Fed.  Rep.  36.     In  this  case  the  when  the  agreement  was  made, 
certificates    provided    that    the   preferred 


864  RAILWAY   BONDS   AND   MORTGAGES.       [CHAP,  XXXIX. 

which,  bj  the  terms  of  the  arrangement  leading  to  the  execution 
of  the  new  mortgage,  were  to  take  precedence  of  the  new  ones 
received  by  the  petitioner.^ 

§  901.  "Who  estopped  to  object  to  Reorganization  Scheme.^  — 
Exceptions  to  a  sale  in  foreclosure  will  not  be  entertained  in 
favor  of  a  bondholder  who  has  been  made  a  party  to  a  reorganiza- 
tion scheme,  and  has  surrendered  his  bonds  in  exchange  for  the 
stock  and  bonds  of  the  new  company,  for  by  so  doing  he  elects  to 
abide  by  the  action  of  the  trustees.^ 

So,  also,  a  bondholder  who  receives  the  bonds  of  the  new  com- 
pany allotted  to  him,  and  attempts  to  buy  more,  and  brings  suit 
for  some  he  claims  to  be  his,  and  acts  in  every  way  as  if  he 
acquiesced  in  the  proceedings  of  the  purchasing  committee,  is 
estopped  to  object  to  the  validity  of  the  reorganization  scheme  on 
the  ground  that  his  representative  on  the  committee  exceeded  his 
powers.* 

The  consent  of  bondholders  required  by  statute  in  Wisconsin 
to  a  sale  made  in  pursuance  of  a  reorganization  scheme  may 
properly  be  inferred  from  the  silence  during  the  whole  of  a  pro- 
tracted litigation,  carried  on  with  prior  incumbrances  by  a  corpo- 
ration formed  to  take  the  title  to  the  property  for  the  benefit  of 
such  bondholders.^ 

§  902.  Plans  held  equitable,  or  the  contrary.  —  The  COUrt  will 
strive  to  give  efl'ect  to  a  fair  arrangement,  passing  over  mere 
technical  defects.^ 

1  Ex  parte  White,  hi  re  Jesnp,  Wil-  to  object  to  the  terms  of  a  decree  of  sale, 
mington  &  Manchester  R.  Co.  (1871),  2  much  less  a  company  formed  bj-  arrange- 
S.  C.  469.  ment  between  the  parties  controlling  the 

There     the     petitioner    alleged,    as    a  sale.      Compton  v.  Jesup  (1897),   167  U. 

ground   for  receiving  the  relief  asked  for,  S.  1. 

that  he  had  exchanged  his  old  bonds  for  ^  Crawsha}'  v.   Soutter  (1867),  6  Wall. 

new  ones  on  the  understanding  that  if  all  739. 

the   bondholders  did    not   come  into  the  *  Matthews   v.    Murchison    (1882),   15 

arrangement,  the  original   securities  were  Fed.  Rep.  691  ;  s.  c.  9  Am.   &  Eng.  K.  R. 

to    be    returned   to    him.       His   demand,  Cas.  693. 

therefore,  was  that,  .so  far  as  he  was  con-         ^  Barnes  v.  Chicago,  M.  &  St.  Paul  Ry. 

cerned,  the  fund  should  be  distributed  on  Co.  (1886),  122  U.  S.  1  ;  s.  c.  7  Sup.  Ct. 

equitable  principles.     The  court  said  that  Rep.  1043. 

if  he  had  a  right  to  disturb  the  arrange-  ^  In  re    Dynevor,    etc.  Collieries   Co. 

ment,  he  had  an  appropriate  remedy,  but  (1879),  11  Ch.  D.  605. 
that,  as  his  only  claim  then   recognizable  In  Kngland  a  scheme  conferring  power 

was  to  participate  in  the  distribution  of  upon  a  statutory  majority  to  make  binding 

the  assets,  it  was  a  sufRcient  answer  to  his  any  compromise  or  arrangement  which  the 

petition,  that  the  question  of  his  right  in  court  might  sanction  rei^uires  the  sanction 

respect  to  the  assets  did  not  depend  on  of  the  court.     Re  Land  Mortgage  Bunk  of 

the  issue  of  fact  raiseil  by  his  allegations.  Florida  (1896),  3  Manson,  164. 

2  Au  outside  purchaser  cannot  be  heard  Pending  an  injunction  and  receiver,  a 


§  902.]  RAILWAY  REORGANIZATIONS,   ETC.  865 

Where  it  is  to  the  interest  of  a  railway  company  that  the  rights 
of  all  bondholders  of  several  series  of  mortgage  bonds  should  be 
cut  off  to  enable  tlie  company  to  reorganize,  a  decree  foreclosing 
all  the  mortgages,  entered  by  consent  of  the  creditors,  will  not  be 
set  aside  at  the  suit  of  a  stockholder  on  the  ground  that  the 
pirincipal  of  some  of  the  mortgages  is  not  yet  due.^ 

Unsecured  creditors  may  have  a  plan  of  reorganization  set 
aside  which  makes  no  provision  for  the  payment  of  their  debts, 
and  contemplates  not  only  a  complete  absorption  by  the  purchas- 
ing committee,  or  its  successors,  of  the  entire  property  of  the 
company,  free  from  all  liability  for  its  debts,  but  also  a  distribu- 
tion of  a  large  sum  of  money  among  the  stockholders,  who,  under 
the  doctrine  that  the  corporate  assets  are  a  trust  fund  for  the 
benefit  of  the  creditors,  hold  their  interest  subject  to  the  debts  of 
the  company .2 

It  is  an  act  of  fraud  for  a  bondholder  to  employ  the  mortgage 
security  as  an  instrument  whereby  he  may  obtain  for  himself  the 
mortgaged  property  at  the  lowest  price,  leaving  his  associate  bond- 
holders unpaid.  "  Community  of  interest  involves  mutual  obliga- 
tion." Nor  are  the  managers  and  officers  of  a  company,  who  are 
trustees  as  well  for  stockholders  as  creditors,  any  less  culpable  if 
they  seek  their  own  profit  at  the  expense  of  its  stockholders,  or 
even  its  bondholders.  It  is  their  duty  in  case  of  a  sale  of  the 
corporate  property  to  secure  the  highest  possible  price  obtainable.^ 

The  court  will  scrutinize  the  resolutions  of  creditors,  although 
recognizing  them  as  the  better  judges  of  what  is  to  their  commer- 
cial advantage.* 

Where  it  appears  that  amongst  the  majority  were  voters  who 
were  not  acting  in  good  faith,  the  court  will  not  sanction  a 
reconstruction.^ 

corporation  may  take  steps  towards  a  re-  2  Railroad  Company  v.  Howard  (1868), 

organization,  employing  agents  and  other-  7  Wall.  392. 

wise  incurring  liability.     Linn  v.  Joseph  »  Jackson  v.  Ludeling  (1864),  21  Wall. 

Dixon    Crucible  Co.    (1896),   35  Atlantic  616. 

Rep.  2.  *  In  re  English,  Scottish,  &  Australian 

A  petition  for  confirmation  of  a  scheme  Chartered  Bank  (1893),  3  Ch.  D.  385,  409. 

between  a  railway  company  and  debenture-  ^  In  re  Wedgwood   Coal    &   Iron   Co. 

holders,   which  included  the  purchase  of  (1877),  6  Ch.  D.  627  ;  In  re  Empire  Min- 

the  petitioning  company's  undertaking un-  ing  Co.  (1890),  44  Ch.  D.  403. 

der  legislative  authority  was  denied,  in  the  But  where  the  affairs  of  a  company  could 

interests  of  general  creditors,  until  a  bill  not  be  restored  to  their  original  position,  a 

before  Parliament  was  actually  passed.    In  winding-up  scheme  was  sanctioned  which 

re  Eastern  and  Midland  Ry.   Co.  (1892),  shutout  from  participation  in  the  distri- 

67  L.  T.  711.  bution   of  the  assets  the  ordinary  share- 

1  Carey  D.Houston,  etc.  Ry.  Co.  (1891),  holders,    notwithstanding    that    the    day 

45  Fed.  Rep.  438.  before  their  meeting  a  letter  was  written  to 

66 


866  RAILWAY    BONDS    AND    MORTGAGES.       [CHAP.  XXXIX. 

And  any  arrangement  between  the  secured  creditors  and  the 
debtor  company,  as,  for  example,  an  agreement  between  them  to 
avoid  a  sale  and  lease  the  property  for  their  own  benefit,  but  to 
the  detriment  of  unsecured  creditors,  will  be  annulled  at  the 
instance  of  the  latter.^ 

On  the  other  hand  the  unsecured  creditors  cannot  object  to  a 
scheme  which  gives  them,  in  lieu  of  their  evidences  of  debt  against 
the  old  company,  second  preferred  income  bonds,  equal  to  the 
amount  of  the  floating  debt  and  interest  thereon.  Such  an 
arrangement  places  them  in  at  least  as  advantageous  a  position 
with  regard  to  the  new  as  they  held  towards  the  old  company.^ 

§  903.  Rights  of  Stockholders  after  Reorganization.  —  (a)  Right 
to  take  Part  in  the  Managemeyit  of  the  Property.  —  The  stock- 
holders of  the  old  company  who  accept  a  reorganization  scheme 
which  provides  that  they  shall  be  entitled  to  become  the  legal 
owners  of  the  stock  issued  by  the  new  company  after  the  bond- 
holders have  received  three  annual  instalments  of  the  interest  on 
their  bonds,  and  that  in  the  mean  time  the  business  of  the  corpora- 
tion is  to  be  controlled  by  the  bondholders,  have  no  standing  in 
court  to  object  to  a  lease  of  the  road  which  is  satisfactory  to  the 
bondholders,  when  it  appears  that  the  liabilities  of  the  corporation 
are  so  great,  as  compared  with  its  assets,  that  there  is  an  ex- 
tremely remote  prospect  that  their  legal  rights  as  shareholders  will 
ever  attach.^ 

A  reorganization  agreement  which  provides  for  separating  the 
right  to  vote  from  the  holder  of  the  stock,  and  confers  that  right 
upon  a  trustee  representing  the  bondholders,  to  be  exercised  until 
certain  mortgage  debentures  issued  in  lieu  of  the  original  evi- 
dences of  debt  held  by  the  railroad  company  are  paid,  is  not  void 
per  se,  as  against  public  policy.  Especially  is  such  an  agreement 
unobjectionable  when  the  charter  of  the  company  expressly  pro- 
vides tliat  the  votes  of  the  stockholders  "  may  be  given  in  person 
or  by  proxy."  ^ 

(b)  Right  to  enjoin  Diversion  of  Earnings.  —  Where  the  re- 
organization scheme  provides  that  certificates  shall  be  issued  to 

induce  a  ratification,  by  a  large  holder  of  Co.   (1884),    22  Fed.   liep.   130  ;  s.  c.  22 

debentures  and  preference  shares.     Buenos  Am.  &  Eng.  R.  R.  Cas.  50. 
Ayres  Water  Supply  Co.,  In  re,  66  L.  T.  *  Mobile    &   Ohio  R.    Co.  v.   Nicholas 

408.  (1893),  98  Ala.  92  ;  s.  c.  12  St.  Rep.  723  ; 

1  Farmers'   Loan  &  Trust  Co.  v.   Mis-  57  Am.  &  Eng.  R.  R.  Cas.  100. 

souri,  L  &N.  Ry.  Co.  (1886),  21  Fed.  Rep.  As  to  the  right  to  vote  by  proxy,  and 

264,  267.  as  to  how  far  agreements  conferring  that 

2  Hancock  v.  Toledo,  Peoria,  &  Wabash  right  are  affected  by  consideiations  of  pub- 
R.  Co.  (1882),  9  Fed.  Rep.  738.  lie  jwlicy  or  otherwise,  see  Mobile  &  Ohio 

8  McHenry    i;.    New  York,  V.  &  0.  R.     R.  Co.  v.  Nicholas  (1893),  98  Ala.  92. 


§§  904-906.]  RAILWAY    REORGANIZATIONS,   ETC.  867 

the  stockholders  of  the  old  company,  which  they  shall  have  the 
right  to  exchange  for  common  stock  in  the  new  if  the  earnings  of 
the  road  prove  sufficient  to  defray  tlie  cost  of  necessary  repairs 
and  improvements,  and  pay  five  consecutive  annual  dividends  of 
seven  per  cent  to  the  preferred  stockholders,  the  holders  of  the 
certificates  are  entitled  to  prevent  by  injunction  any  plain  diver- 
sion of  the  earnings  to  their  prejudice.  But  in  the  absence  of 
any  showing  that  such  a  diversion  is  imminent,  no  injunction  will 
be  issued  until  the  account  of  the  income  and  its  ap])lication  has 
been  satisfactorily  adjusted.^ 

§  904.  Effect  of  Reorganization  upon  Liabilities  of  Old  Company. 
—  Where  the  bondholders  of  a  second  mortgage  reorganize  after 
foreclosure,  as  between  the  company  thus  formed  and  creditors  of 
the  old  company  who  had  been  secured  by  the  first  mortgage, 
no  privity  exists  to  render  the  new  company  liable  upon  the  cer- 
tificates of  indebtedness.  The  liability  "  did  not  run  with  the 
property  into  the  hands  of  those  who  acquired  it  by  foreclosure."  ^ 

§  905.  Costs  in  England  on  Reconstruction.  —  Costs  were  re- 
fused to  certain  claimants  m  proceedings  to  reconstruct,  for  the 
reason  that  their  appearance  was  unnecessary,  as  the  liquidator 
could  take  care  of  their  interests.^ 

Costs  were  denied  to  dissentient  debenture-holders  on  the  ground 
of  unreasonable  opposition  to  a  scheme  of  reconstruction.* 

§  906.  In  Conclusion.  —  The  last  chapter  of  this  work  deals 
to  some  extent  with  the  same  subjects  as  those  embraced  in  the 
earliest  chapters.  The  process  of  reorganization  results  in  new 
issues  of  securities,  and  the  questions  surrounding  the  creation  of 
the  corporation  and  its  original  securities  again  arise.  The  litiga- 
tions which  have  been  passed  in  review  constitute  the  legal  history 
of  American  railway  bonds  and  mortgages.  The  evolution  of  the 
law  on  these  subjects  has  been  largely  accomplished.  The  next 
ten  years  ought  not  to  result  in  the  same  amount  of  railway  liti- 
gation irrespective  of  the  question  of  commercial  prosperity,  and 
its  effect  upon  the  business  environment  of  railway  companies. 

1  Mackintosh  v.  Flint  &  Pere  Marquette  their  shares  are  not  fully  paid  up.  In  re 
R.  Co.  (1888),  32  Fed.  Rep.  350.  London    Chartered     Bank    of    Australia 

2  Sullivan    v.    Portland,    etc.    R.    Co.     (1893),  3  R.  696. 

(1876),  94  U.  S.  810.  3  jie  Albert  L.  A.  Co.   (1871),   6  Ch. 

In  England  the  court  will  preserve  all  App.  387. 
rights  against  shareholders   by  requiring         *  Li  re  Tunis  Ry.  Co.  (1874),  W.  N. 

a  provision   continuing  their  liability  as  121. 
shareholders   in   the   old    company   while 


INDEX. 


THE  FIGURES  REFER  TO  PAGES. 


ACCESSION,  DOCTRINE   OF, 

discussed,  248-252. 
objections  to,  250. 
extension  of,  248. 

not  applicable  where  mortgages  on  different  divisions,  251. 
repudiated  in  Alabama,  252. 
ACCOMMODATION, 

guaranty  of  bonds  for,  not  valid,  118. 

indorsement,  assented  to  by  stockholders,  126. 

by  oflBcer,  effect  of,  when  instrument  in  hands  of  innocent  purchaser,  128. 

ACCOUNTING, 

bill  for,  by  income  bondholders  against  company,  368. 
by  trustee,  when  action  for,  not  maintainable,  313. 
obligation  to  account  for  "  moneys  "  to  mortgagee  of  "  income,"  etc.,  68. 
(See  Action;  Income  Bonds;  Receiver.) 
ACTION, 

to  cancel  bonds,  etc.,  34. 

maintainable  by  stockholders  when  corporation  refuses  to  act,  tb. 

or  where  certainty  that  corporation  wiU  refuse,  ib. 

corporation  must  be  joined  as  a  party,  ib. 

usually  a  party  defendant,  ib. 
by  senior  bondholder  when  bonds  not  due,  ib. 

when  no  averment  of  petitioner's  Hen  upon  earnings,  ib. 

or  that  corporation  misusing  property,  ib. 

or  of  default  in  payment  of  interest,  ib. 
to  annul  bonds  delivered  for  improper  purposes,  ib. 

to  set  aside  security,  ib. 

bar  of,  by  lapse  of  time,  ib. 

no  bar,  where  no  attempt  to  enforce,  ib. 
against  directors  to  enjoin  diversion  of  funds,  54. 

who  may  maintain,  ib. 
creditors'  action  to  annul  directors'  deed,  207. 
by  bondholder  against  trustee  for  moneys  applicable  to  bonds,  55. 
by  bondholder  against  trustee  after  default,  310,  311. 
for  accounting  against  trustee  in  possession,  for  income,  316. 
for  accounting  by  trustee  when  not  maintainable,  313. 
by  trustee,  request  to  begin,  from  whom  necessary,  477. 


870  INDEX. 

The  figures  refer  to  pages. 
ACTION  — continued. 

by  trustee  on  request  of  certain  proportion  of  bondholders,  477o 

whether  maintainable  in  exercise  of  discretion,  request  jjroving  insuf- 
ficient, ib. 
by  trustee  to  enforce  right  of  entry,  302. 
for  an  accounting,  by  income  bondholders,  scope  of,  66. 

computation  of  amount  due,  lb. 
for  possession,  jurisdiction  in  equity,  388. 

not  maintainable  by  junior  against  senior  mortgagee,  ib. 
against  company  for  refusing  to  convert  bonds  into  stock,  56. 

right  not  assignable  without  assignment  of  bonds,  56,  n.  3. 
for  breach,  on  refusal  to  accept  bonds  contracted  for,  74. 

other  bonds  maturing  on  default  of  interest,  may  be  offset,  ib. 
on  coupon,  production  of  bond  unnecessary,  107. 
on  guaranty  of  bonds,  no  defence  that  bonds  void,  117. 

individual  holders'  right  to  enforce  guaranty,  ib. 

by  bondholder  on  guaranty,  127. 

assent  of  stockholders  need  not  be  averred,  128. 
to  have  construction  contract  declared  void,  151. 

by  company  as  against  public  policy,  ib. 

when  contract  partly  executed,  ib. 

where  approved  and  adopted  by  shareholders,  ib. 

where  contract  executed,  ib. 

by  individual  stockholders,  152. 

by  judgment  creditors,  ib. 
for  injuries  to  person  against  receiver  of  federal  court,  575. 
against  receiver  pende7tte  lite,  691. 
receiver  appointed  to  wind  up  company,  ib. 

to  avoid  reorganization  where  plaintiff  appeared  acquiescent,  533. 
to  redeem,  grounds  for  receiver  in,  532. 
to  redeem,  jurisdiction  in  personam  necessary,  806. 
by  debenture-holder,  character  of,  372,  n.  1. 
by  debenture-holder  on  behalf  of  himself  and  others,  379. 
pendency  of  two  suits  in  courts  of  same  sovereignty,  484. 

of  different  sovereignty,  ib. 
of  warranty  not  based  on  false  representations  on  certificates,  689. 
(See  Jurisdiction;    Parties;   Pledgk;   Receivers;   Remedies  of 
Bondholders;   Ri:mov.\l  of  Causes.) 
AFTER-ACQUIRED   PERSONALTY, 

specific  description  necessary  to  pass,  238. 

unless  acquired  for  railroad  purposes,  ib. 

whether  acquired  for  railroad  purposes  sometimes  hard  to  decide,  ib. 

whether  it  must  be  already  in  use,  ib. 
materials  for  track  and  operation  of  road,  ib. 

covered  as  soon  as  acquired,  ib. 

decision  to  the  contrary,  239. 
rolling-stock,  when  covered  by  mortgage,  240. 

fragments  and  old  material,  old  and  new  rails,  when  covered,  ib. 
rolling-stock,  when  passes  under  mortgage  of  entire  line,  etc.,  ib. 

when  an  intention  must  appear,  241. 

wlion  inferred,  210. 
oflBcc  furniture,  when  covered,  242. 


INDEX.  871 

The  figfures  refer  to  pages. 

AFTER-ACQUIRED    PERSONALTY  —  continued. 
fuel,  when  covered,  '2-12. 
chosen  in  action  aud  stock  not  generally  covered,  243. 

unpaid  subscriptions,  ib. 
income,  revenues,  etc.,  when  covered,  246. 

earnings,  when  not  covered,  ib. 

theory  of  agreement  between  parties  respecting,  ib. 

"  net  income,"  when  understood,  ib. 

notes  given  in  consideration  of  extending  line,  243. 
chattels  used  in  carrying  on  mine,  244. 
capital  stock  acquired  with  view  to  consolidate,  ib. 
contract  to  carry  mails,  243. 
municipal  subscriptions  to  aid  construction,  ib. 
appropriation  by  county,  ib. 
property  bought  to  replace  worn-out,  245. 
to  replace  fixtures,  ib. 
replacements  by  receiver,  246. 

personalty  not  used  for  railroad  purposes,  226,  228,  242. 
permanent  and  temporary  disuse,  lien  not  affected  by,  244,  245. 
alterations  in  property  mortgaged  does  not  affect  lien,  245. 
nor  obliterations  of  means  of  identity,  ib. 

(See  After-acquired  Property;  Mortgage.) 
AFTER-ACQUIRED   PROPERTY, 

mortgage  of,  general  rule  as  to  scope  and  binding  effect,  267. 

binding  upon  all  except  purchasers  for  value  without  notice,  ib. 

preferred  to  subsequent  attachment  or  judgment  lien,  ib. 

good  against  subsequent  mortgagee  with  notice,  ib. 

against  purchaser  of  road  mortgaged  as  to  after -acquired  property,  ib. 

superior  to  one  given  to  discharge  government  lien,  269. 
purchaser  with  knowledge  of,  jjosition  of,  267. 
passes  cum  onere,  268. 

mortgage  covers  such  interest  only  as  mortgagor  acquires,  ib. 
when  inferior  to  vendor's  lien,  270. 
priority  over  contract,  not  to  pass  till  paid  for,  271. 
lien  of,  postponed  to  rights  reserved  by  vendor,  342,  345. 
devices  of  vendors  to  secure  priority  over,  343,  350. 

lease,  or  bailment  for  hire,  343,  346. 

conditional  sale,  343. 

reservation  of  lien,  ib. 
clauses  in  railway  mortgage  covering,  215. 
effect  of,  determining  considerations,  ib. 
essentials  necessary  to  bind,  216. 
held,  part  of  entirety  of  railroad  and  franchises,  221. 
theory  exploded,  223,  248-252. 
mortgage  of,  in  nature  of  executory  contract,  221. 

lien  upon,  attaches  when  contractor  acquires  title,  ib. 

valid  against  judgment  creditors,  222. 

conditions  must  exist,  necessary  to  enforce  executory  contract,  224. 

reasonable  certainty  of  description  necessary,  ib. 

reasonable  certainty  of  coming  into  existence,  ib. 
specific  description  of,  necessary  to  pass  under  statutory  lien,  225. 

different  rule  in  Tennessee,  ib. 


872  INDEX. 

The  figures  refer  to  pages. 

AFTER-ACQUIRED   PROPERTY  —  continued. 

interests  in  real  estate,  wliat  sufficient  description  to  pass,  229. 
depends  upon  whether  appurtenant  to  business  of  road,  ib. 
power  of  business  corporation  as  to  mortgaging,  182. 
injunction  to  protect  lien  as  to,  357. 

against  execution  when  claim  was  for  "  running  expenses,"  358, 
(See  After-acquired  Personalty;  Mortgage;  Railroad  Companies; 

und«r  States.) 
AGENCY.     (See  Principal  and  Agent.) 
AGREEMENT.     (See  Contract  ;   Traffic  Agreement.) 
ALABAMA, 

rolling-stock,  held  personalty,  339. 

liens  upon,  not  displaceable  by  prior  mortgage,  ib, 
statutory  provisions  as  to  borrowing  money,  40,  n. 
constitutional  restrictions  upon  issuing  stocks  and  bonds,  4,  n. 
construed,  ib. 

upon  issuing  preferred  stock,  ib. 
directed  against  fictitious  debts,  ib. 
upon  the  consolidating  of  corporations,  ib. 
statutes  respecting  reorganization,  842,  n.  1. 
service  of  summons  in  action  for  damages  under  act  of  1877,  575. 
"ALL   OTHER   PROPERTY," 
effect  of  phrase,  219. 

ALTERATION, 

of  mortgage  after  execution,  by  officers,  205. 

inserting  power  of  sale,  206. 
ANCILLARY   SUITS, 

citizenship  of  parties  to,  not  material,  though  of  same  State,  420. 

to  avoid  foreclosure,  416. 

to  determine  judgment  creditor's  priority,  ib. 

sale  may  be  decreed  of  entirety,  in,  423. 

(See  Receivers.) 
ANTECEDENT   DEBT, 

as  a  basis  of  a  purchase  for  value,  96. 
pledge  to  secure,  ib. 

when  impliedly  included  in  power  to  secure  a  debt,  166  and  n.  5. 
APPEALS, 

to  Supreme  Court  from  Circuit  Court,  825. 

sufficient  if  Circuit  Court  had  jurisdiction  when  decree  rendered,  ib. 
legislature's  power  to  give  appellate  courts  right  to  hear  special  cases,  ib. 
Supreme  Court's  jurisdiction  as  dependent  on  amount  involved,  826. 

where  parties  assert  in  same  suit,  separate  causes,  ib. 

where  some  for  more  and  some  for  less  than  So,000,  ib. 

where,  by  amendment,  amount  reduced  below  $5,000,  ib. 
tupersedeas  bond,  when  and  when  not  required,  827. 

where  decree  in  favor  of  appellant,  ib. 

where  adverse,  ib. 

where  defendant  files  cross-bill  and  complainant  has  appealed,  ib. 

where  receiver  appeals  from  State-court  judgment,  ib. 
supersedeas,  statutory  remedy,  ib. 

conditions  must  be  observed,  ib. 


INDEX.  873 

The  flgiires  refer  to  pages. 

APPEALS  —  contlnned. 

time  aa  essential  element,  827. 

nunc  pro  tunc  granted  only  when  court  causes  delay,  ih. 
whoever  adversely  affected  by  decree  may  appeal,  ib. 

by  bondholder,  from  matters  arising  out  of  reorganization,  ib, 

by  purchasing  committee  of  bondholders,  ib. 

by  bondholder  on  intervention  after  h\\\  pro  confesso,  ib. 

bondholders'  right,  not  affected  by  cross-bill  filed  after  decree,  828. 
from  decree  adjudging  priorities,  before  main  suit  determined,  ib. 
who  cannot  appeal,  ib. 

one  who  is  neither  an  original  party  nor  intervener,  lb. 

from  denial  of  intervener's  petition  to  protect  bonds,  ib. 

where  one,  though  a  party,  is  not  affected,  829. 

representative  party  can  appeal  only  for  body  he  represents,  ib. 
trustee's  petition  to  appeal  for  minority  bondholders,  ib. 
purchaser  at  foreclosure  sale  as  appellant,  830. 
receivers,  appeals  from  decrees  against,  ib. 

by  receiver  himself,  ib. 

by  person  aggrieved  by  decree,  ib. 

where  appellant  bondholder  as  well  as  receiver,  ib. 
junior  incumbrancer  as  appellant,  831. 
stockholders  as  appellants,  ib. 
company  as  party  to  appeal,  ib. 
trustee  as  party  to  appeal,  ib. 
decrees  and  orders  appealable,  832. 

consent  decrees,  not  generally  appealable,  ib. 

effect  of  Revised  Statutes,  ib. 

discretionary  orders  not  reviewable,  ib. 

order  denying  relief  to  bondholder  from  sale  for  mistake,  ib. 

order  denying  petition  to  intervene,  ib. 

order  granting  stay  of  sale,  ib. 

order  refusing  leave  to  file  cross-bill,  833. 

order  amending  pleadings  in  equity  proceedings,  ib. 

order  authorizing  issue  of  receiver's  certificates,  appealable,  ib. 
when  decree  final  for  purposes  of  appeal,  ib. 

decree  of  foreclosure  in  ordinary  form,  ib. 

order  made  on  Supreme  Court  mandate  fixing  amount  of  interest,  834. 

decree  of  sale  of  mortgaged  premises,  ib. 

essential  to  appealability  of  decree  that  amount  ascertained  there- 
in, ib. 

not  that  priorities  be  settled,  ib. 

decree  dissolving  injunction  restraining  foreclosure  sale,  ib. 

dissolving  bondholder's  injunction  restraining  execution  sale,  ib. 

order  settling  accounts  of  receiver,  ib. 

decree  confirming  sale,  reserving  right  to  make  further  order,  835. 
decree  dismissing  cross-bill,  not  final,  833. 
decrees  setting  aside  sales,  when  not  appealable,  835. 
decree  referring  questions  to  master,  when  not  appealable,  ib. 
interlocutory  orders,  when  appealable,  836. 

when  order  disposes  of  main  case,  ib. 

when  establishes  property  rights,  ib. 

order  after  final  decree  that  receiver  may  issue  certificates,  ib. 


87-1  INDEX. 

The  figures  refer  to  pages. 
APPEALS  —  continued. 

order  authorizing  certificates  and  making  them  lien  on  corpus,  837. 
order  directing  sale  of  rolling-stock  to  pay  creditors,  ib. 

granting  compensation  for  services  from  fund  in  court,  ib. 
staying  all  further  proceedings  till  further  order,  ib. 
charging  or  refusing  items  in  receiver's  account,  836. 
determining  no  right,  not  appealable,  837. 
discharging  receiver,  except  in  certain  States,  ib. 
from  one  of  several  decrees,  ib. 
what  appeal  brings  up  for  review: 

"  this  cause,"  an  appeal  of,  brings  up  whole  cause,  838. 

court  will  review  orders  not  in  themselves  appealable,  ib. 
where  appeal  from  order  merely  confirming  sale,  839, 
rulings  not  prejudicial  to  appellant,  not  reviewable,  ib, 
objections  not  presented  below,  not  reviewable,  ib. 
effect  of  appeal  on  control  of  property,  ib. 
when  control  transferred  to  appellate  court,  ib. 
where  receiver  appointed  ancillary  to  main  object,  ib. 
deficiency,  decree  for,  when  not  appealable,  840. 
leave  to  sue,  will  be  assumed  on,  576. 
in  action  to  avoid  foreclosure  on  grounds  of  fraud,  416. 
APPLICATION    OF   MONEYS.     (See  Money;  Trustee.) 
APPURTENANCES, 

definition  of  term,  254. 
what  land  will  pass  under,  252. 
rule,  land  can  never  be  appurtenant  to  land,  253. 
may  be  modified  by  intent  of  parties,  ib. 
broader  scope  of,  as  applied  to  railroads,  ib. 
land,  across  edge  of  which,  track  laid,  when  and  when  not,  255. 
land  to  which  company  has  no  valid  title,  256. 

elevator  not  appurtenant  to  railroad  of  company  holding  stock,  253. 
elevator  not  on  company's  property,  ib. 
hotel  appurtenant,  if  to  be  used  for  passengers,  254. 
not  otherwise,  255. 
what  personalty  passes  under,  256. 
canal-boats  when  and  when  not,  ib. 
railroad  chairs  never  actually  used,  ih. 
ARIZONA, 

statutory  provisions  as  to  issuing  bonds,  40,  n. 
ARKANSAS, 

constitutional  restrictions  upon  issuing  stocks  or  bonds  in,  4,  n. 
statutory  provisions  as  to  issuing  bonds,  40,  n. 
rolling-stock  declared  personal  property  liable  to  seizure,  4,  n. 
guaranty  of  bonds  of  connecting  companies,  129,  n.  3. 
by  foreign  companies,  ib. 
statutes  respecting  reorganization,  842,  n.  1. 
ASSENT.     (See  Written  Assent.) 
ASSETS, 

unused  bonds,  not,  45. 
ATTACHMENT, 
of  income,  07. 
by  bondholder  of  mortgaged  property,  367- 


INDEX.  875 

The  figures  refer  to  pages. 

ATTORXEYS  AND  SOLICITORS.  (See  Compensation  of  Receivers; 
CoMPENSATiox  OF  Tkustees;  Costs;  Counsel  Fees;  Expenses 
IN  Suits,  etc.) 

BAILMENT   FOR   HIRE, 

validity  of,  343,  346,  348,  350. 

with  option  of  buying  at  fixed  price,  346-351. 
BANKERS.     (See  Fiduciauies.) 

BIDS, 

validity  of  sales  as  determined  by,  774. 
rules,  same  as  at  common  law,  ib. 
when  bonds  receivable  at  par,  to  pay,  776. 
English  practice  as  to  reserving  bids,  774. 
(See  Sales.) 
BONA   FIDE  PURCHASER.     (See  Purchaser.) 

BONDHOLDERS, 

relation  to  railroad,  46. 

to  each  other  generally,  ib. 

duties  to  each  other,  ib. 

relative  rank  with  preferred  stockholders,  758. 

when  regarded  as  proprietors,  40. 

when  road  of  less  value  than  bonded  debt,  ib. 

in  England,  when,  ib.  n.  3. 
equity  recognizes  right  of,  to  control  company,  when,  46. 
right  to  mispent  portion  of  proceeds  of  bonds,  54. 

where  purpose  of  issue  of  bonds,  impracticable,  55  and  n.  1. 
original,  protected  against  irregularity  of  issue,  30,  n.  2. 
how  far,  may  rely  on  prospectus,  52. 

cannot  follow  money  paid  otherwise  than  as  promised  in,  ib. 

may  set  up  defence  of  prospectus  as  against  charter,  53, 
right  of  to  assume  regularity  of  bond  issue,  85. 
right  to  assume  date  of  issue  in  bond  correct,  84. 
rights  of,  when  bonds  void,  25. 

right  to  assume  restrictions  upon  issue  have  been  respected,  ib. 
entitled  to  assume  mortgage  regularly  executed,  195. 
presumed  to  know  functions  of  railroads  as  quasi  public  corporations,  157. 
may  impeach  bonds  other  than  those  he  holds,  27. 

exception,  ib.  n.  2. 
rights  of  as  against  liens  acquired  after  recording  mortgage,  84. 
affected  with  notice  of  duly  recorded  writing,  158. 
claiming   under   separate   agreement,  rights  as   against   others  without 

notice,  59. 
bonds,  guarantied  by  co-bondholders,  priority  of,  64. 
when  may  attach  mortgaged  property,  367. 
right  of  to  bring  action  to  enforce  guaranty,  117. 
action  to  enjoin  enforcement  of  railroad  commission  law,  369. 
action  by,  against  trustee  after  default,  310,  311. 

trustee  must  comply  with  request,  to  take  possession,  310. 

when  trustee  must  proceed  without  request,  ib. 

trustee  not  warranted  in  following  advice  of  majority  of,  311. 

must  be  regarded  as  a  class,  not  as  individuals,  ib. 


876  INPEX. 

The  figures  refer  to  pages. 

BONDHOLDERS  —  continued. 

request  of,  to  trustee  to  take  action,  what  amounts  to,  300. 
when  may  proceed  in  equity  to  enforce  statutory  lien,  330. 
holding  guaranty  of  improvement  company,  and  statutory  lien,  ib. 
when  must  require  trustees  of  guaranty  fuud  to  proceed,  ib. 
rights  of  cannot  be  altered  by  trustee  without  consent,  298. 
trustee  cannot  assent  on  behalf  of,  to  prefer  floating  debt,  ib. 
not  bound  by  scheme  of  reorganization  postponing  mortgage,  ib. 
how  scheme  can  be  carried  out,  ib. 
when  knowledge  of  trustee  of  irregularity  of  bonds,  does  not  bind,  305. 

when  does  bind,  tb. 

instances  of,  306. 
remedy  against  trustee  after  foreclosure  not  confined  to  intervention,  316. 
trustee  in  possession  must  account  to,  for  income,  ib. 
claims,  against  trustee  personally,  ib. 
right  of  each  to  proportionate  share  of  all  moneys,  ib. 
rights,  when  trustee  has  diverted  moneys  applicable  to  bonds,  55. 
where  bonds  have  been  acquired  since  money  received,  ib. 
rights  of,  in  action  on  bond  and  against  trustee,  distinguished,  56. 
application  of,  to  determine  validity  of  consolidation  denied,  71. 
right  of  to  protect  security,  44,  n.  3. 
remedies  of,  in  case  of  land  grants,  ib. 

entitled  to  share  of  proceeds  of  mortgaged  property,  when,  52. 
lien  preserved  upon  surrender  of  bonds,  when,  55. 
scheme  to  surrender  old  for  new  bonds  of  reorganized  company,  59. 

rights  of,  after  notice  and  default,  ib. 
non-assenting,  status  of,  after  foreclosure  of  subsequent  mortgage,  58. 
non-assenting,  rights  of,  against  State  guarantying  new  issue,  ib. 
of  income  bonds,  non-assenting,  status  of,  on  accounting,  ib. 
should  not  be  delayed,  till  receiver's  accounts  adjusted,  562. 
suit  against  receiver  long  after  appointment,  557. 
receiver's  denial  of  validity  of  bonds,  etc.,  ib. 
when  not  bound  by  proceedings  to  enforce  mechanics'  liens,  278. 

not  obliged  to  intervene,  279. 
priority  between,  and  guarantors  of  interest  on  reorganization,  129. 
right  to  earnings  as  against  claims  for  labor,  etc.,  66. 
liability  for  income  tax,  77. 

provision  that  bonds  shall  be  paid  without  deduction,  etc.,  ib. 
when  postponed  to  purchasers  of  land  certificates,  267. 
of  bonds  secured  by  mortgage  direct  to  himself,  210. 
may  not  proceed  alone  against  company,  ib. 
of  bonds  negotiable  under  Massachusetts  statute,  117. 
when  estopped  as  against  certificate-holders,  682. 

as  against  purchasers  of  negotiable  securities,  ib. 
suing  for  himself  and  others  not  entitled  to  compensation,  708. 
when  entitled  to  counsel  fee,  713. 
(See  Action;   Df.faui.t;  Equity;   Income  Bonds;  Injunction;  Major- 
ity AND  Minokity  Rights;   Parties;   Purchasers;   Remedies  of 
Bondholders;  Trustee;  understates.) 

BONDS, 

power  of  corporation  to  issue,  3. 


INDEX.  877 

The  figures  refer  to  pages. 

BONDS  —  continued. 

constitutional  and  statutory  rertrictions  upon,  2,  4  and  n.  1.    (See  various 

States.) 
right  to  show  violation  of  restrictions,  25. 

disparity  between  conditions  of  issue  and  authorizing"  act,  21  and  n.  3. 
exclusive  mention  of,  in  act  authorizing  loan,  not  prohibitive,  2. 
not  valid  until  delivery,  23. 
pledge  of,  held  a  delivery,  ih. 

presumption  of  legal  home,  based  on  place  of  issue,  19. 
not  rebutted  by  fact  that  interest  payable  elsewhere,  ib. 
interest  upon,  ib. 

legality  of  rate  determined  by  laws  of  what  State,  ib. 

when  issue  usurious,  20. 
principal  not  due  on  default  of  interest,  unless  so  stipulated,  73. 
no  legislative  power  to  hasten  maturity  of,  ib. 
provision  not  to  fall  due  until  specified  time  elapsed,  ib. 
in  what  payable,  71. 

interest  must  follow  character  of  principal,  72. 

confederate  currency,  ib. 
in  what  payable  with  reference  to  legal  tender  act,  ib. 

claim  for  payment  in  gold  must  rest  on  contract,  ib, 

indorsement,  changing  from  "  lawful  money  "  to  "  coin,"  i&. 
binding  on  corporation,  ib. 
not  on  State,  guarantying  them  after  change,  ib. 

payable  in  coin,  authority  of  State  as  to,  ib. 
when  not  in  prescribed  form,  void  in  hands  of  bona  fide  holder,  84. 

rule  formulated  in  New  Jersey,  ib. 
formalities  prescribed  to  secure  stockholders,  non-observance  of,  85. 
formalities  omitted  by  directors  cannot  prejudice  bona  fide  holder,  ib.  and  n. 
failure  of  directors  to  submit  issue  to  vote  of  stockholders,  86,  n.  1. 
informalities  of  issue,  when  company  alone  may  object,  29. 
bearing  on  face  no  indication  of  wrongful  issue,  86. 
estoppel  based  upon  recitals  in,  87. 
payable  to  guarantor,  when  assignment  of,  representation  of  ownership, 

128,  n.  3. 
payable  to  bearer,  when,  ib. 

date  of  issue,  right  of  bondholder  to  assume  correct,  84. 
statute  limiting  issue  of,  violation  of,  18,  30,  84. 

issued  in  excess  of  limit,  postponed  to  those  within,  89  and  n.  3. 

numbers  as  determining  validity  in  case  of  over-issue,  24,  n.  5. 

over-issue  void  in  directors'  hands,  not  in  innocent  holders',  19. 

nor  where  over-issue  succeeds  holders'  title,  19. 
void  as  to  State  indorsing,  binding  upon  company,  31. 
issued  by  one  corporation,  guarantied  by  another,  84. 
guarantied  by  corporation  under  authority  wrongfully  exercised,  86. 
issued  under  construction  contract  in  which  directors  have  interest,  147. 

effect,  in  hands  of  bona  fide  purchaser,  ih. 
issued  to  be  sold  for  cash,  pledged  to  a  creditor,  33. 

by  whom  such  a  disposition  may  be  objected  to,  ib. 
absence  of  certificate  of  trustee,  as  affecting,  27. 
provision  inserted  by  president,  invalid  as  without  authority,  24. 
tainted  with  fraud  in  their  issue,  94. 


878  INDEX. 

The  figures  refer  to  pages. 

BONDS  —  continued. 

recovery  upon,  by  innocent  holder,  94. 
to  extent  of  work  actually  done,  ih. 
where  trustee's  certificate  a  forgery,  no  recovery,  92. 
stolen,  maker  should  require  proof  that  holder  innocent,  108. 

in  hands  of  bunajide  purchaser  but  lacking  seal,  24. 
validity  of,  onus  upon  those  who  would  impeach,  25. 
shown  to  have  been  illegally  issued,  burden  of  proof,  84. 
put  on  market  after  maturity  of  one  or  more  coupons,  105. 
purchased  at  less  than  face  value,  17,  93. 
secret  agreement  as  to  payment  for,  52. 
issue  of,  to  consolidate  funded  debt,  14,  n. 
to  extend  facilities  of  company,  ib. 
to  enlarge  capacity  of  company,  ih. 
for  procurement  of  rails,  ib. 

to  pay  debt  arising  from  purchase  of  another  road,  ib.     (See  Con- 
solidation.) 
for  money,  labor  done,  and  property  received,  146. 
to  pay  debts  of  another  company,  4,  n. 

void  as  against  holder  with  notice,  14. 
by  two  companies,  to  overcome  restriction  upon  lending  credit,  15 
by  consolidated  company,  21. 

by  consolidated  company  for  bonds  of  constituents,  24,  n.  5. 
by  otiicers,  who  purchase  as  individuals,  29. 

validity  in  hands  of  officers'  individual  creditors,  ib. 
unautfiorized  issue  by  officers  may  be  ratified,  27. 
by  railroad  to  construction  company  having  common  stockholders,  28. 
having  common  directors,  ib. 
statutory  provisions  as  to  issue  of,  13. 

implied  restriction  on  issue,  in  New  York  statute  of  1850,  14. 
must  be  strictly  complied  with,  13. 
the  consideration  for  issue,  ib. 
when  issued  as  security  for  State  credit,  ib. 
the  amount  of  issue,  ib. 
the  purposes  of  issue,  ib. 
the  rate  of  interest  13,  19. 

legislative  power  to  remove  restrictions  upon  power  to  issue,  14. 
where  issue  exceeds  paid-up  stock,  18. 
for  full  value  of  property,  in  addition  to  stock,  28. 
authority  to   issue  under  special  charter,  5.      (See  Charter  Pro- 
visions.) 
validity  of  first,  not  affected  by  later  issue,  29,  n.  3. 
invalidity  of  some,  does  not  affect  mortgage,  25. 
not  void  by  reason  of  invalidity  of  mortgage,  24,  32. 
nor  by  illegality  of  rate  of  interest,  24. 

validity  of  as  affected  by  relations  of  purchaser  to  company,  28. 
sale  to  director  with  stockholders'  ap]>roval,  ib. 
when  sale  valid  except  in  State  creating  cor])oration,  22. 
taken  as  bonus  on  stock  subscriptions,  rights  after  foreclosure,  24. 
whether  benefits  of  mortgage  clear  of  equities  pass  on  transfer,  99. 

rule  in  Illinois  in  affirmative,  ib. 
when  may  be  pledged,  14. 


INDEX.  879 

The  figures  refer  to  pages. 

BONDS  —  continued. 

on  renewal  of  floating  debt,  14. 

to  secure  notes  given  for  unsecured  bond,  ib. 

trustees  cannot  be  compelled  to  issue,  322. 

repurchased  by  company,  right  to  reissue,  58. 

unissued,  not  corporate  assets,  45. 

lien  of,  relates  back  to  record  of  mortgage,  262. 

when  treated  as  equitable  mortgage,  211. 

vendor's  lien,  none  on  sale  of,  4(3. 

deposit  of,  preliminary  to  action,  rights  of  trustee,  300, 

as  affected  by  reorganization,  4,  n.  p.  12. 

contents  of,  as  notice  affecting  priority  of  holder,  154. 

exchanges  of,  and  rights  thereunder,  40. 

until  all  paid,  trust  continues,  292. 

creation  of  fund  to  redeem,  when  does  not  imply  right,  73. 

suits  to  cancel.     (See  Action.) 

issue  of,  enjoined,  when.     (See  Injunction.) 

refunding  of,  30. 

"  Lloyd's  Bonds,"  41. 
(See  Bonds  and  Mortgage;  Consolidation  ;  Conversion  of  Bonds  and 

Stock;  Deferred  Income  Bonds;  Exchange  of  Bonds;  Guaranty 

OF  Bonds;  Income  Bonds;   Irredeemable  Bondsj  Negotiability 

OF  Bonds;  Over-issue  of  Bonds;  Purchasers;  Railway  Companies; 

State- Aid  Bonds;  Surrender  of  Bonds.) 

BONDS  AND  MORTGAGE, 

when  operative,  45. 

subject  to  maker's  control  until  delivery,  ib. 
mortgage  not  operative  until  delivery  of  bonds,  46. 
bonds  not  leviable  under  execution  until  delivery,  45. 
undelivered  bonds  in  hands  of  trustee,  ib. 

rights  of  creditors  as  to,  ib. 
tliough  part  of  bonds  void,  mortgage  not  necessarily  so,  202. 
when  mortgage  may  be  foi-eclosed  though  bonds  void,  198. 
when  must  be  construed  together,  43,  154. 
purchaser  bound  to  notice  all  contained  in  both,  44,  154. 
reference  in  bond  to  mortgage,  effect  of,  43. 

effect  of,  upon  negotiability,  44,  n.  1. 
reference  in  general  terras,  to  mortgage,  44. 

effect  on  bondholder's  rights,  of  restrictive  provisions  in  mortgage,  ib. 
recital  in  bond  secured  by  mortgage,  effect  of,  43. 

right  based  thereon  to  sue  regardless  of  mortgage,  ib. 
uniformity  between  New  York  rule  and  other  States,  discussed,  44. 
liens  of  bonds,  date  from  mortgage  record,  45. 
substitution  of  duplicate  bonds  for  originals,  58. 

lien  of  mortgage  not  affected,  ih. 
pledgee,  waiving  lien,  may  levy  under  execution,  45. 

(See  Bondholders  ;  Bonds  ;  Exchange  of  Bonds.) 

BOOK  DEBTS, 

power  to  mortgage,  178. 

BORROWING, 

power  of  corporations  as  to,  1  and  n.  1. 


880  INDEX. 

The  figures  refer  to  pages. 
BORROWING  —  continued. 
general  rule,  1. 
acts  of,  presumed  valid,  1. 

power  to  give  negotiable  securities,  incidental  to,  1,  n.  1,  3. 
English  Companies  Clauses  Act,  construction  of,  2,  n.  1. 
statutory  provisions  as  to.     (See  under  names  of  States.) 
(See  Railway  Companies.) 
BREACH  OF  TRUST, 
what  amounts  to,  290. 

not  every  mistake  or  neglect,  ib. 
acts  showing  want  of  capacity  and  honesty,  ib. 
neglect  to  enforce  mortgage  after  maturity,  ib. 
(See  Trustees.) 
BRIDGE, 

agreement  as  to  removal  if  not  paid  for,  271. 
BURDEN  OF  PROOF, 

in  action  by  purchaser  of  stolen  bonds,  95  and  n.  3. 
upon  party  impeaching  title  of  bondholder,  83. 
when  bonds  shown  to  be  illegally  issued,  84. 
where  bonds  valid  upon  face,  87. 
upon  holder  of  income  bonds,  to  show  earnings,  71. 
BUSINESS, 

when  right  to  conduct,  passes  under  mortgage,  219. 
BUSINESS  CORPORATIONS, 

no  power  to  mortgage  after-acquired  property,  182. 
(See  New  York.) 

CALIFORNIA, 

constitutional  restrictions  as  to  issuing  stocks  and  bonds,  4,  n. 
statutory  provisions  as  to  borrowing  money,  40,  n. 
mortgages,  code  sections  affecting,  211,  n.  1. 

rolling-stock,  mortgage,  void  unless  recorded  as  chattel  mortgage,  340. 
liabilities  arising  out  of  franchises,  preserved  from  effect  of  alienation,  4,  n. 
compensation  in  eminent  domain  proceedings  assessed  by  jury,  576. 
CANADA, 

trustees  not  liable  for  work  or  material  before  possession,  596,  n.  1. 
CANAL   COMPANY, 

loan  authorized  to  complete  construction  of,  676. 
CAPITAL, 

uncalled,  when  does  not  pass  under  pledge  of  undertaking,  258. 
power  to  mortgage.     (See  Railroad  Companies.) 
CAPITAL   STOCK, 

not  goods  and  chattels,  under  Chattel  Mortgage  Acts,  201. 
(See  Stock.) 
CAR   TRUST, 
defined,  31^. 

typical  example  of  agreement  forming,  ib. 
whether  court  can  authorize  creation  of  by  receiver,  354. 
certificates  of,  in  effect  mortgage  bonds  of  railroad  company,  347. 

inferior  to  earlier  mortgage  with  after-acquired  property  clause,  ib. 
issued  under  contract  with  directors,  when  a  fraud  on  mortgagees, 
348. 


INDEX.  881 

The  figures  refer  to  pages. 

CAR   TRUST  — conthmed. 

holders'  rights  after  default  and  appointment  of  receiver,  352. 
rights  of  non-assenting  holders  of,  ;j47,  ;3.j2. 
car-trust  lease,  lessor's  rights  after  default  and  receiver,  352. 

where  lessor  and  mortgagor  com[)auies  under  same  control,  ib. 
CERTIFICATE-IIOLDEllS.     (See  IIoluehs  of  Ckktificates.) 
CERTIFIC.\TES, 

of  trustee  on  bonds,  his  liability  arising  therefrom,  1517. 
of  public  lands,  when  preferred  to  bondholders,  "207. 
car  trust  certificates.     (See  Cak  Trust.) 
(See  CERTiFiCATf:s  of  Ixdkbtednkss;  Fiust-Liex  Certificates;  Land- 
Grant  Certificates.) 
CERTIFICATES   OF   INDEBTEDNESS, 
power  to  issue,  implied,  when,  15,  35. 
issued  to  creditors,  when,  16. 
not  binding  upon  company  unless  authorized  by  stockholders,  38. 

or  by  them  ratified,  ih. 
issued  to  creditors  to  facilitate  funding  scheme,  35. 

under  special  statute,  ih. 

issue  of,  for  interest  coupons,  37. 

how  far  affects  lien  of,  ib. 

when  construed  as  substitution  and  lien  preserved,  36. 
issued  for  accrued  interest  coupons  not  a  payment,  36,  63. 
issued  for  dividends  to  preferred  stockholders  secured  by  mortgage,  37. 
priority  as  between  and  claim  of  general  creditors,  37. 

and  company,  ib. 
convertibility  into  bonds,  ib. 

"  dividend  in  scrip,"  when  taxable  as,  under  Revenue  Act,  35. 
(See  First-Lien  Certificates;  Holders  of  Certificates.) 
CHARTER   PROVISIONS, 

effect  of  on  issuing  bonds,  4,  n. 
on  power  to  mortgage,  164. 

(See  Bonds;  Statutory  Provisions.) 
CHATTEL   MORTGAGE, 

all  detached  personalty,  proper  subject  of,  247. 
when  mortgage  of  real  estate  must  be  filed  as,  201. 
valid  by  lex  loci  contractus,  valid  in  other  States,  ib. 
unrecorded,  good  as  against  mortgagor,  200. 
when,  as  against  purchaser  or  mortgagee  with  notice,  ib. 
when,  possession  under,  cures  failure  to  recoi-d,  201. 
change  of  possession,  what  deemed  sufficient,  ib. 
mortgagee  having  notice  of  prior,  207. 

railway  mortgages  not  within  purview  of  State  acts  respecting,  200. 
CIRCULARS.     (See  Prospectus;  Purchaser.) 

representations  of,  effect  on  purchaser  of  bonds,  53. 
CITIZENSHIP   OF   CORPORATIONS, 

corporation,  citizen  of  State  creating  it,  432,  433. 

suit   against   corporation,   regarded   as   against   stockholders   in    federal 

court,  432. 
stockholders  presumed  citizens  of  creating  State,  ib. 
consolidated  company,  a  citizen  of  State  where  suit  brought,  433. 

56 


882  INDEX. 

The  figures  refer  to  pages. 

CITIZENSHIP    OF   CORPORATIONS  —  coM^muet/. 

suit  against,  by  citizen  of  same  State,  removal  of,  433. 
whether  foreign  corporation  a  citizen  where  it  conducts  business,  ib. 

where  riglit  amounts  to  mere  license  to  do  business,  ib. 

where  merely  invested  with  rights  of  original  charter,  434, 

merely  leasing  and  operating  road  in  another  State,  ib. 

where  original  charter  duplicated  and   legislation  incorporates  pro 
forma,  435. 

purchase  by  foreign  company  of  franchises  and  property  of  domestic, 
448. 
intent  to  create  new  corporation,  how  manifested,  43.5. 

intent  to  incorporate  under  general  laws  of  foreign  State,  ih. 

filing  certificate,  but  not  dealing  as  if  organized,  ib. 

when  corporation  estopped  to  deny  organization  in  another  State,  ib. 
corporation  suable  in  sister  State  by  implied  or  express  consent,  436. 

deemed  ••  an  inhabitant  of  "  and  "  found  within  "  district,  ib. 
foreign  construction  suing  foreign  railroad  company  and  citizen  of  State,  ib. 
where  right  to  do  business  conditioned  upon  keeping  agent  in  State,  ib. 
cases  within  act  of  Congress  permitting  service  by  publication,  ib. 
waiver  of  corporation's  right  to  be  sued  in  own  State  only,  437. 

jurisdiction  acquired  for  all  purposes,  ib. 
action  against  federal  receiver,  removable  despite  citizenship,  439. 

CITY    AND   TOWN   LOT.     (See  INIortgage.) 

COLORADO, 

constitutional  restrictions  upon  consolidating  railroads,  4,  n. 

upon  issuing  stocks  or  bonds,  4,  n. 
statutory  provisions  as  to  issuing  bonds  and  borrowing,  40,  n. 
statutes  respecting  reorganization,  842,  n.  1. 
mechanics'  liens  in,  276. 
COMMISSION.     (See  Compensation.) 

COMMON    CARRIERS, 

trustees  in  possession  liable  as,  319. 

liability  not  affected  by  surrender  under  decree,  320. 

CO:^IPANIES    ACT   OF   1862, 

power  under,  in  England,  to  mortgage  future  acquisitions,  181. 

COMPANY, 

court  cannot  empower  any  but  railroad,  to  issue  first-lien  certificates,  670. 
(See  Liability  of  Company  during  Receivership.) 

COMPANY   IN    POSSESSION, 

control  and  disposition  of  mortgaged  property  by,  492. 
control  of  corpus  by,  ib. 
usual  right  of.  till  condition  broken,  ib. 

proper  plaintiff  in  action  to  a'^sort  rights  concerning  mortgaged  lands,  ib. 
lease  by,  valid  till  condition  broken,  493. 

right  to  mortgage  property  charged  as  ''  floating  security,"  493. 
mortgaged  property  liable  to  be  levied  on  while,  ib. 
distinction  where  property  essential  to  exercise  of  franchise,  494. 
sale  UTider  execution  of  equity  of  redemption,  ib. 
control  and  disposition  of  income  by,  495. 
when  income  expressly  pledged,  ib. 


INDEX.  888 

The  figures  refer  to  pages. 

COMPANY   IN   POSSESSION  — co«/mwefi. 

discretionary  right  of,  as  to  expenditure  of  income,  497. 

income  bondliolders  cannot  question  sucli  right,  ih. 

specific  appropriation  of  income  by,  superior  to  all  claims,  ih. 

income,  subject  to  levy  or  attachment,  while,  490,  500. 

creditor's  remedy  by  garnisliment,  5U0. 

after  possession  by  trustee,  501. 

application  of  income  to  ilividends,  when  complete,  498. 
unlawfully,  after  demand  upon  rlefault,  5(J(). 

after  demand  trustee  entitled  to  all  earnings,  ib. 

institution  of  suit  equivalent  to  demand,  ib. 

after  default  and  demand  or  suit  begun,  treated  as  receiver,  ib. 
when  mortgagee's  right  to  income  becomes  complete,  501. 
security  must  be  given  by  receiver  to  protect  earnings  from  levy,  ib. 
mortgagee   entitled   to   income   though   company's   control    divested   by 

junior,   ih. 
not  so,  when  divested  by  judgment  creditor,  502. 
rights  of  general,  when  control  divested  by  divisional  mortgagee,  ib. 
purchaser  holding  income  in  trust  for  prior  mortgagee,  ib. 
COMPENSATION    AND   EXPENSES, 
out  of  what  funds  payable,  719. 

fundamental  rule  —  mortgaged  property  must  bear  expenses  of  adminis- 
tration, 719. 

principle  applicable  to  trustee,  receiver,  or  officer  acting  as,  ib. 

applicable  whatever  nature  of  suit,  720. 
where  counsel  retained  by  company  and  continued  by  receiver,  ib. 
necessary  charges,  first  lien  on  mortgaged  property,  ib. 
trustee  may  retain  title  until  compensation  paid,  ib. 
right  cannot  be  evaded,  ib. 
trustees'  and  receivers'  reasonable  expenses  preferred  to  all  other  claims, 

721. 
fees  for  successful  professional  services  on  behalf  of  unsecured  creditors, 

720. 
where  fee  fixed  at  half  recovery,  solicitor's  lien  on  proceeds,  721. 
mortgagor's  expenses,  incurred  selling  lands  as  directed  by  mortgage,  ih. 
lien  for  counsel  fees,  not  lost  by  trustee's  death,  ib. 

payable  ordinarily  out  of  general  fund,  722. 
expenses  of  divisional  mortgagee  in  suit  on  general  junior  mortgage,  ib. 
rule  qualified,  wherever  inequitable  in  operation,  ih. 
where  judgment  creditors  unsuccessfully  assail  assignment  for  certain 

bondholders,  ib. 
fees  of  successful  attorneys  representing  inferior  classes,  ib. 
trustee's  counsel  fees  in  company's  action  to  redeem,  723. 
costs  in  action  deciding  plaintiff's  title  to  rolling-stock,  ib. 
liability  of  prior  mortgagee  for  expenses  of  suit  by  junior,  ib. 

no  liability,  except  upon  unsuccessful  intervention,  ib. 
trustee's  expenses  payable  before  bondholders,  724. 
advances  to  attorneys  and  counsel  should  be  small,  719. 
proper  time  to  settle  at  end  of  litigation,  724. 
decree,  referring  to  master  to  determine  amount  of,  ib. 
reference  may  be  proceeded  with  after  confirmation  of  sale,  ib, 
assertion  of  trustee's  claim  for,  after  redemption,  ib. 


884  INDEX. 

The  figures  refer  to  pages. 
CO^ilPENSATTON    AND    EXVE'NSES  —  continued. 
rehearing  after  remand  by  appellate  court,  724. 
preciseness  necessary  in  exceptions  to  master's  allowances,  725. 
(See  Compensation  of  Receiveks  ;  Compensation  of  Trustees;  Costs; 
Expenses  in  Suits,  etc.) 

COMPENSATION   OF   RECEIVERS, 

preferred  to  receiver's  certificate-claims,  703. 
solicitors  of  receivers,  claims  of,  also  preferred,  ib. 
amount,  how  far  discretionary  with  court,  709. 

policy  which  guides  discretion,  ih. 
governing  considerations  ;  amount,  trust,  care,  responsibility,  time,  skill, 

success,  ib. 
amount  lield  excessive,  reduced,  ib.,  n.  1. 

good  faith  and  reasonable  success,  protect  from  lack  of  foresight,  709. 
residing  at  a  distance  and  inactive,  710. 

order  directing,  should  be  definite  as  to  services  and  basis,  ib. 
during  cessation  of  active  management,  ib. 

amounts  allowed,  ib.,  n.  3. 
Maryland  rule  compared  with  that  of  federal  and  other  courts,  710. 
additional  compensation  when  allowed,  ib. 
acting  as  superintendent  and  attorney,  ib. 

working  and  travelling  during  unusual  hours  from  necessity,  ib. 
cases  where  not  warranted,  711. 
amounts  disallowed,  ib.,  n.  3. 
method  of  determining  amount,  711. 

what  others  would  charge,  irrelevant,  ib. 

but  expert  testimony  admissible,  ib. 

divergence  of,  ib. 

testimony  of  other  receivers,  feebleness  of,  ib. 
(See  Compensation  and  Expenses;  Expenses  in  Suits,  etc.;  Costs.) 

COMPENSATION   OF   TRUSTEES, 

inferior  to  receiver's  certificate-claims,  708. 

solicitors  of  trustees,  claims  of,  also  inferior,  ib. 

none  allowed  in  England,  ib. 

policy  of  allowing  in  United  States,  ib. 

amount  determined  by  what  considerations,  ib. 

for  what  services  and  expenditures  recoverable,  704. 

expenses  of  suit  for  payment  of  rent,  trustee  has  guarantied,  ib. 

for  personal  services,  70.5. 
mortgage  sometimes  determines,  ib. 
percentage  on  par  value  of  bonds  received  as  cash,  ib. 
statutes  sometimes  expressly  provide  for,  ib. 
courts  sometimes  guided  by  analogous  statutes,  ib. 
but  will  settle  amount  in  view  of  all  facts,  706. 

where  whole  time  not  occupied  in  foreclosure  proceedings,  ib. 

where  services  merely  nominal,  ib. 

where  amount  involved  large,  ib.,  n.  1. 
amounts  held  excessive,  70!j. 
State-co>n-t  rules  as  to,  imperative,  707. 
where  more  than  one,  ib. 

character  and  extent  of  eacli  one's  services  controlling,  ib. 


INDEX.  885 

The  figures  refer  to  pages. 

COMPENSATION    OF    TRUSTEE^  -  continued. 
allowances  held  proper  and  sufficient,  707, 
distributable  among   number  specified  in   mortgage,  estoppel  to   claim 

greater,  7U8. 
to  one  discharged  without  his  knowledge,  ih. 
to  successor  of  deceasi'd  trustee,  ih. 

one  not  a  trustee  cannot  claim,  though  performing  duties  of,  705,  n.  1. 
representative  bondholder  not  entitled  to,  708. 

though  trustee's  negligence  made  action  by  him  necessary,  ib. 
(See  Compensation  and  Expenses;  Costs;  Exi'ensks  in  Suits,  etc.) 

CONDITIONAL    SALE, 

void,  when  purchaser  liable  unconditionally  for  price,  345. 
must  be  conditional  both  as  to  title  and  price,  ib. 
when  claim  under,  not  preferred,  though  lien  respected,  620. 
remaining  instalments  due  on,  receiver  will  pay,  697. 

(See  Vendor's  Liens.) 
CONDITIONS, 

statutory,  as  affecting  bond  issue,  85. 

(See  Terms,  Conditions,  and  Limitations.) 

CONNECTICUT, 

statutory  provisions  as  to  bonds  and  borrowing,  40,  n. 
mortgage  by  a  corporation,  manner  of  execution,  185. 

CONSIDERATION, 

of  trust  deed,  true  and  apparent,  211. 

for  issue  of  stocks  and  bonds,  li6. 

money,  labor  done,  and  property  actually  received,  ib. 

for  guaranty  of  bonds,  118. 

"  value  received  "  imports  sufficient,  ib. 

true,  always  open  to  explanation  and  variation,  125. 

transfer  of  guaranty  to  creditor  sufficient  to  cure  invalidity,  ib, 

omission  to  mention  guaranty  on  transfer,  immaterial,  ib. 

CONSOLIDATION, 
defined,  4,  n. 

purport  and  effect  of  term,  132. 
constituent  companies,  14. 
payment  of  debts  of  constituents,  ib. 
power  to  mortgage  after,  168,  169. 

coextensive  with  that  of  constituents,  168. 
power  to  issue  bonds  after,  21. 

issue  by,  consolidated  company  for  bonds  of  constituents,  24,  n.  5. 
right  to  convert  bonds  into  stock  after,  57.     (See  Conversion  of  Bonds 

into  Stock.) 
validity  of,  how  determined,  168. 
ratification  of,  by  different  States,  169. 

application  to  determine  validity  denied  to  income  bondholder,  71. 
illegality  of,  may  not  be  raised  after  lapse  of  years,  when,  22. 
effect  of,  on  priorities,  266. 

first-lien  certificates  issued  to  maintain  single  division  of,  476. 
effect  of,  on  mortgages  against  constituents,  229. 
effect,  rendering  mortgage  valid  on  part  of  road  only,  202. 


888  INDEX. 

The  figures  refer  to  pages. 
CONSOLIDATION  —  continued. 

system  administered  as  entirety,  658.     (See  Power  of  Court  and  its 

Receiver.) 
effect  on  mortgage  of  after-acquired  property,  184. 
statutj    declaring   creditors'  riglits    protected    under,   notice  of  existing 

claims,  266. 
New  Jersey  statutes  affecting,  169. 

(See  under  different  States.) 

CONSTITUTIONALITY, 

of  State  bonds,  129. 

of  act  discriminating  against  claimants,  receiver  cannot  question,  613. 

CONSTITUTIONAL   PROVISIONS, 

relating  to  statutory  liens,  329. 

effect  of,  on  eligibility  of  non-residents  for  trusteeship,  284. 

CONSTITUTIONAL   RESTRICTIONS, 

on  issue  of  stocks  and  bonds,  146. 

"  money,  labor  done,  or  property  actually  received,"  ib. 

object  of  provision,  ib. 

effect  of,  as  a  result  of  decisions,  11,  n. 

when  not  applicable  to  debts  already  incurred,  192. 

when  bonds  issued  partly  for  a  new  debt,  ib. 

CONSTRUCTION   COMPANY, 

which  floats  and  guaranties  bonds,  stockholders  entitled  to  lien,  279. 

agreement  with,  as  to  removing  bridge  if  not  paid  for,  271. 

having  same  directors  and  stockholders  as  railway  company,  271-279. 

CONSTRUCTION    CONTRACTS, 

lien  of,  determined  by  general  equitable  principles,  148. 

not  a  lien  on  proceeds  of  bonds,  ib. 

postponed  to  bonds  held  by  purchasers  for  value,  ib. 

when  not  a  lien  on  constructed  road,  149. 

lien  of,  when  lost  by  surrender  of  bonds  issued  for,  151. 
statutory  lien  of,  149,  150,  n.  3. 

involving  over-issue  of  bonds,  invalid,  147. 
action  to  have  declaimed  invalid,  151.     (See  Action.) 
judgment,  in  action  upon,  for  po.'^session  of  road,  149,  n.  1. 
upon  rescission  of,  when  contractor's  rights  protected,  150. 
bonds  issued  under,  valid  where  no  over-valuation,  18. 
where  road  might  have  been  constructed  for  less,  18. 
(See  Expenses  of  Construction;  Profits  and  Construction.) 

CONSTRUCTION    OF  INSTRUMENTS, 

general  I'ules,  as  to  property  covered  by  mortgage,  216. 
intention  gathered  from  whole  instrument  prevails,  219,  225. 

CONTEMPT   OF   COURT, 

interference  with  possession  of  receiver,  549,  565. 
strikers,  interference  by,  549. 

CONTRACT, 

conflict  of  laws  as  to  validity  of  certain  contracts,  22. 
true  nature  to  be  determined  by  all  provisions  of,  351. 
not  determined  by  name,  349. 


INDEX.  887 

The  figures  refer  to  pages. 

CONTRACT  —  continued. 

statutes  affecting,  cannot  be  evaded  by  use  of  names,  350. 
between  individual  bondholder  and  company  as  to  security,  58. 
of  corporations,  non-observance  of  forms  intended  to  secure  stockholders. 
85. 

effect  not  to  invalidate,  85,  n.  2. 
fraudulent,  cannot  be  set  aside  by  party  to,  205. 

rule  applicable  to  corporations,  205. 
■when  equitable  mortgage  arises  to  extent  of  stipulations  in,  212. 
that  subscriptions  should  be  loans,  when  equitable  mortgage,  213. 
by  senior  bondholders,  conceding  priority,  when  equitable  mortgage,  ib. 
•when  purchasing  company  takes  with  obligations  of,  268. 
when  trustee  of  mortgage  so  takes,  ib. 
between  company  and  landowner,  for  right  of  way,  269. 
mortgagee  of  road  takes  subject  to,  ib. 
that  title  to  personalty  not  to  pass  till  paid  for,  271. 
law  of  place  where  made  controls  railroad  mortgages,  627. 
execution  of,  where  several  receivers,  644. 
exchanging  bond,  rescission  of,  when  denied  after  decree,  650. 
(See  Construction  Contracts.) 

CONVERSION   OF   BONDS   INTO   STOCK, 

not  now  common,  5G. 

"  at  pleasure  of  holder  "  inures  to  benefit  of  holder  only,  ib. 

stock  issued  for  dividends  to  one  holding  stock  before  conversion,  55. 

right  of,  not  affected, by  consolidation,  57. 

exception  in  case  of  election  after  notice,  ib. 
right  of  bondholder  who  is  stockholder  assenting  to  consolidation,  ib. 
effect  of  statute  authorizing  consolidation  upon,  ib. 
right  forfeited  if  not  exercised  within  specified  time,  ib. 

effect  of  agreement  to  an  extension,  ib. 

of  simple  acceptance  of  terms  of  circular,  ib. 

of  bondholder  fixing  his  own  terms,  ib. 
right,  at  or  before  maturity,  forfeited  thereafter,  ib. 

CONVEYANCE   TO   TRUSTEES, 

whether  creates  lien  merely  or  passes  all  but  right  to  redeem,  362. 
importance  of  question  as  affecting  execution  sale,  ib. 

CORPORATION, 

three  essentials  of,  134. 

a  "franchise,"  184,  171,  175. 

may  hold  other  franchises,  134. 

distinction  between,  and  other  franchises,  175. 

rule  of  construction  against  mortgage  of  corporate  existence,  176. 

illustrative  cases,  176-178. 
presumption  as  to  legal  home  of,  19. 
cannot  deny  its  corporate  existpnce  to  avoid  bonds,  31. 
right  to  maintain  action  against  directors,  54. 

not  estopped  by  fact  that  dii-ectors  own  all  stock,  ib. 
common-law  powers  as  to  alienation,  161. 

implied  power  to  mortgage,  162. 

wheu  limited  by  implication,  164. 


888  INDEX. 

The  figures  refer  to  pages. 
CORPORATION  —  continued. 

when  exercise  of  right  incompatible  with  objects  of,  164. 
restriction  by  iiuplication  of  right  to   mortgage   not   countenanced,  ih., 
16r. 

except  as  to  property  essential  to  exercise  of  franchise,  ib. 
purpose  of  creation,  limits  right  of  alienation,  164. 
property  essential  for  exercise  of  franchises,  ih. 

not  proper  subject  of  voluntary  or  forced  sale,  ib. 

unless  authorized  by  legislature,  ib. 

rule  confined  to  real  estate  and  fixtures,  165. 

road-bed  and  fixtures  of  railroad  company,  ib. 

turnpike  company,  ib. 

canal  and  appurtenances  of  canal  company,  ib. 

market-house,  ib. 

plant  of  water  company,  ib. 
power  to  issue  bonds  and  other  negotiable  securities,  3,  84. 
extent  of  power  jiresumed  known  to  public,  84. 

principle  applicable  to  bona  fide  purchasers,  ib. 

exception  to  rule  86,  n.  1. 
right  to  mortgage  not  restricted  by  statutory  lieu,  168. 
bound  by  agent's  acts  within  scope  of  authority,  157. 
ratification  of  acts  of  agents,  187. 
presumption  that  officers  of,  rightfully  in  office,  ib. 
authority  of  officers  to  execute  mortgage,  ib. 
seal,  may  be  affixed  by  secretary  de  facto,  188. 
officers  de  facto,  binding  effect  of  acts  of,  ib. 
when  instrument  executed  by  agent,  deed  of,  186. 

(See  ^loRTGAGE.) 

validity  of  bonds  issued  beyond  authority  of,  84. 

question  whether  contract  usual,  ib. 
when  estopped  from  asserting  invalidity  of  unauthorized  mortgage,  196, 

204. 
when  may  question  validity  of  mortgage,  203. 
mortgage  executed  to  indemnify  guarantor  of  bonds,  204. 
right,  subject  to  law  of  principal  and  agent,  ib. 
rule,  in  pari  delicto,  etc.,  applicable  to,  205. 
cannot  mortgage  what  it  cannot  hold,  183. 
power  to  mortgage  in  one  State,  power  in  others,  when,  166. 
purchaser  from   corporation  of  bonds  guarantied  by  another  corporation, 
84. 

bound  to  inquire  into  guarantor's  powers,  ib. 
compromise  arrangements  between  corporations,  125. 

validity  of  guaranty  included  in.  ib. 
conveyance  by.  cannot  be  questioned  by  junior  mortgagee,  206. 

rule  qualified,  ib. 
foreign,  prohibition  against  "  doing  business"  in  State,  285. 
acceptance  of  trust  to  be  executed  on  contingency,  ib. 
uni)aid  stock  subscriptions,  may  be  assigned,  not  mortgaged,  163. 

rule  in  England.  101,  n.  1. 
foreign,  eligibility  of.  for  trusteeship,  2S5. 

States  of  I'nion,  distinguished  from  other  States  and  countries,  ih. 
constitutional  provisions  resiiectiug  rights  of  citizens,  not  applicable  to,  ib. 


INDEX.  889 

Tlie  figures  refer  to  pages. 
CORVOTiATJON  —  contiimed. 

constitutionalty  of  act  invalidating  trust  deeds  to  foreign,  285. 
possession  by,  under  scrutiny  of  court,  390. 
dealt  with  as  trustee,  ib. 
dealt  with  as  receiver,  ib. 
■when  trustee  in  possession,  exempt  from  liability,  320. 
trustee  in  possession  stands  in  phice  of,  319. 
when  dissolved,  right  to  foreclose  ceases,  396. 
appointment  of  receiver  of  defunct,  516. 

after  appointment  of  receiver,  may  continue  to  exercies  franchises,  551. 
may  elect  directors  after  receiver's  sale,  ib. 
not  dissolved  by  sale  of  property  and  franchises,  780. 
effect  of  declaring  sale  void,  on  corporate  existence,  817. 
franchises  of,  power  to  mortgage.     (See  Fkanchises.) 
(See  Bonds;    Borrowing;  Citizenship  of  Corporations;  Consoli- 
dation ;   DiRixTORs;   Railroad  Companies;    Liability   of   Com- 
pany DURING  Receivership;   Stockholders.) 

CORPUS, 

purport  and  effect  of  term,  133. 

when  unsecured  debt  preferred  as  to,  603. 

control  of,  by  company  m  possession,  492. 

(See  Company  in  Possession.) 
COSTS, 

as  between  different  mortgagees,  716. 

rule  in  England,  ib. 
where  mortgagee  sues  for  administration  and  sale  of  estate,  ib. 
where  mortgagee  sets  up  unfounded  claim,  717. 
where  suit  between  first  and  third  mortgagee,  ib. 
where  success  of  unsecured  creditors'  suit  inures  to  all,  ib. 
to  iutervenors,  718. 

sheriff  fees,  where  execution  plaintiff  becomes  purchaser,  ib. 
attorney  and  counsel  fees,  amount  in  discretion  of  court,  ib. 
amount  held  ample  compensation,  ib. 
advances  to  attorneys  and  counsel,  should  be  small,  719. 
annual  allowances,  ib. 
in  redemption  suit  by  junior  mortgagee,  720. 

where  prior  mortgagee  intervenes  to  make  sale,  unsuccessfully,  723 
(See    CoxMpexsation  and  Expenses  ;    Compensation  of  Receivers- 
Compensation  of  Trustees;  Counsel  Fees;  Expenses  in  Suits. 
etc.) 

COUNSEL  FEES, 

when  preferential  claims,  616. 

when  not,  623. 

not  extending  to  corpus  of  estate,  616. 

counsel  employed  for  special  purposes,  ib. 
of  counsel  retained  by  company  and  continued  by  receiver,  720. 
(See  Costs;  Expenses  in  Suits  relating  to  Mortgaged  Property.) 

COUPONS, 

defined,  100,  106. 

often  treated  as  independent  of  bond,  100. 

pass  as  bonds  under  a  will,  ib. 


890  INDEX. 

The  figures  refer  to  pages. 
COUPON'S  —  continued. 

on  distribution,  equal  with  bonds,  754. 

mere  representatives  of  claim  for  interest,  ib. 

maturing  after  principal,  deemed  cancelled,  103. 

detached,  retain  same  character  as  to  security  as  bonds,  106. 

but  become  independent  claims,  ib. 
validity  of,  not  affected  by  cancellation  of  bonds,  ib. 

rule  in  Maine  and  Ohio,  ib.,  n.  6. 
protected  by  and  subject  to  covenants  in  bond,  108. 
in  action  upon,  production  of  bond  unnecessary,  107. 

suit,  the  theory  of  form  and  mode  of  execution  of,  ib. 
possession  of  prima  facie  evidence  that  holder  holds  bond,  101. 
detached,  whether  covered  by  guaranty  of  bonds,  100,  n.  1  ;   127,  n.  2. 
payable  out  of  revenue,  recovery  where  fund  not  shown,  384. 
recoverable  under  general  count  in  debt,  381. 
transfer  of  possession,  presumptively  of  title,  105. 

does  not  import  guaranty,  ib. 
interest  coupons  pass  by  delivery,  ib. 

matured  coupons  attached  to  bonds,  as  notice  to  purchaser,  95. 
interest  unpaid,  not  notice  of  bond's  invalidity,  154. 
interest  upon,  after  default,  104. 

allowed  as  damages,  ib. 

not  a  breach  of  usury  laws,  ib. 
whether  entitled  to  days  of  grace,  ib. 
default  complete  after  demand,  ib. 

where  interest  runs  without  demand,  105. 
right  of  holder  to  foreclose  for  default  of  interest,  405. 
of  railroad  and  municipal  bonds,  subject  to  same  rules,  105. 
negotiable,  though  not  payable  to  particular  person,  106. 

containing  references  to  mortgage,  effect  on  negotiability,  ib. 
non-negotiable,  when  party  I'ights  depend  on  statutory  construction,  ib. 
waiver  of  State  lien  for  bonded  debt,  whether  extends  to  coupons,  ib. 
stolen,  same  rules  apply  to,  as  to  bonds,  108  (which  see). 

attached  to  bonds,  purchaser's  title  to  those  matured,  108. 

as  to  those  not  matured,  ib. 

consequences,  of  paying  overdue  coupons  of  stolen  bond,  ib. 

stolen  and  non-negoiiable,  purchaser  of,  acquires  no  title,  109. 
lost,  right  to  recover,  upon  tendering  indemnity,  109,  385. 
whether  bought  or  paid,  109. 

matter  of  evidence  of  intention,  ib. 

determining  question,  110. 

as  against  comjmny,  109. 

as  against  bondholders  who  purchased  supposing  them  paid,  ib. 

bought,   inferred  from  fact    that  company  did  not   receive  money, 
110,  n.  1. 

from  declarations  of  transferee,  ih. 

where  purchase  assei'ted  by  agent  to  receive  and  disburse  earnings, 
111. 

where  earnings  blended  with  private  funds,  ih. 

effect  of  resolution  at  agent's  instance  after  receipt  of,  ib. 

lifMi  of,  once  ceasing,  cannot  be  revived  by  company,  ib. 

theory  denying  lender  equal  rii^hts  with  other  secured  creditors,  110. 


INDEX.  891 

The  figures  refer  to  pages. 
COUPONS—  continued. 

theory  strengthened  as  to  subsequent  purchasers,  111. 

decisive  where  paid  by  guarantor  of,  ih.  and  n. 

surrender  for  new,  in  scheme  to  fund  interest,  security  not  released, 

112. 
that  new,  are  under  seal  immaterial,  ib. 
reissued  after  surrender,  mere  evidences  of  debt,  111,  n.  3. 
apparently  paid,  treated  by  court  as  paid,  ih. 
detached  and  barred  by  Statute  of  Limitation,  108. 
funding  of,  under  statute,  118. 

binding  effect  upon  those  of  same  class  not  funded,  ib. 
statute  operates  upon  entire  obligation,  ib. 
whether  holders  may  be  made  parties  defendant,  475. 

(See  Interest  ;  Power  of  Court  and  its  Receiver.) 
COURTS, 

non-interference  between  federal  and  State,  566. 
federal  courts'  chancery  powers,  375. 
not  affected  by  State  legislation,  ib. 
possession  by  corporation  under  scrutiny  of,  390. 
when  trustee  should  consult,  312,  654. 

when  should  report  to,  312. 
(See  Jurisdiction  ;  Power  of  Court  and  its  Receiver;  Removal 
OF  Causes.) 
CREDIT, 

materials  furnished  on,  not  preferred,  619. 
CREDITORS, 

presumption  in  favor  of  unsecured,  65. 

subsequent  to  bond  and  mortgage,  estopped  to  deny  validity,  26,  27. 
not  entitled  to  question  resolution  authorizing  mortgage,  207. 
nor  to  raise  the  question  of  notice  to  stockholders,  208. 
when  not  entitled  to  question  execution  of  mortgage,  207. 
when  executed  by  board  they  contracted  witli,  ib. 
may  assail  mortgage  on  ground  of  fraud,  208. 
or  that  not  registered,  ib. 
but  not  when  they  had  actual  notice,  ib. 
general  creditors'  right  to  file  bill  against  collusive  receivership,  471. 
cannot  compel  trustees  to  issue  bonds,  322. 
claims  of,  for  operating  expenses  upon  earnings,  499. 
"  labor  and  supply-"     (See  Words  and  Phrases.) 
remedy  by  garnishment  process,  to  reach  income,  500. 
apportionment  with  attaching  creditor  of  earnings,  at  foreclosure,  ib. 
(See   Judgment     Creditors;     Operating     Expenses*,     Preferred 
Debts  ;  Priorities.) 

DAMAGES, 

resulting  from  maintaining  railroad  on  street,  lien  for,  269. 
(See  Power  of  Court  axd  Receiver.) 
DAYS   OF   GRACE.     (See  Coupons;  Default.) 
DEBENTURE-HOLDERS, 

character  of  action  by,  372,  n,  1. 

injunction  by,  to  restrain  payment  to  bondholders,  ib. 
when  but  one  remedy  provided  by  special  statute,  379. 


892  INDEX. 

The  figures  refer  to  pages. 

DEBENTURE-HOLDERS  —  continued. 

personal  judgment  when  recoverable  by,  379. 

suing  on  behalf  of  self  and  others,  ib. 
right  to  receiver,  5UU. 

•when  entitled   to  receiver,  though    winding-up  petition   presented, 
506,  n.  1. 
receiver  and  manager  appointed  at  suit  of,  when,  370,  n. 
summary  method  of  realizing  upon  securities,  378. 

power  of  sale  under  Conveyancing  Act,  ib. 

under  Companies  Act  of  1862,  ib. 
right  to  execution  against  corporate  property,  384,  n.  1. 
with  judgment,  when  not  entitled  to  execution,  379. 

right  of  foreclosure  against  uncalled  capital  and  other  pi'operty,  392,  n.  2. 
judgment  in  action  to  foreclose,  807. 
provision  regarding  moneys  in  hands  of  receiver,  ib. 
when  liquidator  cannot  enjoin  sale  by,  772. 
entitled  to  recover  interest  as  damages,  when,  379. 
when  not  a  creditor,  within  meaning  of  Companies  Act,  ih. 
preferred  to  subsequent  creditors  on  winding  up,  603,  n.  2. 

and  to  general  creditors,  ib. 
to  what  extent  secured  by  rolling-stock,  3. 

of  debentures  giving  power  to  majority  to  compromise,  851,  n.  2. 
reconstruction,  power  to  sanction  scheme  of,  ib. 
majority  resolutions  must  be  consistent  with  rights  under  deed,  52. 
on  distribution,  legal  and  equitable  take  equally,  753. 

(See  BoxDHOLDEKs;  Bonds;  Debentures.) 

DEBENTURES, 

negotiability  of,  80.     (See  Negotiability  of  Bonds.) 

estoppel  based  upon  recitals  in,  87. 

when  treated  as  equitable  mortgage,  211. 

"  undertaking  "  pledged  to  secure,  2.57. 

secured  by  "  undertaking  "  of  steamboat  company,  ib. 

of  railway  company,  ib. 
where  company  cannot  interfere  until  default,  258. 
guaranty  of,  assigned  to  guarantor  in  discharge  of  debt,  125. 
issued  to  indemnify  transferrer  of  business  against  debts  of,  15,  n. 
priority  of  only  as  to  the  "  undertaking,"  280,  n.  2. 

as  between  trustees  of  debenture  deed  and  debenture-holders,  280. 
on  winding  up  of  company,  priority  as  to  general  creditors,  ib.,  u.  2. 

as  to  judgment  or  execution  creditors,  ib. 
priority  of  receiver  as  to  money  raised  by  court's  authority,  ib. 
priority  of  issue  after  default  of  interest,  ib. 
after  appointment  of  receiver,  280,  n.  3. 

priority  as  between  holders  of  different  dates  of  issue,  280,  n.  2. 
treated  as  valid  tliough  irregularly  issued,  ib. 

(See    Bonds;    Bokuowi.ng  ;     Dkiu;ntuke-IIolders;     Guaranty    of 

Bonds.) 
DEBTS, 

private,  of  corporate  officer,  pledge  to  secure,  33. 

DECREE, 

obtained  by  fraud,  jwrisdiction  as  to,  420. 


INDEX.  898 

The  figures  refer  to  pages. 
DECREE  —  continued. 

of  State  court  bar  to  proceedings  in  federal,  417. 

final,  determines  rank  of  certificate-holders,  680. 

(See  Ai'i'KALs;  Foukclosuke  Dkcrees.) 
DECREES   AND   ORDERS, 

binding  effect  of,  in  action  by  or  against  trustees,  487. 

order  appointing  receiver  and  imposing  conditions.     (See  Preferred 
Debts.) 

contents  of  order  appointing  railway  receiver,  642,  n.  1. 
(See  Ai'PEALs;  Foreclosure  Decrees.) 
DEFAULT, 

meaning  of  completed  default,  399,  408. 

non-payment  concurred  in  by  mortgagee,  399. 

■whether  demand  necessary  to  complete,  400,  408. 

when  time  essence  of  contract,  408. 

for  a  particular  period,  designated  "contract  grace,"  ib. 

complete  when  "contract  grace  "  expires,  ib. 

what  amounts  to,  when  bondholder  receiving  income,  401. 

no  relief  from  consequences  of,  without  excuse,  402. 

right  to  pay  in  scrip,  not  available  after  default,  403. 

failure  to  make  demand,  no  defence,  ib. 

on  divisional  bonds  not  available  to  consolidated  mortgagee,  401. 

not  complete,  receivership  denied,  528. 

decree  of  foreclosure  reversed  upon  showing  default  waived,  431. 

waiver  of  one,  does  not  affect  rights  on  others,  408. 

may  be  taken  advantage  of  by  single  bondholder,  405. 
especially  where  levy  prohibited  by  mortgage,  ib. 
bound  to  see  all  rights  protected  by  final  decree,  ib. 

right  may  be  restricted  by  mortgage,  406. 
DEFENCES, 

available  in  suit  against  receiver,  571. 

available  against  bondholders,  available  against  trustees,  480. 

absence  of  consideration,  available  to  company,  26,  n.  4. 
not  as  against  bonajide  purchaser,  ib. 

no  defence  against  bonajide  holder  that  bonds  diverted,  92. 

guaranty  of  bonds,  action  on,  no  defence  that  bonds  void,  117. 
DEFERRED   INCOME   BONDS, 

power  to  issue,  32. 

conflict  of  authority  as  to,  ib. 
DELAWARE, 

cases  affecting  reorganization,  842,  n.  1. 
DELIVERY, 

bonds  not  valid  until,  23. 

pledge  construed  as,  ib. 

action  to  annul  bonds  for  wrongful.     (See  AcTiox.) 
DExMAND, 

at  place  designated,  whether  a  prerequisite  for  suit,  401. 

whether  necessary  to  complete  default,  401,  408. 

what  a  sufficient  demand,  401. 

upon  company  after  default  renders  its  possession  unlawful,  500. 

suit  equivalent  to  demand,  ili 

trustee  entitled  to  all  eamincjs  .after,  ib. 


894  INDEX. 

The  figures  refer  to  pages. 

DEPOTS   AND   OTHER   BUILDINGS, 
lands  acquired  for.     (See  Mortgage.) 
"depot,"  term  not  limited  to  place  for  passengers,  254. 

DESCRIPTION   OF   MORTGAGED   PROPERTY.     (See  Mortgage.) 
specific  description,  necessity  for  when  qualified  by  doctrine  of  fixtures, 
247. 
by  doctrine  that  railroad  an  entirety,  248. 

DIRECTORS, 

power  to  borrow  money,  issue  bonds,  mortgage,  etc.,  188. 

authority  to  manage  property,  business  and  affairs,  189. 

may  bind  company  by  guaranty,  without  consent  of  stockholders,  116. 

may  ratify  trust  deed,  differing  from  that  authorized,  190. 

certain  statutes  conferring  powers  declaratory  of  common  law,  188. 

may  be  reimbursed  for  advances  by  bond  issue,  198. 

when  company  estopped  to  contest  on  grounds  of  trust  relations,  205. 

when  entitled  to  lien  for  advances,  346. 

right  of,  to  purchase  bonds  at  a  discount,  95. 

conflict  of  authority  on  question,  94. 

New  York  rule,  95. 

Illinois  and  Kansas  rule,  94. 

where  they  deal  with  company,  ib. 

where  with  persons  to  whom  they  owe  no  duty,  95. 
bonds  issued  to,  as  a  bonus  to  induce  subscription,  29. 
sale  of  bonds  to,  at  full  value,  28. 

having  personal  interest  in  transaction  opposed  to  company's,  147. 
bonds  issued  in  pursuance  of,  ordered  cancelled,  ib. 
car-trust  certificates  issued  to,  when  void,  348. 
meetings  of,  must  conform  to  by-laws,  189. 

when  one,  has  no  notice  of,  ib. 
to  constitute  a  quorum,  president  need  not  attend,  ib. 
may  be  elected  after  receiver's  sale,  551. 

misconduct  of,  aggravated  by  fact  of  stockholders  protesting,  814. 
action  against,  by  creditor  to  annul  deed  for  fraud,  207. 
(See  Fiduciaries.) 

DISTRIBUTION   OF   PROCEEDS, 

master  or  other  distributing  officer  bound  by  decree,  752. 
party  affected,  entitled  to  review  or  rehearing  by  court,  753. 
lien  creditors  always  preferred,  ib. 

exception,  debts  for  operating  expenses,  ib. 
judgment  not  a  lien  unless  made  so  by  statute,  ib. 
where  vendor's  lien  lost  by  rejection  of  bond-consideration,  ib. 
to  equitable,  equally  with  legal,  debenture-holders,  ib. 
claims  of  undisputed  priority,  at  once  payable,  ib. 

equally  to  bondholders  of  same  class,  ib. 
principle  regulating  distribution  among  execution  creditors,  not  appli- 

able,  ///. 
upon  sale  for  all  bonds,  on  default  of  interest  on  part,  754. 
pro  rata  among  creditors  and  assignees,  U). 
equallv  to  pay  coupons  and  ])onds,  il). 
princi[ili',  soujetimes  embodied  in  mortgage,  755. 


INDEX.  895 

The  figures  refer  to  pages. 

DISTRIBUTION   OF   VP^.OCEEDS  — continued. 

where  fund  iusuflicient  and  coupons  of  a  class  partly  paid,  755. 

amongst  holders  of  detached  coupons  maturing  before  and  after  decree,  756. 

coupons  attached  to  bonds  pledged,  part  of  security,  ib. 

to  [)ay  bonds  in  preference  to  advances  for  coupons,  iO. 

where  advances  made  on  understanding  that  coupons  not  cancelled,  757. 

where   bondholders,   whose   coupons   were  paid,   ignorant  of    under- 
standing, Uj. 
priorities  of  persons  surrendering  securities,  ib. 

priority  of  coupons  forfeited  by  exchanging  for  State  guarantied  bonds,  ib. 
surrender  of  senior-class  bonds  will  not  inure  to  junior,  758. 
relative  rank  of  preferred  stockholders  and  bondholders,  ib. 
dependent  upon  what  occurred  at  issue  of  stock,  ib. 
judgment  for  damages  against  company,  not  preferred  debt,  759. 

except  nnder  certain  State  statutes,  760. 

which  have  no  extra-judicial  force,  ib. 
judgments  recovered  against  maker  of  mortgage  foreclosed,  ib. 
builders  of  extension  during  receivership,  have  no  priority,  761. 
where  order  to  build  entered  with  consent  of  some,  ib. 
■where  operating  expenses  a  specific  lien,  ib. 
pledgee  of  bonds  may  prove  for  whole  amount  due,  762. 

but  may  recover  only  advances  with  costs,  ib. 

where  pledge  ultra  i-ires,  ib. 
where  agent  exceeds  autliority  in  negotiating  bonds,  ib. 
when  lien  on  part  of  road  payable  out  of  whole  proceeds,  763. 
surplus,  after  paying  bondholders,  belongs  to  unsecured  creditors,  ib. 
compromise  between  bondholders  and  stockholders  affecting,  void,  ib. 
benefits  intended  for  stockholders  go  to  creditors,  ib. 
where  bondholders  in  their  own  interest  parties  to  arrangement,  764. 
creditors  may  claim  as  equitable  lienors  superior  to  mortgagee,  ib. 
DIVIDENDS , 

subject  to  paramount  obligation  to  pay  debts,  68. 
appropriation  of  income  to  payment  of,  when  complete,  498. 
payable  to  stockholders  at  time  of  declaration,  56. 

to  holders  of  bonds  converted  into  stock  at  time,  ib. 
in  scrip,  distinction  between  and  bonds,  -36,  n.  1. 

and  stock  certificates,  ib. 

EARNINGS, 

diversion  of,  as  ground  for  lien  on  corpus,  673. 
use  of,  for  permanent  improvements,  a  diversion,  661. 
diversion  of,  from  terms  of  lease,  699. 
restoration  of,  diverted  during  receivership,  660. 
anticipated  to  complete  unfinished  lines,  when,  675. 
(See   IxcoMK   Bonds;  Power  of   Court  and   its  Receiver;   Rail- 
road Companies  ;  Trustees  ;  Words  and  Phrases.) 

ejectmp:nt, 

suit  for,  carried  on  concurrently  Mnth  actions  for  other  relief,  430. 
(See  Remedies  of  Bondholders.) 
EJUSDEM  GENERIS, 

when  general  following  particular  words,  218. 
effect  of  phrase  "  all  other  property,"  219. 


896  INDEX. 

The  figures  refer  to  pages. 

ELECTION, 

by  receiver  to  adopt  or  repudiate  contracts  of  company,  695. 

reasonable  time  to  exercise  right,  what  is,  698. 
by  receiver  to  perform  executory  contract  of  company,  643. 

ELEVATOR.     (See  Appurtenances.) 

EMINENT   DOMAIN.     (See  Removal  of  Causes.) 

EMPLOYEES, 

duties  and  powers  of  receiver  as  to,  560. 

couclusiveut'ss  of  receiver's  acts,  ib. 

may  apply  to  court  on  substantial  grievance,  ib. 

petition  for  lescission  of  order  of  receiver  reducing  wages,  ib. 

receiver  not  interfered  with  unless  abuses  discretion,  ib. 

not  bound  by  stipulations  respecting  discharge  of,  ib. 

may  enforce  rule  against  union  men,  550,  560. 

may  refuse  to  re-employ  stiikers,  when,  560. 
court  will  not  direct  receiver  to  contract  with  union  men,  561. 
receiver  may  not  rearrange  company's  rules  witliout  hearing  men,  ib. 
nor  renounce  old  schedule  of  wages,  ib. 
when  court  will  not  approve  reduction  of  wages,  ih. 
wages  and  salaries  of  every  grade  preferred  claims,  615. 
wages  of,  when  order  not  violated  by  receiver,  645,  n.  1. 
protected  from  evasion  of  exemption  laws,  577. 
compensation  for  injuries  to,  658. 
liability  of  receiver  for  injuries  to  his  own,  692. 
receiver  liable  officially  for  torts  of,  690. 
acts  of,  during  receivership,  no  liability  on  company,  685. 
(See  Servant  and  Employee.) 
ENGLAND, 

statutory  restrictions  as  to  bond  issue,  2,  n.  2. 
debenture-holders,  statutory  powers  of  majority  of,  849. 

must  be  construed  strictly,  ib. 

power  to  release  premises  does  not  include  company,  ib. 
.  power  to  modify  rights  does  not  include  power  to  extinguish,  ib. 
when  three- fourths  majority  necessary,  ib. 
court  will  direct  separate  meetings  of  classes,  850. 
a  creditor-shareholder  entitled  to  attend  meetings,  ib. 
debentures  which  pass  by  delivery  should  be  produced,  ib. 
voting  by  proxy,  ib. 
Companies  Act  of  1870,  85.5,  n.  2. 
Companies  Act  of  1867,  limiting  creditor's  remedy,  357. 

dock  company,  within  purview  of,  ib. 

protection  of,  arises,  when,  870. 

tramwny  company,  not  within  purview  of,  370.  n. 

s^le  under  ^.  /a    of  rolling-stock  prior  to  act,  ib. 

dock  company  held  '-company"  within  act,  ib. 
rights  of  creditors  to  levy  on  rolling-stock,  361. 
remedy  by  injunction,  370,  n. 
when  receiver  and  manager  appointed,  i7>.,  509. 
winding  up,  receiver's  power,  rules  and  regulations,  645,  n.  1. 
li(lui<l:itor's  advances,  priority  of  on  winding  up,  682. 
receivers  when  treated  as  court  ollicers  ;  when  as  agents,  689. 


INDEX.  897 

The  figures  refer  to  pages. 

ENGLAND  —  continued. 

no  compensation  to  trustees,  703. 
reorganization,  statutes  respecting,  842,  n.  1. 
costs  in,  867. 

ENTIRETY, 

doctrine  of,  as  applied  to  railroads,  248. 

(See  Accession,  Doctrine  of.) 
EQUITABLE   MORTGAGE, 

constituted  by  writing  and  intention,  211,  212,  n.  3. 

when  bond  treated  as,  211. 

when  debenture  treated  as,  ib. 

contract  that  subscriptions  should  be  loan,  held,  213. 

agreement  for  mortgage  never  executed,  151,  212. 

on  neglect  of  company  to  execute  authorized  mortgage,  212. 

contract  by  prior  bondholders,  conceding  priority  to  junior,  ib. 

agreement  pledging  company's  property  to  agents,  when,  ib. 

to  extent  of  contract  stipulations,  ib. 

EQUITABLE   TITLE, 

in  lands,  when  covered  by  railroad  mortgage,  235. 

EQUITY, 

general  powers  of,  for  relief  of  bondholders,  372. 

assumes  jurisdiction  of  conventional  trust  when  complication  arises,  373. 
sometimes  recognizes  bondholders'  rights  to  control  company,  46. 
bondholder's  scheme  to  get  property  at  inadequate  price,  ib. 
discovery,  sufficient  ground  for  interference  of  court  of,  273. 
jurisdiction  of,  in  suits  for  possession,  389. 

remedy  at  law  inadequate,  ib. 
jurisdiction  to  appoint  receiver,  not  dependent  on  statute,  509. 
inherent  authority  of,  extends  to  appointment  of  trustees,  288. 
powers  of  federal  courts,  independent  of  State  courts,  375. 
will  execute  trust  where  State,  as  trustee,  refuses,  469. 
payment  of  coupon,  conversion  of,  into  purchase,  109. 
will  uphold  mortgage  in  favor  of  an  advancer  of  money,  ib.  and  n.  4. 
ESTOPPEL, 

when  corporation  estopped  to  assert  invalidity  of  mortgage,  196. 

to  contest  mortgage  to  directors,  205. 

to  impeach  bonds,  of  which  it  has  used  proceeds,  31. 

to  deny  validity  over  issue,  91. 

to  deny  its  corporate  existence  to  avoid  bonds,  31. 

to  set  up  unconstitutionality  of  bond  issue,  26  and  n.,  31. 

to  impeach  issue  of  preferred  stock,  31,  n.  1. 

to  repudiate  guaranty,  126. 

to  repudiate  indorsement,  ib. 

to  object  to  receiver's  appointment,  539-541. 

to  deny  organization  in  another  State,  435. 
bondholder  not  estopped  to  impeach  bonds,  27. 
when  junior  lienor  not  estopped  though  a  party,  750. 
when  bondholders  estopped  to  assert  mortgage  against  lenders,  634. 

when  estopped  as  against  certificate-holders,  682. 

as  against  purchasers  of  negotiable  securities,  ib. 
creditor  with  superior  statutory  claim,  estopped  by  decree,  742. 

67 


898  INDEX. 

The  figures  refer  to  pages. 

ESTOPPEL  —  continued. 

subsequent  incumbrancers  joined  as  parties  estopped  by  decree,  745. 

though  liens  misstated  in  pleadings,  ib. 
purchaser  estopped  by  matters  raised  by  cross-bill,  746. 
transferee,  how  far  estopped,  ib. 
how  far  State  estopped  to  rescind  sale,  816. 
receiver  when  estopped  to  dispute  his  certificates,  682. 
against  mortgagees  and  bondholders,  as  to  receivers'  acts,  5.58. 
priority  of  senior  constituent  mortgages  lost  by  estoppel,  668. 
who  estopped  to  object  to  reorganization  scheme,  864. 
as  against  any  one  who  sells  or  gives  currency  to  bonds,  32. 
when  applied  to  defeat  vendor's  lien,  272. 
as  foundation  of  mortgage  of  after-acquired  property,  223. 
based  upon  recitals  in  English  debentures,  87. 

in  bonds,  ib. 

in  State  bonds,  ib. 

(See  Foreclosure  Decrees.) 
EVIDENCE, 

of  whether  coupons  were  bought  or  paid,  10&. 

when  action  against  secured,  and  when  against  unsecured  creditor,  ih. 

EXCHANGE    OF   BOXDS, 

rights  thereunder,  40. 

provision  to  retain  old  as  security  until  all  surrendered,  60. 

new  for  old  a  sufficient  consideration,  ih. 

(See  Priorities  among  Bondholders.) 
EXECUTION, 

personal  property  always  subject  to  sale  under,  356,  359. 
exception  to  rule  in  Minnesota,  357. 
in  England  since  act  of  1867,  ib. 
sale  of  rolling-stock  under,  objections  against,  363. 
sale  of  equity  of  redemption  under,  362. 
rights  of  purchaser,  ib. 

sale  under,  not  restrained  at  suit  of  mortgagor  company,  367. 
exception,  where  property  essential  to  franchise,  165,  367. 
(See  Remedies  of  Bondholders.) 

EXPENDITURE  BY  CREDITORS, 

loans  to  pay  interest  or  operating  expenses  not  preferred  generally,  629. 

bondholders  averting  strike  by  advances  to  pay  employees,  630. 

loaning  money  to  embarrassed  corporation,  631. 

taking  assignment  of  embarrassing  claims  as  security,  ib. 

whether  lender  entitled  to  statutory  lien  of  claim  paid,  ib. 

where  lender  a  court  official,  632. 

claim  of  receiver  for  interest  paid  on  bonds,  ib. 

England,  advances  made  by  liquidator,  priority  of,  ib. 

effect  of  lender  taking  security  for  loan,  633. 

where  money  lent  applied  to  pay  bonded  interest,  ib. 
effect  of  fraud  of  trustees  in  concealing  insolvency,  ib. 
subrogation,  when  lender  not  entitled  to,  ib. 

when  bondholder  estopped  to  assert  mortgage  as  against  lender,  634. 
prioiity  oi  surety  on  apjteal  dependent  upon  claim,  635. 

rule  same  though  surety  company's  attorney,  ib. 


INDEX.  899 

The  figures  refer  to  pages. 
EXPENDITURE   BY   CREDITORS  — conanwerf. 

obtaining  surety  does  not  keep  company  a  "  going  concern,"  636. 
when  surety  on  appeal  entitled  to  reimbursement,  ib. 
when  surety  on  injunction  entitled  to  reimbursement,  ib. 
when  surety  on  replevin  bond  entitled  to  protection,  ib. 
subrogation  of  bondholder  who  has  paid  taxes,  6:57. 
reorganized  company  paying  taxes,  not  entitled  to  reimbursement,  ib. 
EXPENSES   IN   SUITS,  RELATING   TO  MORTGAGED  PROPERTY, 
expenses  of  trustees,  713. 

trustee's  natural  right  to  reimbursement,  712. 

fees  of  counsel  employed  to  defend  mortgage,  ib. 
to  preserve  estate  from  waste,  ib. 
to  foreclose  mortgage,  ib. 
counsel  fee,  when  justified  by  terms  of  mortgage,  713. 
authority  for  insertion  of  terms  must  be  shown,  ib. 
what  not  proper  authority,  ib. 
what  not  proper  ratification,  ib. 
disbursements  in  procuring  evidence,  712. 
in  other  ways  protecting  interests  of  cestuis  que  trust,  ib. 
contract  fees  of  solicitor,  where  suit  interrupted  by  war,  713. 
expenses  of  receiver : 

payments  for  legal  services  and  counsel  fees,  716. 

included  in  direction  to  pay  "  laborers  and  employees,"  ib. 
expenses  of  representative  bondholders  : 
bondholder,   suing  for  class,  right  to  counsel   fee,  though  not  trustee, 
713. 
on  principle  of  agency,  715. 
representative  bondholder  defendant  in  suit  to  determine  priorities,  ib. 
expenses  of  mortgagor : 

salary  of  company's  attorney  postponed  to  liens  and  expenses,  716. 
counsel  fee  in  suit  against  construction  company,  partially  successful,  ib. 
(See  Compensation  and  Expenses  ;  Compensation  of  Receivers  ;  Com- 
pensation OF  Trustees;  Costs.) 
EXPENSES   OF    CONSTRUCTION, 

under  statute  prohibiting  issue,  except  for  money,  labor,  or  property,  17. 
why  not  preferred  like  operating  expenses,  595. 
salaries  of  officers  included  in,  15,  33. 
rent  of  office,  33. 
EXPRESS   COMPANY, 

receiver's  right  to  annul  railway  company's  contracts  with,  696. 
company's  contracts  with  which  should  be  adopted,  697. 
EXTINGUISHMENT   OF   BONDS.     (See  Payment.) 

FALSE  REPRESENTATIONS, 

by  president,  as  such,  considered  those  of  company,  53. 

president  not  personally  responsible,  ib. 
FIDUCIARIES, 

trustee  in  possession  a  fiduciary,  321.     (See  Trustee.) 

effect  in  this  country  of  omitting  to  record  their  liens,  262. 
under  English  Companies  Act  of  1862,  ib. 


900  INDEX. 

The  figures  refer  to  pages. 
FIDUCIARIES  —  continued. 

shareholder  when  not  affected  by  omission,  262. 
when  solicitor  treated  as  fiduciary,  ib. 
■when  banker  not  so  treated,  ib. 
FIRST-LIEN  CERTIFICATES, 

general  principles  underlying  power  to  issue,  663. 

continued  as  a  "going  concern,"  railroad's  chief  value,  ib. 

public  interest,  paramount  to  lien-holders',  ib. 

creditors  presumed  to  deal  with  company  with  regard  thereto,  664. 
prior  lien  on  earnings  and  corpus,  663,  664,  667,  n.  1. 
none  but  railroad  company  can  be  authorized  to  issue,  670. 
conditions  fully  justifying  issue  of,  667. 
not  negotiable,  though  payable  to  bearer,  679. 
vendors'  lien  acquired  after  sale  but  before  confirmation,  666. 

when  lien  not  transferred  to  proceeds  of  sale,  ib. 
issued  for  operating  expenses  without  other  lien-holders'  consent,  ib. 

when  justifiable,  667. 
granted  trustees  and  receiver,  not  assailable  by  company  or  bondholders, 

666. 
priority  of  senior  constituent  mortgages  lost  by  estoppel,  668. 
South  Carolina  rule  against  issuing  ex  parte,  ib. 
dissent  of  parties  against  issue,  effect  of,  669. 

where  minority  show  restoration  of  road  unfeasible,  ib. 
bondholders'  consent  necessary  for  issue  by  private  corporation,  ib. 

cannot  be  ordered  by  court,  670. 
notice  to  interested  persons  should  be  given  before  authorized,  ib. 

risk  to  receiver  and  creditor  from  not  giving  notice,  671. 

circumstances  equivalent  to  notice,  ib. 
necessity  for,  must  be  clearly  established,  ib. 

statement  specifying  indispensable  items  should  be  submitted,  ib. 
for  creation  of  car-trust,  to  relieve  earnings  not  authorized,  672. 
for  what  purposes  issuable,  ib. 
to  keep  road  in  operation  and  repair,  ib. 

for  purchase  of  rolling-stock  and  other  equipment,  ib. 

to  rebuild  bridge  to  connect  adjunct  mine,  673. 

acquire  road-bed  by  condemnation  proceedings,  672. 

to  pay  taxes,  superior  to  all  liens,  ib. 

for  back  claims  for  labor  and  supplies,  what  to  prove,  673. 

diversion  of  earnings  to  claimant's  prejudice,  ib. 

necessary  for  conservation  of  property,  ib. 

mere  enhancement  of  mortgage  lien,  not  sufficient  reason,  ib. 

issued  to  maintain  single  division  of  consolidated  system,  674. 

to  pay  for  construction  work  generally,  675. 

construction  of  additional  lines  generally  beyond  court's  power,  ib. 
where  additional  lines  necessary  to  get  full  benefit  of  security, 

676. 
where  forfeiture  of  land-grant  threatened,  ib. 

for  completion  of  unfinished  lines,  675,  677. 

canal,  loan  authorized  to  complete  construction  of,  676. 

for  construction  works,  effective  only  with  prior  lienor's  consent,  677. 

so,  where  cost  of  repairs  equals  original  construction,  678. 
position  of  U.  S.  Supreme  Court  ou  subject,  ib. 


INDEX.  901 

The  figures  refer  to  pages. 

FIRST-LIEN   CERTIFICATES  -  continued. 

fund,   raised  from   net  earnings   after  payment  of   receiver's  expenses, 
674. 

fund  available  for,  distributed  to  suit  receiver,  ib. 

(See  Ceutikicates  of  Indebtkdness;  Holders  of  Certificates.) 
FIRST-MORTGAGE  BOND, 

when  presumption  of  no  prior  bonds,  156. 

when  bonds  secured  by  junior  mortgage  construed  to  mean,  133. 
FIXTURES, 

what  are,  337. 

concurrence  of  intention  and  actual  annexation,  necessary,  ih.,  n.  3. 

when  cannot  retain  character  of  personalty  as  to  mortgagee,  271. 

when  opposite  rule  prevails,  272. 

rolling-stock  as,  considerations  supporting  view,  341. 

personalty  made  into  bridges  and  depots,  after  execution  of  mortgage, 
247. 

mining  ditch  or  flume,  ib. 

when  transferable  as  realty,  general  rule,  ib. 

(See  Mortgage;  Rolling-Stock;  Vendor's  Lien.) 

FLOATING  DEBT, 

priority  of,  over  dividends,  68. 

(See  Bonds.) 
FLORIDA, 

statutory  provisions  as  to  issuing  bonds,  40,  n. 
mechanics'  liens  in,  276. 

statutory  limitations  of  power  to  mortgage  after-acquired  property,  182. 
statutes  respecting  reorganization,  842,  n.  1. 
exemption  from  taxation,  when  passes  at  foreclosure  sale,  787. 
FORECLOSURE  AND    SALE, 

right  belongs  to  each  bondholder  separately,  393. 

inherent  in  mortgage,  392. 

request  of  bondholders,  when  necessary  to  trustees'  suit,  403. 

when  not  necessary,  404. 
bondholder,  when  estopped  by  decree,  though  no  request  made,  405. 
right  of,  on  default  of  interest,  though  no  provision,  392,  394. 
insertion  of  such  provision,  though  not  in  resolution,  394. 
foundation  of  rule,  interest  part  of  debt,  392. 
when  agreement  of  bondholders  to  forbear,  no  defence,  393. 
improper  motives  no  ground  for  denying  relief,  395. 

important  exception  to  rule,  ib. 
claim  of  title  paramount  not  to  be  considered,  396. 

judgment  creditor  cannot   assert  want  of   resolution   for  issuing   mort- 
gage, ib. 
unfairness  of  reorganization  plans  not  to  be  considered,  ih. 
right  not  postponed  by  stipulation  postponing  right  of  entry,  398. 
nor  when  right  of  entry  depends  on  request,  399. 
right,  how  far  affected  by  agreement,  400. 
provisions  negativing  trustees'  right  of,  394. 

deed  securing  money  raised  to  discharge  liens  and  sell  lands,  ib. 
purchasers  cannot  question  validity  of  mortgage,  208. 
may  sometimes  be  prevented  by  purchase  of  plaintiff's  bonds,  406. 


902  INDEX. 

The  figures  refer  to  pages. 
FORECLOSURE    AND    SXhE  — continued. 

right  of  prior  mortgagee  of  part,  as  against  mortgage  of  entirety,  395. 
mortgagee  need  not  first  resort  to  fund  provided,  394. 
special  remedies  cumulative  upon,  396. 
right  of,  ceases  when  corporation  dissolved,  ib. 

(See  Default;  Foreclosuke  Decrees;  Jurisdiction;  Strict  Fore- 
closure.) 
FORECLOSURE  DECREES, 

conformity  of  decree  to  terms  of  mortgage,  726. 

court  determines  method  to  give  effect  to  stipulations,  ib. 

conformity  of  decree  to  bill,  ib. 

general  rule  —  complainant  awarded  only  what  he  claims,  727. 
rule  applicable  to  decree  pro  confesso,  ib. 
may  determine  matters  not  specifically  presented,  728. 
right  of  priority  of  classes,  ib. 

prayer  for  "  such  other  and  further  relief  "  liberally  construed,  729. 
reorganization  directed  though  specific  relief  sought  was  strict  fore- 
closure, ib. 
right  to  object  for  non-conformity  lost  by  laches,  ib. 
conformity  to  mandate  of  Appellate  Court,  730. 
construction  of  mandate,  ib. 
provisions  of  ordinary  decree,  ib. 

English  practice,  ib. 
amount  unpaid  should  be  stated  whether  principal  due  or  not,  731. 
when  opened  for,  including  amount  unpaid,  ib. 
in  suit  on  general  mortgage,  constituents  not  parties,  ib. 
provision  to  put  purchaser  into  possession,  effect,  ib. 
judgment  for  money  found  to  be  due,  erroneous,  ib. 
court  should  retain  control,  ib. 
embrace  parties  only,  ib. 

foreclosing    general,   cannot   include   provisions   as  to  divisional   mort- 
gages, ib. 
restoration,  on  decree  being  declared  null  on  appeal,  ib. 

imposing  conditions  and  directing  resale,  ib. 
judgment  for  deficiency,  732. 

where  no  mortgage  provision  accelerating  maturity  of  bonds,  ib, 
provisions  of,  where  road  in  possession  of  junior  mortgagee,  ib. 
provisions  on  foreclosure  of  junior  mortgage,  ib. 
disputed  priority  of  incumbrances  should  be  settled  before  sale,  733. 
where  road  ordered  sold  subject  to  underlying  mortgages,  ib. 
when  property  in  hands  of  receiver  pendente  lite  and  certificates  issued,  ib. 
receiver's  outstanding  obligations,  statement  may  be  required,  ib. 
directing  sale  before  settlement  of  controversies,  ib. 
when  directed,  free  from  incumbrances,  734. 
effect,  purchaser  required  to  pay  only  amount  bid,  735. 
where,  in  such  sale,  right  to  redeem  reserved,  ib. 
when  purchaser  ordered  to  pay  enough  for  settled  claims,  ib. 
essential  condition,  that  debts  paid  have  clear  priority,  736. 
immediate  sale  ordered  when  desired  by  parties  interested,  ib. 
not  ordered  at  request  of  small  minority,  ib. 
not  postponed  at  request  of  small  minority,  ib. 
opposing  considerations,  ib. 


INDEX.  903 

The  figures  refer  to  pages. 

FORECLOSURE  DECREES  —  continued. 

common  practice  of  court  where  prior  liens,  733, 

where  some  liens  prior  and  others  subsequent,  734. 
ordering  sale  to  satisfy  part  of  debt  overdue,  737. 
preserving  lien  of  unmatured  portion,  ih. 
ordering  sale  before  maturity  though  not  authorized  by  deed,  ib. 

when  proper,  ib. 
finding  amount  due  before  proof,  ib. 
decree  nisi  before  bonds  produced,  738. 

when  made  absolute,  ib. 
decree  nisi  in  suit  seeking  foreclosure  for  interest,  ih. 

on  payment  of  amount  due,  decree  suspended,  ib. 
time  allowed  for  payment  in  discretion  of  court,  ih. 
federal  court  guided  by  express  State  statute,  ib. 
qualification  of  general  rule,  ib. 
provisions  reserving  control  of  property,  purpose  of,  739. 

not  intended  to  give  purchaser  right  to  abandon  sale,  ih. 
order  confirming  sale  reserving  right  to  make  further  order,  ib. 
final  decree  terminates  litigation,  ib. 

cannot  be  vacated  or  modified  after  term,  ih. 

what  is  final  decree  in  foreclosure,  ib. 

where  two  decrees  may  operate  together  as  final,  ih. 

after  term  of  entry,  cannot  be  changed  essentially,  740. 

may  be  amended  as  to  mode  of  execution,  ib. 

but  not,  long  after  filing,  ib. 

rule  does  not  apply  to  interlocutory  decrees,  ih. 
effect  of  generally  —  to  cut  off  all  rights,  741. 

though  sale  in  pursuance  of  plan  of  reorganization,  ib. 

conclusiveness  as  to  all  courts,  ib. 

effect  on  receiver's  compensation  after  removal  of  cause,  ih. 

as  to  matters  not,  but  which  might  have  been,  asserted,  742. 

"  barring  and  foreclosing  "  mortgage  of  prior  date,  ih. 

barring  claim  of  contractor,  ih. 

effect  of,  to  estop  creditor  with  superior  statutory  claim,  ih. 
giving  priority  to  levy,  when  binding  upon  bondholder,  743. 
where  claims  not  passed  upon,  ib. 
where  settlement  of,  not  involved  in  decision,  ib. 

rule-decree  must  be  construed  with  reference  to  issue  and  prayer,  744. 
stockholder's  suit  to  set  aside  consolidated  decree  of  Circuit  Court,  ib. 
when  Circuit  Court  decree  deemed  final  after  appeal,  745. 
federal  courts  bound  by  State  construction  of  State  statutes,  ib. 

possible  exception  as  to  constitutionality,  ib. 
rendered  in  one  federal  district,  not  res  adjudicata  in  another,  742,  n.  1. 
estops  subsequent  incumbrancers  joined  as  parties,  745. 

immaterial,  though  liens  misstated  in  pleadings,  ib. 
purchaser  when  estopped  as  to  matters  raised  by  cross-bill,  746. 
transferee  of  purchaser,  how  far  estopped,  ib. 
in  suit  for  benefit  of  all,  binding  upon  all,  ib. 
unsecured  creditors,  though  not  parties  bound  by,  ib. 
not  so  as  to  specific  lien-holders,  ib. 

ineffective  as  to  judgment  creditor,  not  privy  thereto,  747. 
no  ground  to  enjoin  judgment  creditor  from  enforcing  judgment,  ib. 


904  INDEX. 

The  figures  refer  to  pages. 

FORECLOSURE   DECREES  —  continued. 

no  defence  to  scire  facias  to  continue  lien  against  debtor's  successor,  747. 
pro  confesso,  binding  effect  of,  ib. 
by  consent,  binding  effect  of,  ib. 

consent  to  sale  without  finding  of  amount  due,  ib. 

consent  to  omit  day  of  payment,  ib. 

that  purchase-money  payable  by  surrender  of  bonds,  ib. 

purporting  to  be  by  consent,  has  verity  of  record,  ib. 

when  deemed  not  by  consent  although  consent  recited,  748. 

consent  renders  valid  decree  otherwise  void,  648. 
acquiescence  an  implied  sanction  of  sale,  749. 
binding,  as  a  result  of  laches,  ib. 
a  reasonable  time,  what  is,  ib. 
where  consent  obtained  by  fraud,  ib. 

where  facts  always  well  known  to  plaintiffs,  ib. 
after  decree  has  been  fully  executed,  750. 
assertion  of  right  to  avoid  bid  cannot  be  delayed,  ib. 
when  does  not  estop  junior  lienor,  though  a  party,  ib. 
when  deemed  to  have  waived  right  to  redeem,  ib. 
when  separate  order  barring  right  of  redemption,  unnecessary,  751. 
rescission  of  contract  exchanging  bonds  when  denied  after  decree,  750. 
(See  Foreclosure  and  Sale;   Foreclosure  Proceedings;  Strict 
Foreclosure.) 

FORECLOSURE  PROCEEDINGS, 

statutes  varying  modes  of,  as  to  existing  mortgages,  376. 
ordinary  methods  of,  ill  adapted  to  railroad  mortgages,  377. 
validity  of,  as  affected  by  conflicting  State  laws,  23. 
where  part  of  bonds  valid  in  both  States,  ib. 
suit  to  avoid,  maintainable  only  in  court  granting  decree,  416. 
(See  Foreclosure  and  Sale;  Foreclosure  Decree;  Strict 
Foreclosure.) 

FOREIGN  CORPORATIONS.     (See  Corporations.) 
FORFEITURE, 

of  charter,  proceedings  to  enforce,  173. 

on  alienation  of  franchise,  ib. 

(See  Conversion  of  Bonds  into  Stock;   Statutory  Provisions.) 

FORGERY, 

of  trustee's  certificate,  no  recovery  on  bonds,  92. 

FRANCHISES, 

definition  of,  134. 

exclusiveness  a  non-essential,  13. 

grant  of,  not  creative  of  personal  confidence  relation,  174. 

corporation,  a  franchise,  175. 

distinction  between  and  other  franchises,  ib. 
not  recognized  in  England,  ib.,  n.  3. 
right  to  acquire  property  considered  as,  249. 

involving  right  of  transferring  after-acquired  property,  ib. 
charter,  measure  of  corporate  powers,  174. 
grant  of,  creates  contract  with  State,  ib. 
mortgage  of,  as  distinguished  from  other  property,  170. 


INDEX.  905 

The  figures  refer  to  pages. 

FRANCHISES  —  continued. 

necessity  of  express  legislative  permission,  170. 

Maine  theory,  171. 

Vermont  theory,  173. 

reasons  for,  173,  174. 

power  to  sell  implies  power  to  mortgage,  178. 

when  mortgage  of,  valid  as  to  part  only,  203, 

corporate  existence,  rule  of  construction  against  mortgage  of,  176. 

illustrative  cases,  176-178. 

invalidity  of  mortgage,  question  for  State,  172,  n.  1. 

proceedings  to  enforce  forfeiture  of,  173. 

of  a  railway  company,  134. 

term  when  used  in  plural,  meaning  of,  135. 

scope  of,  ill. 

when  not  included  in  general  transfer,  220. 

exercise  of,  after  appointment  of  receiver,  551. 

(See  Manufacturing  Companies.) 
FRAUD, 

inferred  from  personal  interest  of  officers  in  contract,  197. 
exceptions  to  rule,  198. 

circumstances   ordinarily  deemed   fraudulent,   not   as  to  railroad  com- 
panies, ib. 

when  mortgage  may  be  foreclosed  though  bonds  void,  ib. 

when  request  of  bondholders  to  foreclose,  insufficient  for,  300. 

when  bonds  upon  which  request  made,  owned  by  competing  road,  ib. 

scheme  between  trustee  and  syndicate  to  sacrifice  property,  48. 

bondholder  using  security  to  obtain  property  for  himself,  865. 

officers  seeking  profit  at  expense  of  creditors  and  others,  ib. 

acts  of  corrupt  majority  frustrated,  50,  51  and  n. 
illustrative  English  cases,  51  and  n. 

of  person  intrusted  with  negotiation  of  bonds,  93. 

first  lienor's  title  postponed  to  second's  on  grounds  of,  63. 

as  a  ground  for  receivership,  527. 

(See  Vendor's  Lien.) 
FUEL.     (See  Words  and  Phrases.) 
FUTURE   ADVANCES, 

mortgage  to  secure,  when  valid,  201. 

when  made,  may  be  tacked  to  mortgage,  202. 

priorities  of,  264,  n.  3. 

GARNISHEE  PROCEEDINGS.     (See  Attachment.) 
GAS  COMPANIES, 

whether  subject  to  doctrine  of  preferential  claims,  593,  595. 
distinction  between  and  railroad  companies,  593. 
GEORGIA, 

constitutional  restrictions  upon  acquiring  stocks  of   other  corporations, 

4,  n. 
statutory  provisions  as  to  bonds  and  borrowing,  40,  n. 
statutes  respecting  reorganization,  842,  n.  1. 
rules  as  to  receiver  using  leased  cars,  621. 

rule  preferring  claim  for  damages,  caused  operating  road,  626. 
receiver's  liability  for  injuries  to  employees,  692. 


906  INDEX. 

The  figures  refer  to  pages. 

"GOING   CONCERN," 

public  interest  in  railroad  as  such,  591. 
claims  preferred,  necessary  to  keep  road,  591,  602. 
(See  Words  and  Phrases.) 

GOVERNMENT   LIEN, 

mortgage  given  to  discharge,  inferior  to  one  of  after-acquired  property, 
269. 

GUARANTY, 

forming  part  of  compromise  with  guarantor's  debtor,  125. 

valid,  as  substitute  for  claim  against  guarantor,  ib. 

invalidity  of  inception  cured  by  transfer  to  creditor,  ib. 
by  transportation  company,  to  brewing  company,  121. 
by  manufacturer  of  iron-work  of  customer's  contracts,  ib. 
by  dealer  in  goods,  to  manufacturer  thereof,  122,  n.  3. 
by  railroad  company  of  dividends  in  elevator  company,  120. 
(See  Guaranty  of  Bonds.) 

GUARANTY   OF    BONDS, 

power  to  guaranty  and  to  issue  bonds,  coextensive,  122. 
English  view  as  to  power  of  corporations,  respecting,  114. 
implied  authority  of  corporations  as  to,  115. 

where  transaction,  including  guaranty,  not  ultra  vires,  ib. 
when  sustained  by  sufficient  consideration,  ib. 
for  accommodation  not  valid,  118. 
consideration  for,  credit  to  obligors,  ib. 
when  guaranty  given  before  delivery  of  bonds,  ib. 
when  after  delivery,  ib. 

to  save  corporation  from  embarrassment,  120. 
where  benefits  to  obligor  company  merely  conjectural,  ib. 
where  expense  has  been  incurred  on  faith  of,  ib. 
officer's  authority  determined  by  usual  considerations,  115 
corporators  estopped  to  repudiate,  when,  126. 

effect  of  formal  omissions  as  to  innocent  purchasers,  127. 
corporation  precluded  from  setting  up  its  own  neglect,  ib. 
principle  applied  to  prevent  injunction,  ib. 
when  court  disposed  to  uphold,  as  against  stockholders,  ib. 
statutory  provisions  respecting,  presumed  known  to  acceptor  of,  117. 
ratification  of,  where  given  without  statutory  petition,  ib. 
purchaser  of,  without  notice  of  failure  to  petition,  rights  of,  ib. 
independent  rights  created  by  contract,  ib. 
defence  that  bonds  void,  not  available  to  guarantor,  ib. 
owned  by  corporation,  valid,  126. 
taken  by  guarantor  in  payment  of  debt,  ib. 
transferred  in  payment  of  debt  of  obligor,  valid,  125. 
presumption  in  favor  of  regularity  of  execution  of,  128. 
unauthorized,  whether  valid  to  buna  fide  holder,  122. 
improper  exercise  of  power  as  to,  128. 
innocent  purchaser,  rights  of  not  impaired,  ib. 

of  company  carrying  on  a  business,  unauthorized  to  guarantors,  120. 
of   "  World's    Peace   Jubilee    and    International   IMusical   Festival,"    by 

railway  company,  ib. 
for  construction,  by  obligors  of  connecting  road,  121. 


INDEX.  907 

The  figures  refer  to  pages. 

GUARANTY   OF  BONDS  -  co7immef7. 

right  of  guarantors  to  hold  obligors  liable,  121. 
of  railroad  company  by  lumber  company,  122. 

where  railroads  in  two  States  and  power  granted  in  only  one,  116,  n.  1. 
as  security  for  lessor  company's  rent,  119. 
severed  coupons  not  within,  127,  n.  2. 

when  liability  upon  arises,  on  default  of  interest,  127,  n.  2. 
assignment  of  bonds  with  representation  as  to  ownership,  effect,  128,  n.  3. 
when  bonds  payable  to  guarantor,  lb. 
when  payable  to  bearer,  ih. 

(See   Debentures;   Negotiability  of  Guaranty;    Railuoad  Com- 
panies ;  under  diffei-eut  States.) 

HOLDERS   OF  CERTIFICATES, 

rights  of,  678. 

certificates  not  negotiable,  ib. 

merely  evidence  of  right  to  amount  specified,  679. 

practically  call  loans,  683. 
charged  with  notice  of  all  circumstances  attending  issue,  679,  680. 

of  terms  and  contingencies  contemplated  in  order  of  issue,  679. 

of  events  prior  and  subsequent  to  purchase  of  certificates,  ib. 

that  final  action  of  court  may  prejudicially  affect  instruments,  ib. 
certificates  disposed  of  in  unauthorized  way,  invalid,  ib. 
in  hands  of  subsequent  purchaser,  ib. 

issued  for  materials  supplied,  invalid  for  those  to  be  supplied,  680. 
issued  in  excess  of  authorized  number  absolutely  void,  ib. 
not  bound  to  look  behind  order,  ib. 
when  payment  not  limited  to  any  fund,  ib. 
rank  of  as  lienors,  dependent,  on  final  decree,  ib. 
lien  of  certificates  continues  while  order  in  force,  ib. 
silence  of  referee's  report  as  to  certificates,  when  no  adjudication,  ib. 
sale  of  certificates,  a  trust  personal  to  receiver,  681. 

purchaser  from  holder  takes  subject  to  all  equities,  ib. 
trust  fund  not  liable  until  receiver  controls  it,  ib. 

when  rule  sufiiciently  complied  with,  ib. 
not  bound  to  see  to  application  of  proceeds,  ib. 
special  collateral  security,  taking  does  not  prejudice,  ib. 
bondholders,  when  estopped  as  against,  682. 
receiver,  when  estopped  to  dispute  validity  of  certificates,  ib. 

authorizing  bank  to  sell  and  drawing  checks  against  proceeds,  ib. 

immaterial  that  authority  revoked  before  sale  in  question  made,  ib. 

obtaining  security  on  learning  of  bank's  insolvency,  a  ratification,  ib. 
purchaser  of  railroad  agreeing  to  pay  invalid  certificates,  effect,  ib. 

court  bound  to  recognize  estoppel,  683. 
when  entitled  to  recover  full  face  value,  ib. 
when  taken  within  limit  of  court's  discount,  ib. 
taken  for  less  than  lowest  percentage  of  par,  ib. 
court  not  empowered  to  disregard  laws  against  usury,  ib. 
need  not  present  certificates  for  payment  before  sale,  ib. 
right  to  assume  receiver  will  give  notice  of  payment,  ib. 
HOTEL.     (See  Appurtenances.) 


908  INDEX. 

The  figures  refer  to  pages. 

HYPOTPIE CATION  OF  BONDS, 

held  to  be  issue,  17.     (See  Wisconsin.) 

IDAHO, 

constitutional  restriction  upon  issuing  stocks,  bonds,  4,  n. 

statutory  provisions  as  to  issuing  bonds  and  borrowing,  40,  n. 

effect  under  constitution  of  consolidating  home  and  foreign  corporations, 
4,  n. 

liabilities  arising  out  of  franchises  preserved  from  effect  of  alienation,  ib. 
ILLINOIS, 

constitutional  restrictions  upon  issuing  stocks  or  bonds,  4,  n. 
bonds  issued  to  pay  another  company's  debts  held  void,  ib. 
held  not  to  interfere  with  usual  methods  of  raising  funds,  ib. 

constitutional  restriction  against  consolidation,  ib. 

rolling-stock  constitutionally  declared  personal  property,  ib.,  339. 

statutory  provisions  as  to  issuing  bonds  and  borrowing,  40,  n. 

statutes  respecting  liens  upon  railroads,  628,  n. 

no  statutory  power  to  make  preferred  stock,  lien,  758. 

statutes  respecting  reorganization,  842,  n.  1. 

statute  of  declaring  certain  trusts  unlawful,  286. 

appointment  of  receiver  must  be  made  in  term,  510. 

unless  afterwards  confirmed  by  court,  ib. 

vendor's  lien  only  retained  by  complying  with  Chattel  Mortgage  Act,  349. 

sale  of  bonds  when  proceeds  used  in  construction  of  road,  23. 

issue  if  not  restricted  to  meet  accrued  obligations,  ib. 
INCOME, 

lien  upon,  acquired  only  in  manner  declared  by  moi'tgage,  497. 

•when   passes   under  mortgage  of   after-acquired   personalty,  246.     (See 
Mortgage.) 

not  covered  by  mortgage  of  "  franchises,  pledges,  and  rights,''  247. 

covered  by  term  "  personal  property,"  246. 

subject  to  garnishment,  when,  500. 

money  earned  by  trustee  in  possession  not  garnishable,  501. 

subject  to  levy  or  attachment  while  company  in  possession,  499. 

rights  of  creditor  fixed  when  execution  issued,  ib. 

trustee  in  possession  must  account  for,  316. 

INCOME   AND  PROFITS, 

meaning  of  phrase.     (See  Income;  Words  and  Phrases.) 

INCOME    AND    REVENUES, 

meaning  of  phrase      (See  Words  and  Phrases.) 

INCOME   BONDHOLDERS, 

bill  against  company  for  accounting,  when  may  be  maintained,  368. 

injunction  when  granted  at  suit  of,  ib. 

expenditure  of  earnings  by  company,  rights  of,  considered,  497. 

when,  as  to  interest,  only  general  creditors,  369. 
(See  Income  Bonds.) 
INCOME   BONDS, 

meaning  of  term,  64,  70- 

security  for,  pledge  of  corporate  income,  64. 

what  must  appear  upon  face  of,  ib. 


INDEX.  909 

The  figures  refer  to  pages. 

INCOME  BOliJJyS  —  continued. 

if  cumulative,  what,  64. 

if  payable  out  of  future  incomes,  ib. 
holders  of,  when  entitled  to  lien,  65. 

when  corporation  dissolved  or  disorganized,  ib. 
holders  of,  when  entitled  to  accounting,  ib. 

when  amount  of  interest  dependent  upon  net  earnings,  ib. 

scope  of  accounting,  66. 

as  well  for  earnings  at  beginning  as  during  progress  of  suit,  ib. 

computation  of  amount  due,  ib. 

regulated  in  interests  of  all  concerned,  ib. 
treated  as  an  appropriation  of  income,  ib. 
as  against  attaching  creditors,  ib. 
cost  of  issuing  not  chargeable  against  income,  ib. 
interest  upon,  when  default  occui'S,  69. 

payable  primarily  out  of  income  of  a  six  months'  period,  ib. 

when  burden  upon  holder  to  show  earnings,  71. 
issue  of,  in  payment  of  contract  shown  to  be  valid,  34. 

rights  of  stockholders,  ib. 
rights,  when  purchaser  at  foreclosure  fails  to  complete,  65. 
exchange  of,  for  surrendered  stock,  effect  to  create  preferred  stock,  68. 

floating  debt  a  prior  claim  to,  ib. 
rights  of  non-assenting  holder  on  surrender  for  other  bonds,  66. 
power  to  execute  obligations  to  complete  road  not  affected  by,  70. 
power  to  change  or  extend  road  not  affected  by,  69. 
holders  of,  held  simply  contract  creditors,  ib. 
holder  of,  may  recover  in  money,  though  bonds  provide  for  scrip,  when, 

71. 
provision  in  reorganization  scheme  to  give  unsecured  ci-editors,  64. 

not  fraudulent,  ib. 

higher  security  than  old  company's  stock,  ib.,  n.  5. 
(See  Defekred  Income  Bonds.) 
INDEMNITY, 

right  of  trustee  to,  on  being  requested  to  take  action,  300. 
INDIANA, 

statutory  provisions  as  to  issuing  bonds  and  borrowing,  40,  n. 
statutes  respecting  reorganization,  842,  n.  1. 

respecting  liens  for  taxes  and  debts,  628,  n. 

declaring  against  eligibility  of  non-residents,  284. 
no  statutory  power  to  make  preferred  stock,  lien,  758. 
guaranty  of  bonds,  for  benefit  of  guarantor,  129,  n.  3. 
"INDOOR  MANAGEMENT  OF  COMPANY," 

purchaser  not  obliged  to  take  notice  of,  85. 
INJUNCTION, 

against  bond  issue  as  device  to  increase  stock,  34. 

against  issue  of  stock  in  conversion  of  fraudulently  issued  bonds,  ib.,  n. 

against  non-resident  trustee  suing  in  federal  court,  288. 

not  granted  to  trustee  to  restrain  action  for  his  removal,  484. 

restraining  levy  on  property  covered  by  trust  deed,  211. 

not  granted  at  suit  of  mortgagor  company,  367. 

except  when  property  is  essential  to  franchise,  ib. 


910  INDEX. 

The  figures  refer  to  pages. 

INJUNCTION  —  continued. 

federal  court,  no  jurisdiction  against  execution  of  State  court,  368. 

■will  not  issue  to  restrain  sale  under  power,  when,  303. 

at  suit  of  receiver,  356. 

against  execution  sales  of  personalty,  ib.,  358. 

objectionable  consequences  of  such  sales,  363. 

special  equity  must  be  shown  in  some  courts,  359. 

to  protect  lien  of  after-acquired  property  clause,  357. 
such  lien  sufficient  equity  in  federal  courts,  360. 

inadequacy  of  security  whether  sufficient  gi'ound,  358. 

inadequacy  of  legal  remedy,  363. 

public  interests  in  railroad,  ground  for,  364. 

to  restrain  levy  upon  revenues  appropriated  to  State  loan,  ib. 
against  execution  sales  of  realty,  365. 

when  sale  pressed  by  numerous  creditors,  ib. 

to  prevent  multiplicity  of  suits  and  irreparable  damage,  ib. 
to  restrain  sale  under  bondholder's  levy,  367. 
against  execution  when  trustees  in  possession,  366. 

application  for  leave  of  court  to  enforce  judgment,  i?>. 
against  separate  execution  sales  of  property  mortgaged,  770. 
at  suit  of  bondholder,  355. 

to  prevent  waste  by  mortgagor  in  possession,  ib. 

to  restrain  company  from  taking  up  part  of  road,  ib. 
■     to  restrain  acts  of  third  persons,  356. 

when  corporation  has  refused  to  act,  ib. 

to  enjoin  enforcement  of  railroad  commission  law,  369. 

by  first-mortgage  bondholders  against  levy  by  second,  367. 

in  aid  of  income  bondholders,  368. 

when  company  obligated  to  apply  surplus  earnings  to  interest,  ib. 
not,   where  principal    only  of  income   bonds   secured  by  mort- 
gage, ib. 
stockholder's  title  to  or  equity  in  stocks,  as  entitling  him  to,  33. 
by  debenture-holders  to  restrain  payment  to  bondholders,  372,  n.  1. 
available  in  England  as  in  America,  370,  n. 
Stay  of  Sales  by 

when  injunction  to  stay  will  be  granted,  808. 

often  dependent  on  validity  or  invalidity  of  mortgage,  ib. 

not  merely  because  mortgagee  without  right,  809. 

not.  if  defendant  capable  of  responding  in  damages,  ib. 
not  merely  because  amount  of  bonds  due  unascertained,  ib. 
where  sale  under  mortgage  of  indemnity  given  to  guarantor,  ib. 
where  mortgage  seoures  bonds  issued  by  directors  to  themselves,  810. 
where  default  caused  by  misconduct  of  debtor's  agent,  ib. 
where  State-aid  bonds  the  subject,  ib. 
where  injunction  sought  by  junior  mortgagee,  ib. 
where  effect  is  to  extinguish  ritj-hts  of  junior  lienors,  ib. 
where  State  shows  intention  to  subordinate  its  rights,  ib. 
receiver's  certificate-holders  as  asjainst  mechanics'  lienor,  ib. 
by  trustee  of  junior   mortgage   against  sale  under  prior  statutory  mort- 

gatre,  811. 
disproportion  between  amount  of  decree  and  property's  value,  ib. 
presumption  that  directors  will  act  to  protect  bondholders,  ib. 


INDEX.  911 

The  figures  refer  to  pageB. 

INTEREST, 

iu  what  payable,  must  follow  character  of  principal,  72. 

contract  to  pay  in  gold,  not  a  contract  to  pay  an  increased  rate,  101. 

rate  cannot  be  raised  to  prior,  to  the  prejudice  of  subsequent  lienors,  ib. 

rate  payable  to  party  subrogated  to  rights  of  lienor,  102. 

payable  after  maturity,  whether  legal  or  contract  rate,  ib. 

on  bonds  payable  elsewhere  than  phice  of  issue,  19. 

statutory  provisions  allowing  any  rate,  20.    (See  Statutory  Provisions.) 

bonds  not  invalidated  by  illegality  of  rate,  24. 

upon  income  bonds,  69.     (See  Ln-come  Bonds.) 

on  railroad  bonds  usually  evidenced  by  coupons,  100. 

rate  payable  after  coupons  in  default,  before  judgment,  103. 

after  judgment,  ib. 

where  parties  contract  with  reference  to  a  particular  State,  ib. 

upon  coupons  after  default,  104. 

allowed  as  damages,  ib. 

not  usurious,  ib. 
on  coupons  unpaid  not  notice  of  bond's  defect,  154. 
power  of  trustee  to  waive  default,  301. 

default  of,  when  liability  of  guarantor  arises  upon,  127,  n.  2. 
right  of  recoupment  as  to,  in  action  for  refusing  bonds  contracted  for,  113. 
overdue,  funding,  presumption  against  novation,  112. 
(See   Bonds;   Debentures;    Default;    Income    Bonds;    Past-due 
Interest.) 
INTERVENER, 

not  necessary  he  should  obtain  judgment,  268. 
(See  Intervention.) 
INTERVENTION, 

by  bondholders  in  trustee's  suit,  what  must  be  shown,  482. 

right  of,  only  to  enforce  rights  under  mortgage,  485. 

where  their  and  trustee's  interests  no  longer  identical,  483. 

where  trustee's  allowance  contested,  ib. 

where  trustee  of  another  mortgage  on  same  property,  ib. 

where  trustee  has  done  or  contemplates  a  detrimental  act,  ib. 

where  he  is  not  responsible,  ib. 

where  incompetent  or  negligent,  ib. 

to  show  trustee's  unfitness  to  conduct  suit,  484. 

to  raise  issue  of  fraud  in  trustee's  suit,  454. 

by  committees  of  several  series  of  bondholders  in  trustee's  action,  460. 

whether,  may  intervene  when  already  represented,  485. 

when  trustee's  suit  in  sister  State,  ib. 

bondholder's  remedy  against  trustee   after  foreclosure,  not  confined 
to,  316. 

in  stockholder's  suit,  not  compellable,  429. 

right  of  other  bondholders,  on  foreclosure  by  one.  405. 

by  majority  bondholders  in  foreclosure  instigated  by  minority,  482. 

by  minority  that  specific  charges  may  be  heard,  484. 

bondholder   not  obliged  to  intervene,   on  mechanics'  lien  proceed- 
ings, 279. 

may  be  exercised  while  proceeding  in  fieri,  485. 

nevertheless  due  diligence  must  be  observed,  485,  490. 

after  rendition  of  decree,  to  set  it  aside,  490. 


912  INDEX. 

The  figures  refer  to  pages. 

INTERVENTION  —  continued. 

when  right  of,  denied  to  bondholder  after  decree,  745. 
will  not  be  enjoined  from  levying,  744,  n.  1,  747. 

bondholder's  right  of,  after  appeal,  in  action  by  co-bondholders,  474. 
by  bondholders  under  federal  order,  limited  to  district  citizens,  ib. 
appeal  by  bondholders  on  intervention  after  bill  pro  confesso,  828. 
by  trustee  in  bondholder's  suit,  486. 

when  cause  may  continue  in  his  name,  ib. 
receiver's  right  of,  in  foreclosure,  468. 

by  receiver  appointed  since  property  attached  in  foreign  State,  427, 
553. 
by  judgment  creditor  in  foreclosure  suit,  396. 

claiming  prior  lien,  right  of,  470. 

simple  contract  creditor,  when  has  right,  ib. 

when  judgment  creditor  denied  privilege,  747. 

will  not  be  enjoined  from  enforcing  judgment,  ib. 
by  general  creditors  to  frustrate  collusive  receivership,  471. 
by  rival  creditors  to  contest  priorities,  477,  478. 
prior  mortgagee  not  allowed  to  intervene,  when,  464. 
stockholder's  right  of   where  corporation  fails  to  plead  defence,  417. 

when  directors  refuse  to  defend,  467. 

by  stockholder  for  stay,  until  own  suit  determined,  521. 
by  cross-bill  of  material-men,  etc.,  454. 
right  of  removal  of  cause  by  intervener,  442. 
appeal  from  denial  of  intervener's  petition  to  protect  bonds,  828. 
order  denying  petition  to  intervene  not  appealable,  832. 
English    debenture-holders,  when  proceeds  of   execution   sale   not  paid 

over,  370,  n. 
costs  of  interveners,  717. 

on  general  subject  of,  see  authorities  collected  on  page  491. 
INVESTMENT  OF  TRUST  FUNDS, 
dutv  of  trustee  as  to,  313. 

oblio-atory,  to  follow  instructions  of  instrument,  exception,  ib. 
IOWA,  ° 

statutory  provisions  as  to  issuing  bonds,  40,  n. 

reorganization,  statutes  respecting,  842,  n.  1. 

code  provision  that  judgment  for  injury  shall  be  lien,  687. 

as  to  mortgaging  after-acquired  property,  258. 
courts  of,  will  restrain  execution  against  pledged  property,  361. 
mechanics'  liens  in,  274,  277. 

rolling-stock,  held  personalty,  not  subject  to,  340. 
fees  of  receiver  and  his  attorney  preferred,  712,  n.  1. 

not  trustee's  compensation  or  counsel  fees,  ib. 
mortgage  to  secure  bonds,  held  a  transfer  under  statute  of,  18. 
IRREDEEMABLE  BONDS.     (See  Deferred  Income  Bonds.) 

JUDGMENT, 

not  a  lien  unless  made  so  by  statute,  753. 
how  lien  of,  affected  by  registration  laws,  260. 

prevails  in  counties  where  mortgage  not  recorded,  261. 

postponed  to  unrecorded  mortgage  of  which  creditor  has  notice,  ib. 

assignee  of,  takes  subject  to  such  mortgage,  ib. 


INDEX.  913 

The  figures  refer  to  pages. 

JUDGMP:NT  —  continued. 

whether  he  has  or  has  not  notice,  261. 
of  Circuit  Court  where  lien  of,  attaches,  263. 

how  sale  of  road  under  must  be  made,  ib.,  n.  4. 
of  another  court,  when  does  not  establish  a  preference,  604. 
against  construction  company   when  not  recognized  on   enforcement  of 

bonds,  278. 
against  receiver,  when  prior  to  mortgage,  051. 

for  damages  wliou  enforceable  against  purchaser  at  foreclosure  sale,  627. 
lien  for  personal  injuries  not  displaced  by  mechanic's  lien,  673. 
against  maker  of  mortgage  foreclosed,  lien  cut  off,  760. 
not  necessary  that  intervener  should  first  obtain,  268. 
application  for  leave  of  court  to  enforce,  'Miii. 

(See  Judgment   Ckkditok.) 
JUDGMENT   CREDITOR, 

right  of,  to  intervene  in  foreclosure,  396. 

bill  by,  for  a  receiver,  sufficiency  of,  533. 

.sale  by,  of  equity  of  redemption  of  company  in  possession,  494. 

may  levy  upon  or  attach  income  in  company's  possession,  499. 

lien  of,  on  income  fixed  when  execution  issued,  ib. 

cannot  be  deprived  of  lien  of  judgment  by  legislation,  260. 

without  notice  of  prior  lien,  priority  determined  by  registration  laws,  261. 

when  left  to  common-law  rights  by  registration  laws,  ib. 

when  treated  as  subsequent  purchasers  without  notice,  ib. 

(See  Judgment  ;  Setting  aside  Foreclosure  Sales.) 
JURISDICTION, 

attaches  when  process  served,  423. 

on  removal  to  federal  court,  date  of  original  service,  ib. 

process  of  court  ineffective  beyond  territorial  jurisdiction,  552. 
objection  to,  addressed  to  court  itself,  426. 

by  plea  in  abatement,  ib. 

too  late  after  answer,  ib. 

when  must  be  taken  in  limine,  826. 

not  lost  by  dismissal  of  bill  on  demurrer,  423. 
appearance,  by  non-resident  corporation  sued  jointly  with  resident,  ib. 
to  control  rex,  whether  possession  necessary,  conflicting  views,  424. 
established  by  prior  control  of  subject-matter,  how  far,  412,  414. 

who  may  assert  exclusiveness  of  court  first  acquiring,  425. 
federal,  acquired  in  bondholder's  action,  prevails  over  trustees'  State  suit, 

423. 
courts  of  concurrent,  control  of  litigation  by,  412. 

federal  and  State  courts,  rule  when  concurrent,  413. 

prevails  though  proceeding  in  sister  court  defective,  ib. 
of  federal  court  where  company  citizen  but  plaintiff  not,  ib. 

to  decide  conflicting  claims,  property  being  in  its  possession,  ib. 

when  disputants  citizens  of  same  foreign  State,  ib. 
exclusive,  to  annul  or  enfore  court's  decrees,  415. 
federal  mandamus  as  against  State  injunction,  416. 
federal  court  cannot  enjoin  State  sale  under  execution,  415. 
federal  attachment  and  State  replevin,  414. 
of  court  of  equity  to  appoint  receiver,  509. 

to  appoint  receiver,  primary  amongst  several  courts,  511. 

58 


914  INDEX. 

The  figures  refer  to  pages. 
JURISDICTION  —  continued. 

possession  of  receiver  not  interfered  with  by  other  courts,  415. 

over  property  illegally  in  receiver's  possession,  549. 

intervention  by  receiver  when  property  attached  in  other  State,  427. 

action  enjoined  in  one  State  court,  maintainable  in  another,  414. 
acquired  by  bill  to  foreclose,  complete  over  subject-matter,  416,  421. 

over  all  collateral  issues,  ib. 

over  bills  to  construe  orders  and  decrees,  ih. 

decree  of  State  court  bar  to  proceeding  in  federal,  417. 
of  court  decreeing  foreclosure,  to  determine  judgment  creditor's  lien,  416. 
of  federal  court  over  creditor's  bill  to  aid  State  court,  ib. 

federal  court  will  not  interfere  after  sale  decreed  in  State,  417. 

nor  enforce  judgment  against  property  ordered  sold  by  State  court,  ih. 

State  court  will  not  interfere  where  matter  begun  in  federal,  ib. 
corporation  defendant  cannot  enjoin  action  in  another  court,  ib. 
trustee  cannot  be  enjoined  in  action  between  officers,  419. 
suit  in  co-ordinate  court  permissible,  when,  41<S. 

when  possession  of  first  court  not  disturbed,  ib. 

when  second  court  may  decide  questions  not  raised,  419. 
federal  court  assumes  control  of  trust  not  before  involved,  ib. 
as  to  decrees  obtained  by  fraud  in  other  court,  ib. 
foreclosure  suits  pending  in  State  and  federal  courts,  concurrently,  ib. 
suit  against  mortgagor  after  surrender  to  trustee,  ib. 
courts  may  decline  to  exercise,  to  avoid  conflict  of,  418. 

and  for  convenience  of  appeal,  ih. 
acquired  in  equity  to  restrain  judgments  at  law,  421. 
in  suits  to  impeach  decree,  ih. 

subsequent  foreclosure  of  same  property,  ih. 
in  one  federal  district,  exclusive  over  property  in  others,  422. 
of  State  court,  of  property  in  other  State,  ih. 

legislative  assent  of  other  State,  ib. 
compulsory  process  of  federal  court  against  unwilling  suitor,  ih. 

in  personam  to  control  property  beyond,  ib. 

to  compel  assignment  of  outside  property,  423. 
of  ancillary  court  to  decree  sale  of  entirety,  ib. 
of  court  sitting  in  domicil  of  national  bank  plaintiff,  510. 
pendinrj  suit  as  a  bar  to  suit  in  other  court : 

pending  foreclosure  of  second  mortgage  when  bar  to  suit  on  first,  427. 
State  courts  and  federal  presiding  over  different  territory,  428. 
pendency  of  suit  in  foreign  court,  not  a  bar,  ib. 

rule  makes  States  of  Union  foreign  to  each  other,  ib. 
plea  of  lis  peiit/ens  not  .sustainal)le  unless  cases  alike,  ib. 

parties,  also,  must  be  the  same,  429. 

suit   by    stockholders    against   comj)any    and    foreclosure    by  bond- 
holders, ib. 

foreclosure  by  trustee  in  State  court,  and  coupon-holder  in  federal,  ib. 

■when  trustee  does  not  represent  all  bondholders,  430. 

when  different  relief  is  asked  for.  ib. 

one  suit  on  notes,  another  on  mortgage  securing  them,  ib. 

ejectment  suit  concurrent  with  both.  ib. 

suit  to  inaiutain  risxht  to  mad  and  foreclosure  suit,  ib. 

foreclosure  of  first  mortgage  in  federal  and  second  in  State  court,  ib. 


INDEX.  915 

The  figures  refer  to  pages. 

JURISDICTION  —  continued. 

second  suit  allowed  to  proceed,  when,  431. 
general  creditor's  bill  and  one  of  less  scope,  430. 
other  illustrations,  10. 
JURY, 

whether  actions  against  receivers  triable  without,  determined  by  court, 
575. 

KANSAS, 

act  relating  to  injuring  stock,  applies  to  receivers,  6S9. 

receiver's  liability  for  injuries  to  his  employees,  093. 

statute  making  judgment  for  damages  prior  to  mortgage,  628. 

foreclosure,  statutes  relating  to,  409. 

reorganization,  statutes  respecting,  842,  n.  1. 

guaranty  or  purchase  of  bonds,  129,  n.  3. 
KENTUCKY, 

constitutional  restrictions  upon  issuing  stocks  and  bonds  in,  4,  n. 

statutory  provisions  as  to  issuing  bonds,  40,  n. 

constitutional  prohibition  against  consolidating  and  pooling,  4,  n. 

effect,  under  constitution,  of  consolidating  home  and  foreign  corpora- 
tions, ih. 

reorganization,  statutes  respecting,  842,  n.  1. 

statute  respecting  future  liens,  264. 

rolling-stock,  etc.,  of  railways  declared  personalty,  liable  to  seizure,  4,  n. 
held  taxable  as  a  fixture,  341. 

choses  in  action  of  railways  declared  subject  to  attachment,  4,  n. 

liabilities  arising  out  of  franchises  preserved  from  effect  of  alienation,  ib. 

"  after-acquired  "  clause,  deemed  sufficient  equity  for  injunction,  360. 

law  respecting  trustee  empowered  to  sell  on  default,  295. 

liens  of  employees  and  material-men,  628,  n. 

LABOR, 

bonds  issued  for,  when  valid,  18,  n. 
LABOR   AND    SUPPLIES, 

issue  of  first-lien  certificates  for,  673. 
LABOR   AND   SUPPLY    CREDITORS, 

meaning  of  phrase.     (See  Words  and  Phrases.) 
LABORER, 

meaning  of  term.     (See  Words  and  Phrases.) 
LACHES, 

on  appointment  of  receivers,  discountenanced,  533. 
on  raising  objections  to,  .541. 

effect  of  as  ratification  by  corporation,  205. 
LAND-GRANT   CERTIFICATES, 

substituted  for  bonds,  39. 

holder's  right  to  restrain  waste,  ih. 
LANDS, 

when  trustee  authorized  to  warrant  title  on  sale  of,  296. 

condemned  lien  for  damages  against  company  superior   to  prior  mort- 
gages, 269. 
(See  Appurtenance;  Mortgage;  Railway  Companies) 


916  INDEX. 

The  figures  refer  to  pages. 

LEASE, 

by  company  in  possession,  493. 

executed  by  mortgagor,  mortgagee  cannot  enforce  covenants  in,  237. 

trustee  in  possession  when  not  bound  as  assignee  of,  318. 

when  stockholder  estopped  to  question  validity  of,  205,  n.  5. 

of  rolling-stock,  right  of  lessor  to  terminate,  621. 

termination  of,  lessor  of  equipment  entitled  to  notice,  695. 

right  of  receiver  to  disaffirm,  572, 

whether  receiver  shall  adopt,  determined  by  creditors'  interests,  695. 

not  compellable  to  carry  out  at  a  loss,  696. 

unless  conduct  constitutes  an  election  to  accept,  ib. 

cannot  abrogate,  698. 

does  not  take  as  assignee  of,  ib. 

does  not  adopt  by  operating  lien  where  no  demand,  ib. 
nor  become  subject  to  company's  guaranty  of  interest  on  lessor's  bonds,  ib. 
bound  to  disburse  earnings,  according  to  terms  of,  699. 
lessee's  rights,  how  affected  by  receiver's  discharge,  545. 
withdrawal  of  consideration,  ground  for  renouncing,  700. 

what  amounts  to  such  withdrawal,  ib. 
car-trust  lease,  rights  of  lessor  after  receiver  appointed,  352. 
where  in  effect  a  mortgage  though  not  recorded,  350. 
(See  Bailmext  FOR  Hire;  Conditional  Sales;  Lessor  and  Lessee; 
Vendor's  Liens.) 
LEGAL    SERVICES, 

claims  for,  when  and  when  not  preferred,  617. 
LEGAL   TENDER   ACT.     (See  Statutes.) 
LESSOR   AND   LESSEE, 

title  of  lessor  paramount  to  mortgagee's,  346. 

not  if  rolling-stock  placed  on  road  before  lease  executed,  ib. 
liability  of  lessee  for  rent  where  lease  part  of  void  contract,  150,  n.  4. 
(See  Lease  ;  Railroad  Companies.) 
LLIBILITY   OF   COMPANY   DURING   RECEIVERSHIP, 
contract  liabilities  suspended  by  receiver's  appointment,  684. 
corporate  existence  not  affected  by  appointment,  ib. 

when  order  constitutes  directors  quasi  receivers,  ib. 
corporate  note  made  during  quasi  receivership,  effect  as  to  fund,  ib. 
liability  for  tort  ceases  after  receiver  takes  control,  685. 
where  property  returned  to  company  without  sale  after  large  outlay,  ib. 
company  not  liable  for  acts  of  employees,  ib. 
rule  same  though  company's  president,  receiver,  686. 
when  partly  under  receivership  and  partly  operated  by  lessee,  ib. 
when  receiver  considered  company's  agent,  ib 
continues,  unless  possession  of  receiver  is  exclusive,  685. 
where  receiver's  sole  duty,  to  receive  earnings  and  account  therefor,  686. 
after  possession  restored,  for  claims  arising  during  receivership,  687. 

where  propert}'  restored  without  sale,  688. 
claims  suable  in  State  court,  though  receiver,  federal,  687. 
enforceable  by  bill  to  subject  property  to  payment,  when,  ib. 

when  not,  ib. 
to  sliijiper  in  action  of  damages,  what  must  be  proved,  688. 
during  rRCf'ivcrsliip  pcndcule  lite,  G91. 
(See  Liabilities  ok  Receiver;  Power  of  Court  and  its  Receiver.) 


INDEX,  917 

The  figures  refer  to  pages. 

LIABILITY   OF   RECEIVER, 

"  persous  owning  or  operating  "  includes  receiver,  687,  n.  2. 
receiver  liable  as  coinuion  carrier,  G«b. 

not  personally,  ib. 

responsible  personally  for  faithful  discharge  of  duties,  ib. 
protected  in  disposition  of  funds  by  conforming  to  order,  ib. 
liable  for  wilfully  exceeding  powers,  689. 
not  exempt  as  public  ofBcer,  690. 
not  exempt  as  agent  or  trustee,  691. 
proceeding  against  him  officially,  proceeding  in  rem,  ib. 
in  England,  when  liable  as  court  officer ;  when  as  agent,  688,  n.  5. 
as  to  property  in  foreign  8tate,  690. 
when  liable  for  false  representations  on  his  certificates,  689. 

warranty,  action  for,  not  based  upon  representations,  ib. 
liable  officially  for  torts  of  employees,  690. 

not  personally,  689. 
liability  for  injuries  to  his  employees,  692. 

where  injuries  caused  by  fellow-employee's  negligence,  ib. 

conflict  of  decisions,  692,  693. 

defect  in  road,  injuries  from,  692. 
bound  to  exercise  same  care  as  company,  691. 
when  cause  of  action  arose  prior  to  appointment,  ib. 

when  appointed  pendente  lite,  not  proper  party,  ib. 

when  appointed  to  wind  up  company,  691,  692. 
for  company's  contracts,  693. 

not  bound  to  adopt  them,  ib. 

receiver  of  system  may  renounce  contract  with  constituent,  694. 
complications  arising,  how  dealt  with  by  court,  ib. 

succeeds  to  company's  right  to  annul,  696. 

to  company's  right  to  terminate  license,  ib. 

entitled  to  reasonable  time  to  elect,  693. 

interests  of  creditors,  controlling  consideration,  695. 
ratification,  from  what  implied,  ib. 
contracts  which  will  be  adopted,  696. 

those  with  connecting  lines  for  exchange  of  facilities,  ib. 

certain  contracts  with  express  companies,  697. 

to  pay  remaining  instalments  due  on  conditional  sales,  ib. 

to  pay  company's  telegraph  tolls,  69.5. 

for  work  on  building  until  he  directs  work  to  cease,  ib. 

for  completion  of  building,  with  court's  approval,  ib. 

those  which  good  faith  requires  should  be  carried  out,  697. 

when  he  recognizes  and  acts  under  a  pooling  contract,  698. 

to  bear  burdens  when  lie  enjoys  benefits,  700. 
receiver  cannot  abrocrate  lease,  698. 

adoption  of,  when  working  line,  does  not  operate  to,  ib. 
when  liable  upon  covenants  in  lease  to  company,  694,  n.  1,  69.5. 

to  pay  rent  for  occupation  under  company  lease.  698. 

bound  to  disburse  earnings  as  directed  by  lease,  699. 

not  where  parties  under  same  control,  697. 

where  court  asked  to  determine,  rent  payable  during  deliberation,  699. 

when  court  will  direct  no  more  paid  out  of  corpus,  ib. 
withdrawal  of  consideration,  ground  for  renouncing  lease,  700. 


918  INDEX. 

The  figures  refer  to  pages. 

LIABILITY   OF   RECEIVER  —  continued. 

what  amounts  to  withdrawal,  7U0. 
lessor  of  equipment  eutitled  to  notice  of  termination,  695. 
cessation  of  liability,  7UU. 

by  consummation  of  foreclosure  sale,  ib. 

in  consequence  of  discharge,  ib. 
after  discharge,  not  liable  as  to  injuries  during  receivership,  701. 

purchasers  at  sale  not  liable,  ib. 

purchaser's  liability  for  personal  injuries,  while  receiver  continues 
possession,  ib. 
power  of  court  to  resume  control  to  enforce  claims,  ib. 
(See  Liabilities  of  Company  ;  Power  of  Court  and  its  Receiver; 
Receivers.) 
LICENSE, 

company's  right  to  terminate,  passes  to  receiver,  696. 
LIEN, 

definition  of  term.     (See  Words  and  Phrases.) 

as  determined  by  construction  of  phrase  "all  other  property,"  131. 

statutory  depends  upon  construction  of  statute,  137. 

contract,  upon  terms  of  contract,  ib. 

superior  to  unsecured  claims  of  earlier  date,  263. 

distinction  between  and  preferred  debts,  587. 

of  bonds,  not  affected  by  date  of  issue,  45. 

date  from  mortgage  record,  ib.  ■ 

retention  of,  as  determining  question  of  payment  or  substitution,  62. 

preserved  though  bonds  surrendered,  when,  55. 

when  over-issue  of  bonds,  a  lien,  91. 
of  mortgage,  on  substitution  of  duplicate  for  old  bonds,  58. 
acquired  after  recording  mortgage,  right  of  bondholder  as  against,  81. 
effect  of  fiduciary  omitting  to  record,  262. 
effect  in  England  under  Companies  Act  of  1862,  ib. 
cannot  usually  be  displaced  by  mortgages,  259. 
under  construction  contracts,  147. 

determined  by  general  equitable  principles,  148. 

statutory,  of  construction  contract,  149,  150,  n.  3. 
statutory,  subsequent  legislation,  effect  of  upon,  333. 
established  by  State  statute  when  recognized  by  federal  courts,  263. 

in  favor  of  creditors,  supplying  rolling-stock  declared  by  statute,  645. 

preference  of,  over  prior  general  mortgage,  ib. 
for  damages  for  lands  condemned,  superior  to  prior  mortgage,  269= 

for  consequential  damages,  ib. 
upon  earnings  enforceable  as  an  equitable  charge,  67. 

rule  in  case  of  mortgage  upon  all  property,  ib. 
receiver's  expenses  made  first,  by  appointing  order,  662. 
for  counsel  fees,  not  lost  by  trustee's  death,  721. 
of  coupons  once  ceasingf,  cannot  be  revived,  111. 
of  Cirruit  Court  jndcrment,  where  attaches,  263. 
effected  before  complete  organization  preferred  to  those  after,  260. 
(See  Aftf.r  ACQUiKr^D  Pijopkijty;  Distribution  of  Proceeds  ;  First- 

MEX    Certificates;     Government     Lien;     Mechanic's     Lien; 

Power  of  Court  and  its  Receiver;  Preferred  Debt;  Statu- 
tory Lien  ;  Vendor's  Lien.) 


INDEX.  919 

The  figures  refer  to  pages. 

LIMITATION^, 

statutes  of,  action  by  trustee  stays  running  of,  as  to  bondholder,  490. 
(See  Teums,  Conditions,  and  Limitations.) 
LIMITATIONS   AND    CONDITIONS, 

in  statute  as  alfecting  validity  of  bond  issue,  85. 
.LIS   PENDENS, 

doctrine  does  not  apply  to  purchase  of  bonds  for  value,  99. 

LOUISIANA, 

constitutional  restriction  upon  issuing  stocks  and  bonds,  4,  n. 
statutory  provisions  as  to  issuing  bonds  and  borrowing,  40,  n. 
constitutional  effect  of  consolidation  between  home  and  foreign  corpo- 
rations, 4,  n. 
reorganization,  statutes  respecting,  842,  n.  1. 

MACHINERY, 

vendor's  lieu  on  sale  of,  272. 

MAINE, 

statutory  provisions  as  to  bonds,  40,  n. 
statute  relating  to  trustees  of  railroad  companies,  322. 
statute  regulating  election  of  trustees,  292. 
foreclosure,  statutes  relating  to,  409. 
reorganization,  statutes  respecting,  842,  n.  1. 

whether  injunction  granted  to  restrain  execution  against  rolling-stock,  361. 
MAJORITY   AND   MINORITY   RIGHTS, 

majority  cannot  bind  minority  to  a  surrender  of  rights,  47. 
elasticity  of  rule,  ib. 

rule  under  governments  unrestricted  from  impairing  contracts,  49. 
legislation  empowering  majority  of  bondholders  to  reorganize,  48. 
reasons  for,  49,  n. 

effect  of  reorganization  upon  minority  rights,  47. 
constitutionality  of  legislation  affecting,  48. 

legislation    limiting    time    for    concurrence    of    minority    of    bond- 
holders, ib. 
coercion  of  minority,  ib. 

transactions  induced  by,  ib. 

relationship   of   bondholders,  opposed  to  wishes  of  majority  being 
defeated,  ib. 
powers  of  majority  under  mortgage  provisions,  49. 

empowering   three-fourths    majority   to    "  assent    to   any   modifica- 
tion," 50. 
acts  of  corrupt  majority  frustrated,  50,  51,  n.  1. 
powers  of  majority  construed  strictly,  52,  n. 
under  provisions  for  foreclosure  on  default  of  interest,  409. 
minority  bondholder's  bill  to  foreclose  when  sustainable,  461. 
MANUFACTURING   COMPANIES, 
franchises  of,  power  to  mortgage,  171. 

may  hold  stock  in  corporation  supplying  them  material,  123,  n.  3. 
(See  Guaranty.) 
MARKET-HOUSE, 

of  one  holding  market  franchises,  not  salable  under  execution,  165. 


920  INDEX. 

The  figures  refer  to  pages. 

MARYLAND, 

statutory  provisions  as  issuing  bonds  and  borrowing,  40,  n. 

reorganization,  statutes  respecting,  842,  n.  1. 

whether  courts  of,  will  restrain  execution  against  rolling-stock,  361. 

place  of  sale  of  mortgaged  property,  rule  in,  773. 

rule  in,  as  to  receiver's  conipeusatiou,  710. 

MASSACHUSETTS, 

statutory  provisions  as  to  bonds,  40,  n. 

abrogation  of  conunon-law  power  to  issue  bonds,  16,  24. 

powers  since,  much  enlarged,  16,  n.  2. 

statute  relating  to  trustees  of  railroad  companies,  322. 

statute  of,  respecting  notice  of  meetings,  193. 

reorganization,  statutes  respecting,  842,  n.  1. 

MASTER'S   REPORT, 

will  not  be  set  aside,  without  firm  conviction  that  erroneous,  574. 
MATERIAL-MEN.     (See  Mechanic's  Lien.) 

MATERIALS, 

definition  of  term.     (See  Words  and  Phrases.) 

MATURITY, 

meaning  of  term.     (See  Words  and  Phrases.) 

MAXIMS, 

cuicunque  aliquis  quid  concedit,  concedere  videtur,  etc.,  180. 
"  equality  is  equity,"  753. 
expressio  unlus,  etc.,  218. 

qualification  of,  ib. 
he  who  seeks  equity  must  do  equity,  584,  n.  1,  589. 

applied  where  construction  contract  rescinded,  150. 
omnia  rite  acta,  illustrated  by  English  cases,  30,  n. 

invoked  to  protect  original  holder  of   bonds  against  irregularity  of 
issue,  30,  n.  2. 
omnis  ratihabitio  retrotrahitw  et  mandato  priori  cequiparatur,  28. 
once  a  mortgage  always  a  mortgage,  211. 
qui  sentit  commodum  ^entire  debet  et  onus,  799. 
qui  prior  est  in  tempore  prior  est  in  jure,  260. 
vifjilantihus  non  dormientibus  equitas  subvenit,  533. 

MECHANIC'S   LIEN, 

general  laws,  how  far  applicable  to  railroads,  274. 
if  not  applicable,  effect  upon  labor  claims,  ib. 
statutes  creating,  varied  phraseology  of,  273. 
division  of  statutes  into  two  classes,  ib. 

statutes  creating  a  mere  security,  ib. 

statutes  creatine:  an  absolute  priority,  ib. 
lien  of  mortgage  not  displaced  by  statute  creating,  ib. 

for  improvements  subsequent  to  record  of  mortgage,  262,  264.  n.  3. 

priorities  where  mortgagor  has  option  to  incur  future  liabilities,  275. 

where  he  binds  himself  so  to  do.  ib. 
statutes  strictly  construed,  reason,  277. 

lien  must  be  perfected  according  to  technical  requirements,  ib. 

only  obtainable  as  provided  by  statute,  278. 

where  last  item  of  vinm  account  accrues  within  filing  period,  277. 


INDEX.  921 

The  figures  refer  to  pages. 
MECHANIC'S   LIEN  —  continued. 

lieu  given  to  "laborers  "  in  corporation's  employ,  meaning  of,  277. 
failure  to  sue  within  statutory  limit  of  twelve  montlis,  ib. 
in  general  terms,  covers  whole  road  at  time  of  construction,  274. 
for  work  on  com})leted  road,  subordinate  to  mortgage,  275. 
certificates  issued  subseciueut  to  decree  sustaiuiug,  subject  to,  GSO. 
for  labor  and  material  used  in  construction,  nut  in  operating,  274;. 
in  Iowa,  rolling-stock  held  not  subject  to,  31U. 
in  North  Carolina,  279. 
property  in  receiver's  hands  not  subject  to  process  to  enforce,  5G5. 
bondholders  when  not  bound  by  proceedings  to  enforce,  278. 
States  where  sub-contractors  of  sub-contractors  not  entitled  to,  277. 
waiver  of,  accepting  fund,  constituting  equitable  assignment,  27(3. 
acceptance  of  collateral  security,  ib. 

stipulation  that  lienor  be  paid  from  particular  fund,  no  waiver,  ib. 
nor  security  of  divisional  bonds  where  lien  on  whole  line,  277. 
(See  under  names  of  States.) 
MEETINGS, 

substantial  compliance  with  statutory  requirements  as  to,  191. 
notice  of,  when  meets  requirement  of  Massachusetts  statute,  193. 
whether  notice  of  given,  mortgagee  not  bound  to  inquire,  196. 
(See  Directors;  England.) 
MICHIGAN, 

statutory  provisions  as  to  issuing  bonds  and  borrowing,  40,  n. 
constitutional  restriction  against  consolidation,  4,  n. 
reorganization,  statutes  respecting,  842,  n.  1. 
guaranty  of  bonds  of  other  company,  129,  n.  3. 

MINNESOTA, 

statutory  provisions  as  to  issuing  bonds  and  borrowing,  40,  n. 

reorganization,  statutes  respecting,  842,  n.  1. 

statutes  respecting  mortgaging  after-acquired  property,  258. 

statutory  receiver  for  benetit  of  creditors,  521. 

personalty  of  railroad  cannot  be  levied  on  separately  in,  357. 

MINORITY.     (See  Majority  and  Minority  Rights.) 

MISAPPLICATION   OF   PROCEEDS.     (See  Purchaser.) 

MISFEASANCE   AND   MISCONDUCT, 
when  trustee  liable  for  co-trustees,  313. 

MISSISSIPPI, 

statutory  provisions  as  to  bonds,  40,  n. 

constitutional  restriction  upon  issuing  stocks  and  bonds,  4,  n. 

constitution  declares  rolling-stock  personalty,  ib. 

mortgage  of  future  earnings  subordinate  to  claim  for  operating  expenses, 

628,  n.  632. 
reorganization,  statutes  respecting,  842,  n.  1. 

MISSOURI, 

statutory  provisions  as  to  issuing  bonds  and  borrowing.  40,  n. 
constitutional  restriction  upon  issuing  stocks  or  bonds,  4,  n. 

upon  issuinfj  preferred  stock,  ib. 

upon  consolidation,  ih. 
effect  of  consolidation  between  home  and  foreign  corporations,  ib. 


922  INDEX. 

The  figures  refer  to  pages. 
MISSOURI  —  continued. 

rolliug-stock  of  railways  constitutioually  declared  personalty,  4,  n. 

law  oi  mechanics'  liens  iu,  275. 
MONEr, 

protection  to  vendors,  extended  to  advancers  of,  346. 

coming  into  hands  of  trustee,  application  of,  314. 

should  be,  with  view  to  dimiuisb  indebtedness,  ib. 

meaning  of  term.     (See  Words  and  Phrases.) 

MONTANA, 

statutory  provisions  as  to  issuing  bonds  and  borrowing.  40,  n. 

constitutional  restriction  upon  issuing  stocks  and  bonds,  4,  n. 

upon  consolidation,  ib. 

effect  of  consolidation  between  home  and  foreign  corporations,  ib. 

liabilities  arising  out  of  franchises  preserved  from  effect  of  alienation,  ib. 

guaranty  of  bonds  of  connecting  lines,  129,  n.  3. 

judgment  for  injuries,  prior  to  mortgage,  628,  n. 

MORTGAGE, 

common-law  power  of  corporation  to  execute,  162. 

application  of  rule  in  railway  companies,  ib. 

power  as  affected  by  statutory  provisions,  164. 
effect  as  to  railroad  companies,  ib. 
of  railroad  property,  validity  of,  when  determined  by  charter,  216. 

when  by  general  laws,  ib. 
executed  by  corporate  agent  when  corporate  act,  186. 

not  unless  executed  in  name  of  company,  ib. 

or  purports  to  be  deed  of  company,  ib. 

authority  of  corporate  officers  to  execute  must  appear,  186,  187. 

but  may  be  inferred  from  facts  and  circumstances,  187. 
may  be  authorized,  executed,  and  acknowledged  outside  State,  193. 

matter  discussed,  ib. 

authorized  by  resolution  passed  outside  State,  194. 

in  any  State  where  line  extends,  195. 
where   mortgagee    without   notice    that    no   quorum   present   at   execu- 
tion, ib. 

that  director  was  not  notified  and  absent,  196. 
not  invalidated  by  misapplication  of  proceeds  of  bonds,  197. 
■when  not  executed  as  directed,  but  directors  adopt  it,  196. 
where  corporation  acquiesces,  as  by  using  consideration,  197. 
unauthorized,  validated  l>y  ratification  of  stockholders,  196. 

but  intervening  rights  not  displaced  by  ratification,  197. 

ratified  only  by  proportion  of  stockholders  necessary  to  authorize,  ib. 
void,  for  want  of  authority,  does  not  invalidate  bonds.  24,  32. 
of  corporate  existence,  rule  of  construction  against.  177. 

illustrative  cases,  176-178. 
of  property,  company  not  empowered  to  hold,  invalid,  182. 
effect  of  constitutional  requirement  as  to  place  of  business,  195. 
circumstances  rendering  void  ordinarily,  not  as  to  railroad  companies,  198. 

may  be  valid  as  to  part  of  road  only,  202. 

effect,  where  two  companies  of  different  States  consolidate,  ib. 

of  franchises,  when  valid  as  to  part  oidy,  203. 

when  void  only  as  to  unauthorized  provision,  ib. 


INDEX.  923 

The  figures  refer  to  pages. 

MORTGAGE  —  continued. 

when  void  as  to  realty,  but  valid  as  to  personalty,  203. 
alteration  by  officers  after  execution,  205. 

by  inserting  power  of  sale,  ib. 
validity  of,  as  affected  by  circumstances  of  execution,  185. 

necessity  of  witnesses  to  execution  of,  ib. 

formalities  of  oath,  not  complied  with,  U). 

acknowledgment,  formalities  of,  ib. 

seal,  necessity  of  affixing,  ib. 

delivery,  when  takes  effect,  ib. 
special  requirements,  186. 
vagueness  of  its  description,  effect  on  validity,  ib. 

pledge  of  real  and  personal  estate  without  specification,  ib. 

omission  to  state  amount  to  be  secured,  ib. 
when  concurrence  of  stockholders  unnecessary  to  execution  of,  191. 
validity  of,  when  cannot  be  questioned  by  trustee,  208. 

when  may  be  questioned  by  company  and  stockholders  only,  203. 
validity  of,  when  State  estopped  to  dispute,  208. 
ratification  of,  by  legislature,  169. 

inferred  from  acts  and  circumstances,  ib. 
right  to,  not  restricted  by  statute  declaring  lieu  of  State,  168. 
securing  bonds,  objection  to  validity  of,  12. 

not  affected  though  some  bonds  void,  25. 

when  may  be  foreclosed  though  bonds  void,  198. 

not  operative  until  delivery  of  bonds,  46. 

effect  of  special  act  declaring  valid,  13. 

effect  of  provisions  in  certificate  of  organization,  ib. 

purporting  to  be  of  even  date  with  bonds,  84. 

bondholders'  right  to  assume  purport  correct,  ib. 

bondholders'  rights  as  against  liens  acquired  after  recording,  ib. 

whether  benefits,  clear  of  equities,  pass  with  transfer  of  bonds,  99. 

rule  in  Illinois  in  affirmative,  ib. 
of  income,  treated  as  an  appropriation  thereof,  66. 

as  against  attaching  creditors,  ib. 

when  subject  to  attachment  before  possession  under,  67. 

rule  when  mortgage  is  upon  all  property,  ib. 

of  "  franchises,  pledges,  and  rights  "  will  not  pass  income,  247. 

lien  upon  income  acquired  only  in  mode  declared  by,  497. 

made  in  one  State  protects  earnings  in  another,  247. 
general  rules  of  construction,  216. 

all  writings  must  be  construed  together,  217. 

general  words  followed  by  particular,  218. 
qualification  of  rule,  ib. 

particular  followed  by  general,  ib. 

when  refers  to  things  ej'usdem  generis,  ib. 
general  words  with  qualifying  phrases,  effect  of,  230,  232. 
property  covered  by,  216. 

identified  from  ownership  at  execution  of,  216,  219. 

most  general  words  sufficient  to  transfer,  219. 

whatever  necessary  to  enjoyment  of  thing  granted,  220. 

right  to  carry  on  business,  when  passes,  ib. 

lauds  not  yet  located  or  granted,  233. 


924  INDEX. 

The  figures  refer  to  pages. 
MORTGAGE  —  continued. 

grants  made  subsequently  to  further  construction,  233. 

where  company's  authority  limited  to  laud  for  road,  ih. 
terminal  facilities  when  covered  by,  2^5. 
lands  acquired  for  depots  and  other  buildings,  234. 
lands  acquired  for  right  of  way,  ib. 
lands  held  by  equitable  title  when  covered  by,  235. 
contract  for  sale  of  lands,  236. 

leasehold  interests,  when  covered,  ib. 

lease  of  a  belt  railroad,  ib. 
only  such,  used  in  promoting  purposes  of  railway,  passes,  227. 
what  is  property  used  for  railroad  purposes,  228,  243. 
mere  convenience,  not  necessity,  228. 
when  it  is  "necessary"  property,  ib. 
whether  it  need  be  "indispensable,"  ib. 

lands,  pi'oper  test  as  to,  whether  seizable  under  eminent  domain,  ib. 
city  lots  designed  for  railroad  use,  but  never  used,  229. 
distinction  between  unnecessary  property  and  that  thought  necessary 

but  unused,  2o2. 
land  beyond  charter  limit  will  not  pass,  231. 
town  lots  must  be  appurtenant  and  indispensable,  ib. 
lands  granted  as  inducement  to  erect  depot,  ib. 
laud  used  temporarily  for  an  office,  ib. 
property   afterwards    consolidated    when   remains    subject    to   lien, 

229. 
on  works  projected  but  not  completed,  {6. 
fixtures,  when  pass  as  realty,  general  rule,  247. 
of  road,  track,  and  franchises,  includes  fixtures,  247. 

and  future  additions  to  fixtures,  ib. 
property    not    required    for    operating    road,    must    be    specifically   de- 
scribed, 226. 
whether   requisites   of   description  the   same   as  to  companies   and 

individuals,  ib. 
after-acquired  personalty  when  specific  description  necessary,  238. 

when  not  acquired  for  railroad  purposes,  ib. 
when  necessity  for,  qualified  by  view  that  railroad  an  entirety,  248. 
when  qualified  by  doctrine  of  fixtures,  247. 
provisions : 

that  bonds  shall  be  paid  without  deduction,  77. 

effect  of  as  to  bondholders'  liability  for  income  tax,  ib. 
for  payment  of  principal  on  default  of  interest,  74.  407. 

right  based  upon,  must  be  determined  by  existing  conditions, 

407. 
must  be  in  express  terms,  ih. 

if  principal  due  at  trustees'  election,  election  must  be  shown,  ib. 
when  provision  applies  to  "  foreclosure  "  itself,  not  to  bringing 

suit.^407,  n.  3. 
provisions  as  affected  by  statute  authorizing  bond  issue,  409. 
that  bondholder  shall  not  foreclose  till  trustee  refuses,  472. 
for  entry  by  trustee,  cfround  a'jainst  receivership,  .534. 
for  request  of  majority  to  foreclose  on  default  of  interest,  76. 
must  be  observed  strictly,  ib. 


INDEX.  925 

The  figures  refer  to  pages. 
MORTGAGE  — continued. 
policy  of,  70. 
common  provisions  as  to  maturing  of  principal,  75. 
construction  of,  ib. 
that  bonds  payable  at  specified  time,  election  of  bondholders  on 

default,  ib. 
variance  judicially  considered,  76. 
election  to  treat  as  due,  effect  on  future  interest  coupons,  75. 
on  senior  mortgages,  *'/;. 
election  to  determine  right  to  stolen  bonds,  ib. 

provisions  prevail  over  statute  subsequently  passed,  292. 
power  to  insert  provisions  to  enforce,  implied,  168. 
power  to  sell  implied,  ib. 

clauses  in,  as  affecting  power  of  majority,  49,  51  and  n. 
power  of  sale  in,  on  default  of  interest,  74. 
right  to  prevent  sale  by  payment  of  interest,  ib. 
power  to  foreclose  and  sell  incident  to  power  to  execute,  374,  SOS- 
existing,  how  far  affected  by  creation  of  new  obligations,  263. 
effect  of  Kentucky  statute  respecting  future  liens,  264. 
effect  of  consent  to  preference  of  new  bonds,  ib. 

provision    as    to    after-acquired    property    as    affecting    subsequent 
lienors,  182. 
priority  over  mechanic's  lien,  where  optional  to  incur  liability,  275. 

where  mortgagee  binds  himself  to  incur  it,  ib. 
to  secure  future  advances,  when  valid,  202. 

priorities  of,  264,  n.  3. 
priority  of,  as  affected  by  legislation,  273. 
construction,  a  question  for  the  court,  617. 
lex  loci,  ib. 

of  road  "  built  and  to  be  built,"  623. 
in  form  of  trust  deed,  210. 
direct  to  bondholder,  ib. 

bondholder  may  not  proceed  alone  against  company,  ib. 
of  real  estate,  when  must  be  filed  as  chattel  mortgage,  201. 
in  proceedings  affecting  lien  of,  trustees  represent  bondholders,  667. 

receiver  represents  company,  ib. 
foreclosure  of,  in  one,  and  concurrence  in  other  federal  court,  187. 

res  adj'udicata,  as  to  court  rendering  decree,  ib. 
trustee  of  more  than  one,  duties  of,  312. 

(See  After-acquired  Property;  Appurtenances;  Bond  and  Mort- 
gage; Chattel  Mortgage  ;  Conveyance  to  Trustees;  Equi- 
table Mortgage;  Fixtures;  Franchises;  Lien;  Presumption; 
Railroad  Companies;  Right  of  Way;  Statutory  Lien;  Stock- 
holders; Trustee;  Undertaking;  Vendor's  Lien;  names  of 
States.) 
MORTGAGEE, 

when  entitled  to  income  though  company's  control  divested,  502. 
of  chattels  having  notice  of  prior  mortgages,  207. 
junior  cannot  question  company's  power  to  convey,  206. 
qualification  of  rule,  ib. 

when  cannot  question  prior  bond  issue,  26,  207. 
parties  standing  in  same  position  as,  207. 


926  INDEX. 

The  figiurea  refer  to  pages. 
MORTGAGEE  —  continued. 

when  cannot  object  as  to  stockholders'  consent  to  prior  mortgage,  206. 
of  part,  as  against  junior  mortgagee  of  entirety,  395. 
action  for  possession  not  maintainable  by  junior  against  senior,  388. 
practice,  when  prior  mortgagee  improperly  made  party,  464. 
when  entitled  to  costs,  ib. 
prior  mortgagee,  how  made  party,  ib. 
junior,  not  made  party,  his  right  to  redeem  unaffected,  465. 
though  made  party,  decree  must  cut  off  his  lien,  ib. 

NATIONAL   BANK, 

receiver  in  suit  by,  510. 

jurisdiction  of  court  sitting  in  domicil  of,  ib. 

NEBRASKA, 

statutory  provisions  as  to  bonds,  40,  n. 

constitutional  restriction  upon  issuing  stocks  and  bonds,  4,  n. 

upon  consolidation,  ib. 
consolidation  construed  to  mean  "join"  or  "unite,"  ib. 
statutes  respecting  mortgaging  after-acquired  property,  258. 
reorganization,  statutes  respecting,  842,  n.  1. 
rolling-stock  constitutionally  declared  personalty,  4,  n. 
guaranty  of  bonds  of  connecting  line,  129,  n.  3. 

NEGLIGENCE, 

trustee  in  possession,  liability  of,  for  injuries  from,  319. 

NEGOTIABILITY   OF  BONDS, 

determined  by  law  of  country  where  action  brought,  82. 
foreign  bonds  when  treated  as  negotiable,  ib. 
decisions  against,  not  regarded  as  authority,  79. 

policy  that  has  established,  79,  80. 

in  England,  80. 
feature  determining,  80,  81,  n.  1. 

when  no  payee  named,  81. 

filling  in  name  of  holder,  ib. 

departure  from  common-law  rule,  ib. 

uncertainty  as  to  time,  does  not  affect,  when,  ib. 
as  to  amount,  how  affected  by,  82. 
effect  upon,  of  reference  to  mortgage,  44,  n.  1. 
of  writing,  which  promises  security  for  money,  as  scrip,  78,  n.  2. 
(See  Bonds.) 

NEGOTIABILITY   OF   COUPONS, 

when  payable  to  order,  bearer,  or  indorsed  in  blank,  105. 

when  so  payable  and  separated  from  its  negotiable  bond,  106.  ' 

when  contain  references  to  mortgage,  ib. 

(See  Coupons.) 

NEGOTIAIULITY   OF    GUARANTY, 

indorsed  upon  bonds,  127. 
purely  collateral,  ib. 

NET   EARNINGS, 

when  mortgage  of,  includes  earnings  going  and  coming,  246. 


INDEX.  927 

The  figures  refer  to  pages. 

NET    EAR^mGS  — continued. 

when  not  covered  by  mortgage,  246. 

(See  Trustek;    Words  and  Phrasks.) 
NEVADA, 

statutory  provisions  as  to  issuing  bonds  and  borrowing,  40,  n. 

NEW   HAMPSlIIllE, 

statutory  provisions  as  to  bonds,  40,  n. 

mortgage  by  a  corporation,  formalities  of  execution,  185. 

rolling-stock  regarded  as  personalty,  310. 

NEW  JERSEY, 

statutory  provisions  as  to  issuing  bonds  and  borrowing,  40,  n- 
rule  as  to  bonds  not  in  pi-esci'ibed  form,  81. 
reorganization,  statutes  respecting,  842,  n.  1. 
statutes  affecting  consolidation,  169,  188. 
foreclosure,  statutes  relating  to,  409.     " 
rolling-stock,  not  fixtures,  338. 

Chattel  Mortgage  Act  not  applicable  to,  ib. 

NEW   MEXICO, 

statutory  provisions  as  to  issuing  bonds  and  borrowing,  40,  n, 

NEW^   YORK, 

statute  restricting  corporate  power  to  mortgage,  174. 
statutory  provisions  as  to  issuing  bonds  and  borrowing,  40,  n. 
business  corporations  act,  power  to  issue  bonds  under,  9. 

bonds  valid  though  in  excess  of  half,  ib. 

limited  personal  liability  of  directors,  11. 

consent  to  mortgage  under,  192. 

what  amounts  to  written  consent,  ib. 

corporation  cannot  vote  its  own  shares  to  make  up  majority,  ib. 

consent  to  purchase-money  mortgage  unnecessary,  ib. 

by  whom  objection  to  mortgage  may  be  taken,  193. 
reorganization,  statutes  respecting,  842,  n.  1. 
"reorganization,"   "reincorporation,"   and   "consolidation,"  distinction 

between,  84.5,  n.  1. 
statute  authorizing  consolidation,  266. 

code,  section  1628,  applies,  not  to  action  based  on,  858. 
appointment  of  receiver  on  dissolution  of  company,  509,  n.  8. 
statute  relating  to  corporation  receiver's  applicability,  709,  n.  1. 
foreclosure,  statutes  relating  to,  409. 
rolling-stock  held  personalty  in,  337. 
guaranty  of  bonds,  129,  n.  3. 
provisions  of  code  respecting  excessive  amount  of  judgment,  ib. 

NON-RESIDENTS, 

eligibility  for  trusteeship  secured  by  State  constitittions,  284. 
trustee  becoming  resident  abroad,  effect  of,  312. 

NORTH    CAROLINA, 

statutory  provisions  as  to  issuing  bonds  and  borrowing,  40,  n. 
reorganization,  statutes  respecting,  842,  n.  1. 
judgment  for  torts,  priority  of,  over  mortgages,  628. 

NORTH  DAKOTA, 

statutory  provisions  as  to  bonds,  40,  n. 


928  INDEX. 

The  figures  refer  to  pages. 
NORTH   T) AKOTk  — continued. 

constitutional  restrictions  upon  issuing  stocks  and  bonds,  4,  n. 

upon  consolidation,   ib. 

foreclosure,  statutes  relating  to,  409. 

code  provisions  affecting  mortgages  of  after-acquired  property,  258. 

NOTICE, 

under  recording  statutes,  158. 

statutes  relating  to  bond  and  mortgage,  156. 

presumption  statutory  requirements  have  been  complied  with,  ib. 
from  knowledge  of  extrinsic  facts,  153,  155. 

facts  that  would  put  a  prudent  man  on  inquiry,  155. 

illustrations,  156. 

corporate  records,  not,  ib. 
as  imparted  by  instrument  itself,  153. 
implied  from  recitals  in  bonds,  88,  89. 
from  smallness  of  price,  89. 
from  years  of  unpaid  coupons,  89,  95. 

reference  in  bond  to  mortgage,  notice  of  latter's  contents,  154. 

contents  of  bonds  as  of  circumstances  of  executing  mortgage,  ib. 

facts  expressed  on  instrument,  purchaser  need  not  look  beyond,  153. 
exceptional  instance,  153,  n.  2. 

change  of  numbers  on  bonds,  not,  154. 

nor  that  intei-est  on  some  coupons  not  paid,  150. 
as  affecting  priority  of  judgment  creditor,  261. 
as  affecting  creditor's  assignee,  ib. 
as  determining  unqualified  rights  of  bondholder,  153. 
constructive,  when  affects  rights  of  purchaser,  154. 
to  trustees  in  matters  not  arising  in  litigation,  effect  of,  304. 

where  held  not  notice  to  bondholders,  ib. 

where  trustee  invested  with  merely  naked  trust,  304,  306. 

■where  trustee  regarded  as  agent,  306. 
doubtful  state  of  law  as  to  effect  on  bondholders,  307. 
(See   Bondholders;    Creditor;    Mortgage;    Presumptions;    Pur- 
chaser; Trustee.) 
NOVATION, 

substitution  distinguished  from,  36,  62. 

intention  to  extinguish  old  obligation  must  be  shown,  853. 

presumption  against  on  funding  overdue  interest,  112. 

overcome  by  clearest  evidence  only,  ib. 

NUISANCE, 

trustee  in  possession,  liability  of,  for  injuries  from,  319. 

NUMBERS, 

not  integral  part  of  bond,  154. 

change  of,  not  notice  that  bonds  have  been  stolen,  (7;. 

effect  of  on  bonds  to  determine  validity  in  case  of  over-issue,  24,  n.  5. 

OFFICERS, 

when  president  empowered  to  create  lien  upon  income,  190. 

when  upon  franchises  of  company,  ih. 
president's  inijilied  power  to  stipulate  as  to  default  of  interest,  ib. 


INDEX.  929 

The  figures  refer  to  pages. 
OFFICERS  —  continued. 

may  not  insert  unusual  terms,  190. 
as,  payment  of  attorney's  fees,  ib. 
unauthorized  provisions,  need  not  vitiate  others,  191. 

subsequent  approval  of  board,  196. 
when  without  authority  to  mortgage,  191. 
superintendent  witliout  authority  to  mortgage,  ib. 
de  facto,  binding  effects  of  acts  of,  188. 
omission  to  execute  authorized  mortgage,  effect  of,  212. 

OHIO, 

statutory  provisions  as  to  issuing  bonds,  40,  n. 
validity  of  bonds  sold  to  a  syndicate  of  directors,  24,  n.  5. 
statute  respecting  mortgaging  after-acquired  property,  180. 
no  statutory  power  to  make  preferred  stock  lien,  758. 
statute  relating  to  negotiability  of  instruments,  16  and  n.  3. 
reorganization,  statutes  respecting,  842,  n.  1. 
rule  as  to  selling  real  estate  of  railroad,  767. 
rolling-stock,  whether  personalty  or  realty  doubtful,  340. 
judgment  for  labor,  supplies,  and  injuries,  preferred  to  mortgage,  628,  n. 
order  removing  receiver  reviewable  on  appeal,  537. 
OKLAHOMA, 

statutory  provisions  as  to  issue  of  bonds,  40,  n. 

statutes  respecting  mortgaging  after-acquired  property,  258. 

OPERATING  EXPENSES, 

meaning  of,  651. 

a  paramount  charge  on  trust  fund,  ib. 

what  allowed  as,  654. 

awards  as  damages,  against  receiver  for  servant's  acts,  762. 

payable  out  of  receiver's  income  only,  ib. 

where  receiver  appointed  merely  to  pay  rent  from  profits,  ib. 
priority  of  claim  for,  not  affected  by  attachment,  582. 
payable  out  of  proceeds  when  specific  lien,  660. 
lien  on  corpus,  when,  ib. 

advances  for,  a  risk,  without  court's  prior  sanction,  662. 
(See  Words  and  Phrases.) 
OVER-ISSUE  OF  BONDS, 

company  estopped  to  deny  validity  of,  91. 

or  that  they  fall  within  security,  ib. 
when  subsequent  mortgagee  may  assert  invalidity  of,  ib. 
when  valid  only  to  extent  of  consideration  received,  ib.,  n.  2. 
rights  as  between  holders  within  and  without  the  limit,  90. 

where  all  indorsed  by  State,  ib. 
when  lien  upon  corporate  property,  91. 
priority  as  between,  and  income  bonds  subsequently  issued,  ib. 

and  subsequently  recorded  mortgage,  ib. 
OVER-VALUATION, 

where  railroad  the  consideration  of  issue,  17,  22. 

PARTIES, 

in  suits  relating  to  corporate  securities,  458. 
two  classes  of,  ib. 

69 


930  INDEX. 

The  figures  refer  to  pages. 
PARTIES  —  continued. 

in  action  to  cancel  bonds,  corporation  necessary  party,  34. 
to  foreclosure  suit,  who  only  necessary,  459. 
who  proper,  but  not  necessary,  465. 

quasi,  persons  of  a  class  represented  in  foreclosure  suit,  459. 
may  be  heard  in  own  interests,  ib. 
stockholders  when  sufficiently  represented,  466. 
bound  by  decree,  when  corporation  defendant,  ib. 
general  rule  that  trustee  and  beneficiary  necessary  parties,  475. 
exceptions  in  case  of  railroad  mortgages,  and  reasons  for,  ib. 
applies  to  ex  officio  trustees,  as  State  treasurer,  476. 
heirs  or  personal  representatives  of  deceased  trustee,  296. 

except  on  death  of  all  trustees,  ib. 
trustee  proper  plaintiff  under  ordinary  circumstances,  478. 
to  foreclose  mortgage,  ib. 
to  maintain  and  defend  trust  fund,  ib. 
to  apply  for  injunction  against  illegal  proceeding,  ib. 
to  bring  suit  to  settle  priorities  under  certain  circumstances,  ib. 
to  secure  from  company  an  accounting  for  earnings,  ib. 
trustee  as  party  defendant  generally,  480. 

where  stockholders  seek  to  avoid  sale  under  friendly  foreclosure,  ib. 
trustee  substituted,  pending  suit,  without  court's  sanction,  481. 
where,  with  consent  of  court,  ib. 

non-resident  trustees  as  defendants,  ib. 

service  by  publication,  when  necessary,  ib. 
bill  by  or  against  trustee  alone,  not  demurrable,  478. 
when  dismissed  as  to  trustee  of  subsequent  mortgage,  466. 
where  several   trustees,  one  sufficient  to  protect  rights  of   beneficiaries, 

477,  478. 
bondholders  as  plaintiif,  459. 

one  or  more  may  sue  on  behalf  of  all,  472. 

not  where  mortgage  executed  to  bondholders  by  name,  473. 
whether  regard  must  be  had  to  wishes  of  other  bondholders,  459. 
where  removal  of  trustee,  object  of  suit,  472. 

where  trustee  has  acquired  adverse  interests,  ib. 
where  guilty  of  active  misconduct,  473. 
where  non-resident  and  insane,  ib. 
where  trusteeship  of  foreign  corporation,  vacant,  ib. 
necessity  of  showing  request  and  refusal  of  trustee  to  sue,  459,  460. 
request  must  come  from  bond-owners,  477. 

whether  trustee  may  continue  suit,  though  request  insufficient,  ib. 
incapacity  of,  when  special  powers  conferred  on  trustee,  482. 
when  restrained  from  joining  in  suits  against  trustee,  481,  482. 
only  proper  parties  to  compel  execution  of  trust  deed,  460. 
dift'ering  immaterially  in  circumstances  from  complainant,  ib. 
action  for  specific  performance  on  refusal  of  trustee,  ib. 
committees  of  several  series  of  bondholders  as,  in  trustee's  action,  ib. 
declining  to  come  in  as  plaintiffs,  joined  as  defendants,  475. 
safe,  without  joining  in  suit  begun  by  others,  474. 
privilege  of  intervention  open  after  appeal,  ib. 
charged  with  utmost  good  faith,  472. 
pledgor  of  bonds  may  maintain  suit  in  interests  of  all,  461. 


INDEX.  931 

The  figures  refer  to  pages. 
PARTIES  —  continued. 

but  pledgee  must  be  a  party,  4G1. 
so  pledgee  may  foreclose,  making  owner  party,  ib. 
when  receiver  not  proper  party  in  federal  action,  468. 
when  proper  though  unnecessary  in  foreclosure,  4G7. 
when  proper  in  stockholder's  action  to  cancel  bonds,  ib. 
receiver  pend^'nte  Ule  when  not  proper  party,  G91. 
when  appointed  to  wind  up  company,  ib. 
construction  company  directors,  when  necessary,  467. 
guarantors  of  bonds  not  proper  parties,  when,  ib. 
persons  materially  interested  may  intervene,  470. 
judgment  creditors  claiming  superior  lien,  ib. 
simple  contract  creditors,  when,  ib. 
defendant,  who  necessary,  depends  on  relief  asked,  461. 
usually  mortgagor  and  all  subordinate  lienors,  402. 
where  mortgagor  alone  sufficient,  402,  406. 
where  mortgagor  neither  necessary  nor  proper,  462. 
prior  mortgagee  usually  not  necessary  party,  ib. 
especially,  when  prior  mortgage  not  due,  463. 
if  due,  holder  may  be  compelled  to  surrender,  ib. 
when  prior  mortgagee  a  proper  party,  ib. 

on  appointment  of  receiver  of  revenues,  ib, 
when  junior  seeking  sale  of  entire  estate,  464. 
grantee  of  trust  deed  to  determine  alleged  priority,  ib. 
prior  mortgagees  when  not  allowed  to  intervene,  on  junior  foreclosing,  ib. 
mortgagee  of  divisional  mortgage,  466. 
United  States  as  party  defendant,  470. 

but  where  they  have  become  parties,  decree  binds  them,  ib. 
same  rule  applies  to  State,  ib. 
States  as  parties  defendant,  468. 
general  rule,  cannot  be,  ib. 

distinguishable  from  State  officers  as  defendants,  i5. 
but  general  rule  cannot  be  evaded,  ib. 
joining  as  defendant  one  of  similar  interests  to  plaintiffs,  458. 
consequences  of  omitting  to  join  junior  lienor,  465. 
under  compulsory  process  of  federal  court,  422. 
to  cause,  sought  to  be  removed,  439. 
must  be  same  to  sustain  a  plea  of  Ha  pendens,  429. 
prior  mortgagee,  how  made  a  party,  464. 

(See  Bondholders;  Intervention;  Trustees.) 
PAYMENT, 

of  bonds,  question  of,  as  distinguished  from  substitution,  61. 
question  of,  determined  by  terms  of  agreement,  ib. 
conclusion  of,  not  warranted  where  lien  preserved,  62. 
effect  upon  security,  01. 

reissue  and  effect  of,  upon  security,  62. 
certificates  issued  for  accrued  interest  coupons,  when  not,  63. 
(See  Substitution.) 
PENNSYLVANIA, 

statutory  provisions  as  to  issuing  bonds,  40,  n. 

constitutional  restriction  upon  issuing  stocks  and  bonds,  4,  n.;  24,  n.  ;. 
upon  consolidation,  4,  n. 


932  INDEX. 

The  figures  refer  to  pages. 

PENNSYLVANIA  —  continued. 

statute  respecting  liens  of  construction  companies,  149. 

relating  to  trustees  of  railroad  companies,  322. 
reorganization,  statutes  respecting,  842,  n,  1. 
rolling-stock  not  leviable  after  insolvency  of  road,  361. 
equity  court's  jurisdiction,  373. 
guaranty  of  bonds,  12.9,  u.  3. 
action  on  bond,  in  whose  name  maintainable,  385. 

when  no  demand  necessary,  ib. 

PERSONAL  PROPERTY  DETACHED, 

when  must  be  specifically  described,  247. 
safe,  248. 

office  furniture  and  fuel,  247. 
planing-mill,  248. 

PLEADINGS  AND  PRACTICE, 

allegations,  in  action  to  annul  bonds,  34. 

in  action  by  bondholder  to  rescind  for  fraud,  156. 

in  bill  for  redemption,  806. 

sufficiency  of  bill  by  judgment  creditor  for  receiver,  533. 

omission  to  register  mortgage  must  be  alleged,  208. 
bondholder's  bill  should  allege  trustee's  refusal  to  take  action,  471,  n.  4. 
averments  : 

that  petitioner  has  lien,  34. 

that  corporation  is  misusing  property,  ib, 

default  of  interest,  ib. 

of  indorsement  on  bonds,  to  show  defendant's  liability  for  interest, 
126,  n.5. 

averment  of  election  to  treat  bonds  as  due,  75, 

ownership  of  bonds,  when  sufficiently  alleged,  56,  449. 

equitable  mortgage  and  priority  over  junior  lienors,  449. 

single  question  on  lienholder's  demurrer  to  equitable  mortgage  fore- 
closure, 450. 

setting  forth  sufficient  description  of  mortgaged  property,  449. 

amount  secured,  sum  due,  and  conditions  of  mortgage,  ib. 
bill  by  or  against  trustee  alone,  not  demurrable,  478. 
title  of  trustees  sufficiently  alleged,  when,  476. 

whether  trustee  should  allege  reason  for  not  joining  beneficiary,  477. 
bills  held  not  demurrable,  450. 

usual  prayer  in  bill  filed  by  trustee  to  obtain  possession,  451. 
defences  against  bondholders  available  against  trustees,  478. 
answer  of  corporation,  how  verified,  452. 
omission  of  corporation  to  appear  and  answer,  ib. 
answer  of  lienholders  in  foreclosure  of  equitable  mortgage,  ib. 
pleas  of  lis  pendens  not  sustainable  unless  cases  alike,  428. 
objection  to  jurisdiction  addressed  to  court,  426. 

by  plea  in  abatement,  ib. 

too  late,  to  object  after  answer,  ib. 
dismissal  of  bill  by  complainant,  when  and  when  not  allowable,  454. 

usually  without  prejudice  to  bringing  another  suit,  455. 
dismissing  bill  as  to  trustee  of  subsequent  mortgagee,  466. 
effect  of  not  joining  junior  lienor,  465. 


INDEX.  933 

The  figures  refer  to  pages. 

PLEADINGS   AND   PRACTICE  — con^imte^Z. 
cross-bills,  purpose  of,  452. 

practical  illustrations,  452. 

when  cross-bill  may  set  up  new  matter,  453. 

cross-bill  falls  on  dismissal  of  original,  45G. 

orders  made  in  suit  will  be  set  aside,  ib. 

when  may  be  ordered  by  court,  453. 

optional  among  antagonistic  defendants,  ib. 

should  be  filed  before  rendition  of  decree,  ib. 

filed  without  leave  of  court  may  be  avoided,  454. 

when  leave  presumed  granted,  on  appeal,  ib. 

by  bondholder  to  raise  issue  of  fraud,  ib. 

by  persons  not  parties  to  original  suit,  ib. 

by  material-men,  laborers,  etc.,  ib. 
supplemental  bills,  when  proper  and  when  not,  451. 

order  on  bondholder's  petition  directing,  ib. 

right  to  file  where  facts  subject  of  amendment,  152. 

serving  subpoena,  451. 
on  bringing  suits,  pending  receivership,  565. 

as  to  injurious  orders  made  during,  ib. 

mode  of  enforcing  claims  against  property  in  receivers'  hands,  573. 

when  appointment  of  receiver  an  issue,  order  admissible  in  evidence, 
572. 

on  removal  of  ancillary  receiver,  553. 

on  review  of  master's  report  on  receiver's  account,  562. 

how  prior  mortgagee  made  a  party,  464. 
■when  prior  mortgagee  improperly  made  a  party,  ib. 

when  entitled  to  costs,  ib. 
to  bring  in  unwilling  suitors,  422. 

PLEDGE, 

of  commercial  paper  does  not  carry  power  to  sell,  96. 

rule  applied  to  sale  of  railroad  bonds  in  Illinois,  97. 

but  corporation  bonds  generally  excepted  from  rule,  ib. 
of  railroad  bonds,  33. 
of  railroad,  98. 

of  bonds  issued  to  be  sold  for  cash,  33. 
by  corporation  may  be  levied  upon  by  pledgee,  45. 
of  bonds  for  less  than  face  value,  amount  recoverable,  93. 

amount  payable  on  redemption,  98. 

to  secure  payment  of  money  advanced  on  sham  note,  96. 

of  antecedent  debt,  17,  33,  90. 

to  secure  private  debt  of  officer,  33. 

to  secure  rent  and  salaries,  ib. 
specific  pledge,  what  included  in,  240. 
rights  of  pledgee,  where  no  formal  delivery,  23. 
pledgee  as  a  bona  fide  holder,  conflict  of  opinion,  96. 
where  note  void  but  debt  valid,  pledge  valid,  33. 
right  to  sell,  presumable  from  nature  of  transaction,  97. 
foreclosure  and  sale  at  small  price,  ])urchaser's  title,  ib. 
sale  without  notice  of  bonds  pledged,  77. 

when  time  fixed  for  payment  of  debt,  ib. 


934  INDEX. 

The  figures  refer  to  pages. 
PLEDGE  —  continued. 

when  given  as  security  for  acceptances,  ib. 
right  to  deem  pledged  bonds,  77. 
on  accounting,  ib. 

in  case  of  assignment  of  pledge,  ib. 
where  pledgee  assigns  to  secure  his  own  debt,  ib. 

rights  of  assignee  on  accounting  after  foreclosure,  ib. 
pledgee  has  no  lieu  for  counsel  fee,  when,  715. 

(See  Distribution  of  Proceeds  ;  Parties  ;  Sale.) 

POSSESSION  OF  TRUSTEE, 

right  of  trustee  to  exercise  corporate  franchise  and  operate  road,  315. 

surrender  of,  where  taken  to  prevent  foreclosure,  317. 

(See  Remedies  of  Bondholders  ;  Right  of  Entry;  Trustee.) 

POST-DUE  INTEREST. 

(See  Words  and  Phrases.) 

POWER  OF  COURT  AND  ITS  RECEIVER, 

application  for  receivership,  a  submission  to  management  by  court,  639. 
court  has  full  power  to  direct  management  during  receivership,  040. 
contracts  of  receiver  binding  only  when  approved  by  court,  639,  643. 

court  may  modify  or  disregard  them,  643. 
receiver's  powers  only  such  as  appointing  order  confers,  643,  662. 

where  subsequent  approval  disjjenses  with  prior  order,  643. 

contracts  not  within  scope  of  appointing  order,  not  binding,  644. 
parties  aggrieved  by  court's  action,  remedy  of,  640. 
nature  and  extent  of  powers  conferred  on  receiver,  ib. 

controlling  considerations,  ib. 

that  road  may  be  sold  as  a  "  going  concern,"  ib. 

to  keep  it  intact,  free  from  loss  or  injury,  641. 
court  unwilling  to  make  radical  changes,  ib. 
no  power  to  build  extensions  with  earnings,  or  corpus,  ib. 
court's  powers  subordinated  to  compromise  extinguishing  receivership,  640. 
contract  for  legal  services  must  be  authorized  by  order,  644. 
excess  of  authority,  in  making  rebatement  contract,  not  assumed,  ib. 
receiver  without  authority  to  make  large  outlays,  644,  654,  662,  n.  2. 

when  reference  to  master  sufficient,  644. 

when  receiver  should  apply  to  court  direct,  ib. 

when  he  should  apply  in  advance,  ib. 

allowance  of  claims  against  receiver,  controlling  considerations,  645. 

when  claimant  shows  good  faith  though  contract  improvident,  646. 

illustrations,  ib. 
where  court  will  not  award  damages  but  indemnify  contractor,  ib. 
where  court  has  sanctioned  injurious  contract,  ib. 
powers  conferred  on  receiver  by  appointing  order,  liberally  construed,  647. 

principle  of  construction,  648. 

may  issue  or  call  in  corporate  securities,  647. 

authorized  to  operate  road  to  preserve  traffic  and  connections,  648. 
where  power  of  court  derived  from  statute,  ib. 
power  to  cease  operating  section  of  composite  system,  ib. 
receiver's  right  to  revoke  running  powers  granted  by  company,  649. 
to  take  lease  of  another  road,  ib. 
where  receiver  appointed  for  special  purpose,  limited  powers  of,  ib. 


INDEX.  935 

The  figures  refer  to  pages. 

POWER  OF   COURT   AND  ITS   RECFAVER  — continued. 

after  sale,  reservation  of  control  in  order  discharging  receiver,  650. 
lien  on  corpus  in  hands  of  purchaser,  ib. 

for  price  of  rolling-stock,  ib. 

not  for  legal  services,  ib. 
■where  several  receivers,  all  need  not  execute  contract,  644. 
receiver  need  not  perform  executory  contracts  of  company,  643. 
remedy  to  compel  election  by,  613,  n.  1. 
accounting  by  State-court  i-eceiver  on  removal  of  cause,  640. 
disposition  of  trust  fund  dariurj  receicership  : 

general  rule  —  trust  estate  must  bear  expenses  of  administration,  650. 

expenses  of  receivership  first  claim  on  income,  6.51. 

when  that  exhausted,  on  proceeds  of  sale  of  property,  ib. 
operating  expenses,  a  paramount  charge,  ib. 

claims  for,  more  numerous  than  "preferential  claims,"  ib. 
receiver's  outlay,  not  justified  by  comparison  with  company's,  ib. 
when  court  may  exceed  company's  limit,  ib. 
judgment  against  receiver,  prior  to  mortgage,  when,  ib. 
claim  against  receiver,  judicial  error  to  dismiss,  652. 
receiver's  power  to  resume  possession  to  enforce  claims,  ib. 

power  may  be  reserved  by  court,  701. 
company's  expenses  after  receiver  appointed   not   chargeable    on   trust 

fund,  652. 
refunding  scheme,  when  expenses  of  not  allowed  ex  parte,  ib. 
reorganization  scheme,  expense  of  when  allowed  receiver,  ib. 
interest  on  lien  debts  whether  payment  will  be  ordered,  ib. 

determined  with  reference  to  interests  of  whole  estate,  ib. 

interest  ordered  paid  at  instance  of  subordinate  creditors,  653. 

not  of  divisional  mortgage,  to  protect  junior  consolidated  mort- 
gage, 653. 

interest,  when  loan  ordered,  to  pay,  ih. 

priority  as  between  loan  and  other  expenses,  ib. 
funded  coupon-bonds  should  be  directed  paid  before  later  coupons,  654. 
taxation  of  property  in  receiver's  hands,  ih. 
receiver's  duty  to  procure  court's  authority  for  extraordinary  expenditures, 

644,  654. 
what  within  line  of  his  discretion,  655,  662. 
operating  expenses,  what  allowed  as,  654. 
allowable  expenses  for  supplies,  655. 

office  rent,  656. 

interest  on  loans  to  keep  road  in  operation,  ib. 

materials  and  chattels  necessary,  654. 

interest  on  bonds  of  subordinate  road,  656. 

expenditures  usual  in  business  with  connecting  roads,  ib. 

payments  for  moneys  received  from  them  according  to  custom,  ib. 

freight  rebates  and  allowances  to  shippers  to  secure  business,  ib. 
expenditure  to  defeat  construction  of  rival  road,  disallowed,  ib. 
expense  of  promoting  bill  in  Parliament,  657,  n.  1. 
corporation  contracts  adopted  by  receiver,  657. 

rent  of  track  of  other  companies,  ib. 

rent  of  rolling-stock,  ih. 

where  rolling-stock  subject  to  vendor's  lien,  ib. 


936  INDEX. 

The  figures  refer  to  pages. 

POWER   OF   COURT   AND   ITS   RECEIVER  —  continued. 
liabilities  for  torts  during  operation  by  receiver,  657. 

footing  of  such  claims,  658. 

immaterial  that  claim  merged  in  judgment,  ib. 

except  that  interest  runs  only  from  judgment,  ib. 

such  claims,  a  charge  on  earnings  of  receiver,  ib. 
employees,  compensation  for  injuries  to,  ib. 
consolidated  system,  administered  as  an  entirety,  ib. 

claims  for  rent  of  subdivisions,  659. 

where  road  taken  possession  of,  a  leased  line,  ib. 

where  used  for  private  purposes,  rules  of  administration,  ib. 

apportionment  where  divisions  have  had  general  benefits,  660. 
when  divisional  bondholders  estopped  to  question  apportionment,  ib. 

when  company  cannot  look  to  subordinate  for  reimbursement,  ib. 

power  of  receiver  for  controlling  company,  ib. 
receiver's  power  to  purchase  on  credit,  657. 

when  authority  implied,  ib. 
vendor  not  bound  to  know  receiver  had  funds,  ib. 
restoration  of  earnings  diverted  during  receivership,  660. 

when  effected  by  making  operating  expenses  lien  on  corpus,  ib. 

back  claims  postponed,  when  made  a  lien  on  corpus,  673. 

use  of  earnings  in  making  permanent  improvements,  a  diversion,  661. 

when  claimant  for  damages  may  recover  amount  diverted,  ib. 
receiver's  poioer  to  raise  money  for  expenses : 

charge  on  fund,  validity  dependent  upon  order,  662. 

advances  for   operating    expenses  without    court's    prior   sanction, 
risked,  ib. 

receiver's  expenses,  when  a  first  lien  by  appointing  order,  ib. 

bondholder's  assent  a  condition  of  appointment,  ib. 

power  to  create  debts  for  operating  expenses  until  sale,  665. 

composite  line,  expenses  for  part  charged  upon  whole,  666. 

where  constituent  company  worked  at  loss,  deficiency  lien  on  corpus,  ib, 

certificates  to  pay  back  labor  claims  ordered  on  appointment,  663. 
statutory  receiver,  expenses  of,  when  cannot  be  lien  on  corpus,  ib. 
(See  First-Lien  Certificates;  Holders  of  Certificates; 
Receivers.) 

POWER  OF  SALE, 

sketch  of  law  regulating,  372,  n.  2. 

by  trustees  controlled  by  court  at  suit  of  beneficiary,  302. 

rarely  exercised,  ib. 

effective  to  divest  title,  without  foreclosure,  ib. 

irrevocable,  ib. 

POWERS, 

incidental,  defined,  3. 

of  railroad  company  to  mortgage  future  earnings,  64. 

assumption  against  violation  of  restrictions  upon,  87. 
assumption  strengthened  by  recitals,  ib. 
estoppel  based  upon  recitals,  ib. 
(See  Borrowing;  Directors;  Oikickrs;  Railway  Companies.) 
PREFERRED  DEBTS, 

theory  and  propriety  of  preferring  particular  debts,  582,  583  and  n.  1. 


INDEX.  937 

The  figures  refer  to  pages. 
PREFERRED   DEBTS  —  continued. 

court  has  no  power  to  postpone  liens  for  new  claims,  582. 
attachment  does  not  affect  preftjrence  of  ojierating  expenses,  ib. 
operating  expenses  of  receiver  appointed  to  represent  company  only,  583. 
lien  for  expenses  incurred  shortly  before  appointment,  ib. 
operating  expenses  incurred  before  or  after  receivership,  585. 

applicablity  of  income  to  payment  of,  586. 

whether  proceeds  of  sale  of  mortgaged  property  ever  applicable,  583. 
substance  of  case  Fosdick  v.  Schall,  584. 

equities  contracted  to  keep  road  alive,  587. 
debts  not  liens  but  preferred  as  paramount  duty,  ib. 

equities  of,  based  upon  peculiar  nature  of  railroad  business,  588. 

equities  discussed,  588  and  n. 

based  upon  public  interest  in  road  as  a  "  going  concern,"  590. 
■whether  other  corporations  subject  to  doctrine  of  preferential  claims,  593. 

holding  as  test,  —  right  to  exercise  eminent  domain,  593. 

anomalies  of  doctrine,  595. 

no  good  reason  for  favoring  operating  over  construction  expenses,  ib. 

theory  that  company  in  possession  after  default,  bondholder's  agent, 
596. 

a  reason  for  preferring  debts  then  contracted,  597. 

theory  insufficient  as  not  involving  an  estoppel,  ib. 

length  of  possession  evidencing  assent,  necessary,  ib. 

weakness  of  theory,  598. 
priority  of  back  claims  : 

power  of  court  to  require  payment  of,  on  appointing  receivers,  599. 

underlying  maxim,  he  who  seeks  equity  must  do  equity,  ib. 

power,  not  dependent  upon  fact  that  earnings  diverted,  600. 
power  of  court  to  displace  vested  liens,  limited,  ib. 
order  directing  payment  does  not  confer  absolute  right,  601. 

court  not  bound  by  order  but  may  question  claim,  ib. 

order  a  protection  to  receiver  principally,  ib. 

conditions  of,  binding  on  applicant  for  receivership  and  subsequent 
litigants,  ib. 

conclusive  as  to  particular  claim,  when  parties  accept,  602. 

may  direct  payments  of  such  claims  as  master  directs,  ib. 

when  order  fails  to  direct  payments,  what  claims  preferable,  ib. 
claims  necessary  to  keep  road  "  going  concern,"  ib. 

claims  do  not  become  liens  because  income  insufficient,  008. 

debts  should  be  paid  from  earnings  properly  chargeable  against,  603. 
unless  order  directs,  no  preference  against  corpus,  ib. 
back  claims,  not  ordinarily  lien  on  corpus,  605. 

appointing  receiver  does  not  change  character  of  debt,  ib. 

some  special  equity  must  be  shown  to  effect  lien.  6 

diversion  of  earnings,  basis  for  lien  on  corpus,  602,  n.  4;  606. 
on  theory  that  earnings  constitute  current  debt  fund,  606. 

restoration  of  earnings  compelled,  tliough  mortgage  gives  lien,  ib. 

until  possession  taken,  earnings  under  mortgagor's  control,  ib. 
payment  of  intere.st,  when  not  a  diversion,  ib. 

not  as  regards  creditor  with  claim  not  due,  ib. 

nor  lessor  whose  rent  is  not  in  arrear,  607. 

when  mortgagee's  advances  more  than  amount  paid,  ib. 


938  INDEX. 

The  figures  refer  to  pages. 
PREFERRED   DEBTS  —  continued. 

when  corporation  not  yet  a  "going  concern,"  607. 
doctrine  of  diversion  not  applicable  in  ordinary  creditor's  suit,  609. 

nor  where  credit  given  for  materials,  622. 
preservation  of  property,  a  ground  for  lien,  GOT. 
assumption  of  floating  debt  by  purchasers  creates  no  lien,  608. 

but  gives  creditors  security  of  an  additional  debtor,  ib. 
debts  against  part  of  composite  road,  charge  on  whole,  ib. 
judgment  of  another  court,  when  does  not  establish  preference,  605. 
debt  not  preferred  on  mere  promise  of  bondholder,  ib. 
assignee  of  preferred  debt  entitled  to  preference,  604. 
period  beyond  with  back  claims  not  ■preferred: 

generally  six  months  preceding  receiver's  appointment,  610. 
from  delivery  of  materials,  not  from  date  of  note,  612. 
presumption-creditors  have  ceased  to  look  to  earnings,  611. 
"  six  mouths'  rule  "  adopted  as  by  analogy  to  statutes,  610. 

not  an  absolute  rule,  611. 
three-year  old  claims  preferred,  ib. 
items  of  running  account  antedating  period  fixed  by  order,  612. 

where  account  not  under  subsisting  contract,  ib. 
unsecured  claims  antedating  order  payable  out  of  surplus  earnings,  ib. 
back  claims  entitled  to  priority: 
tests:  debt  operated  to  bondholder's  advantage  directly,  613. 
payments  made  to  preserve  estate,  ib. 

debt  necessary  for  ordinary  administration  of  corporate  affairs,  ib. 
claims  which  have  and  have  not  been  preferred,  614,  n.  1. 

preferring  receiver's  fees  to  wages  for  preceding  months,  610. 
fees  of  attorney,  ib.,  617. 
loan  by  receiver  for  carrying  on  business,  ib. 
debts  for  freight  and  ticket  balances  always  allowed,  615. 
debts  incurred  for  transportation,  ib. 
wages  and  salaries  of  every  grade  of  employees,  ib. 
claim  for  services  as  counsel,  ib. 
counsel  employed  for  special  purposes,  616,  617. 
president's  salary,  not,  616. 
reason,  617. 
nor  secretary's,  616. 

without  order  at  time  of  appointment,  ib.,  n.  5. 
claims  for  supplies  and  materials,  preferred,  618. 

whether  furnished  under  contract  with  mortgagor  company  or 

another,  619. 
waiting-rooms  and  ticket-offices,  treated  as  supplies,  ib. 
claims  for  materials  furnished  on  credit,  not  preferred,  ib. 

diversion  of  earnings  immaterial  when  credit  given,  622. 
rights  of  conditional  vendors,  619,  020. 
right  of  lessor  of  rolling-stock  to  terminate  lease,  620. 
claim  for  rental  of  cars  during  receivership,  621. 
Georgia  Supreme  Court  rules,  ib. 
■where  lessor  another  line,  622. 

claim  contracted  during  original  construction,  not  allowed,  ib. 
of  prior  mortgagor  over  contractor  who  completes  road,  623. 
damages  for  breach  of  contract,  not,  624. 


INDEX.  939 

The  figures  refer  to  pages. 

PREFERRED  DEBTS  —  continued. 

exception,    where     company    builds    road,    for    percentage    on 
earnings,  624. 
damages  caused  by  operating  road,  ib. 

payment  of,  generally  imposed  as  a  condition,  ib. 
rule  in  Georgia,  626. 
rule  in  Tennessee,  ib. 

where  prior  lien  on  earnings  lost  by  acquiescence,  614. 
(See  Expenditures  by  Creditors.) 

PREFERRED   STOCK, 

company  issuing,  estopped  to  impeach,  when,  31,  n.  1. 
(See  Words  and  Phrases.) 

PRESENTATION.     (See  Demand.) 

PRESUMPTIONS, 

as  to  legal  home  of  corporation,  19. 

that  corporate  officers  rightfully  in  office,  187. 

that  corporate  acts  of  agent  within  scope  of  authority,  ib. 

of  bondholder's  knowledge  of  public  functions  of  railways,  157. 

that  mortgage  regularly  executed,  195. 

of  due  execution  of  guaranty,  128. 

in  foreclosure  that  necessary  circumstances  existed,  187. 

that  seal  regularly  and  authoritatively  affixed,  ib. 

not  overcome  by  omission  to  show  absence  of  directors'  vote,  ib. 
that  statutes  relating  to  bond  issue  have  been  observed,  156. 
in  favor  of  unsecured  creditors,  65. 
that  transferee  of  coupon  bonajide  holder,  83. 
against  novation  in  scheme  to  fund  interest  overdue,  112. 

overcome  by  clearest  evidence  of  intention,  ib. 
that  lien  reserved  by  State  for  benefit  of  bondholders,  329. 
that  courts  of  other  States  will  construe  according  to  common  law,  217. 
(See  Bonds.) 
PREVENTIVE  REMEDIES.     (See  Injunction.) 

PRINCIPAL, 

no  legislative  power  to  accelerate  maturity  of,  73. 
payable  on  default  of  interest,  president  may  stipulate,  190. 
not  so  payable  unless  stipulated,  73. 
payment  of  on  default  of  interest,  usual  clause,  74. 
when  mortgagor  may  prevent  sale  by  payment  of  interest,  ib. 
may  be  offset  against  damages  for  refusing  other  bonds  contracted  for,  ib, 
power  of  trustee  to  declare  due,  299. 

election  to  treat  as  due  on  default  of  interest,  cancels  coupons,  103. 
(See  Mortgage.) 

PRINCIPAL   AND   AGENT, 

a  person  dealing  with  agent  must  inquire  into  authority,  157. 
agent  binds  corporation  only  within  scope  of  authority,  ib. 
contract  within  scope  of  authority  presumed  valid,  187. 
when  instrument  executed  by  agent,  act  of  corporation,  186. 
company's  right  to  contest  mortgage  subject  to  rules  respecting,  204. 
authority  to  purchase  bonds,  does  not  extend  to  making  agreement,  98. 
diversion  by  agent  of  principal's  bonds,  54. 


940  INDEX. 

The  figures  refer  to  pages. 
PRINCIPAL    AND    AGEl^T  —  continued. 
effect  of  subsequent  agreement,  98. 

(See  Mortgage;  Officers;  Ratification.) 

PRINCIPAL   AND   INTEREST, 
default  of,  when  complete,  399. 
omission  to  pay,  concurred  in  by  mortgagee,  ib. 
whether  demand  necessary  to  complete  default,  400. 

(See  Default  ;  Foreclosure  and  Sale;  Remedies  by  Bondholders; 
Right  of  Entry.) 

PRIORITIES, 

of  debt  over  dividends,  68. 

of  debts  contracted  before  receivership,  2.59,  n.  1. 

as  between  mortgage  and  vendor's  lien,  271. 

established  by  State  statute,  when  recognized  by  federal  courts,  263. 

as  dependent  upon  decree  of  sale,  ib. 

liabilities  assumed  at  sale,  follow  title,  ib. 
between  guarantors  of  interest  and  bondholders  on  reorganization,  129. 
as  between  constituent  and  consolidated  bondholders,  266. 

as  affected  by  statute  declaring  creditors'  rights  protected,  ib. 
of  lien  effected  prior  to  organization  of  company,  260. 
of  certain  claims  to  railroad  mortgages,  259,  n.  1. 

for  labor  and  material,  ib. 

of  first  liens,  postponing,  ib. 
not  disturbed  by  receiver's  possession,  547. 
not  disturbed  by  consolidation,  266. 

of  liens  cannot  generally  be  displaced  by  mortgages,  259. 
of  mortgages  as  affected  by  legislation,  273. 
of  judgment  creditor  cannot  be  disturbed  by  legislation,  260. 
when  lost  by  estoppel,  265. 

effect  upon,  of  "  after-acquired  property"  clause,  267. 
(See  After-acquired  Property;  Distribution  of  Proceeds;  Eng- 
lish Debentures;  Fixtures;  Operating  Expenses;  Preferred 
Debts  ;  Priority  among  Bondholders  ;  Vendor's  Lien.) 

PRIORITY   AMONG  BONDHOLDERS, 

contents  of  bonds  as  notice  affecting,  154. 
in  case  of  over-issue,  90. 

where  all  indorsed  by  State,  ib. 

as  between  purchaser  of  excess  and  junior  mortgagee,  ib.  and  n.  1. 
as  between  bondholder  and  co-bondholder,  guarantying  his  bonds,  64. 

court  cannot  render  a  decree  impairing  guaranty,  ib. 
when  mortgages  on  divisions  and  whole  line  of  different  dates,  241. 
where  old  bonds  exchanged  for  nfiw,  58,  60. 
depending  upon  express  stipulations,  61. 

claim  of,  under  agreement  unknown  to  purchaser  of  new  bonds,  ib. 
as  affected  by  fraud,  63. 

(See  Over-issue  of  Bonds.) 
PROFITS, 

(See  Income  and  Profits.) 

PROMISSORY   NOTE, 

though  void,  debt  may  be  valid,  33. 


INDEX.  941 

The  figures  refer  to  pages. 

PROPERTY, 

whether  within  scope  of  mortgage  lien,  216. 
crucial  question,  particularity  of  description,  ib. 
company  not  authorized  to  acquire,  cannot  be  mortgaged,  183. 
payment  for  bonds  in,  18  and  n.  1. 

(See  After-acquired  Property;  Company  in  Possession;  Mortgage; 
Over- valuation;  Road  and  Property;  Words  and  Phrases.) 

PROPERTY   AND   FRANCHISES, 

power  to  mortgage  after-acquired  property  inferable  from  phrase,  1 82. 

PROPERTY   AND   INCOME, 

power  to  mortgage,  effect  of,  1G6. 

PROSPECTUS.     (See  Bondholder;  Circular;  Purchaser.) 

PROTECTED. 

(See  Words  and  Phrases.) 
PROXY, 

right  to  vote  by,  866. 

(See  Reorganization.) 
PUBLIC   INTEREST, 

ground  for  injunction  against  execution,  364. 

PUBLIC   POLICY, 

appointment  of  receiver  to  manage  railroad,  not  against,  508. 

PURCHASER, 

bo7iaJide,  who  is,  82. 

a  purchaser  in  open  market,  when,  ib. 

persons  doing  work  or  furnishing  material,  83. 

for  value,  protected  when,  28,  30,  n.  2. 

over-issue  of  State  bonds  in  hands  of,  59. 
of  bonds  under  contract  limiting  issue,  89. 

of  surplus  when  all  indorsed  by  State,  90. 

priorities  of,  over  junior  mortgagor,  91. 
of  bonds  secured  by  mortgage  altered  after  execution,  206. 

issued  under  construction  contract  in  which  directors  have  interest,  147. 

in  hands  of  company,  bearing  trustee's  certificate,  83. 

after  execution  of  mortgage,  of  bonds  secured  by  prior  mortgage,  ib. 

issued  uU7-a  vires,  84. 

not  in  prescribed  form,  ib. 

guarantied  under  apparent  authority,  86  and  n.  1. 

with  nothing  on  face  to  show  wrongful  issue,  86. 

issued  by  one  corporation  guarantied  by  another,  84. 

pending  foreclosure,  notice  of,  immaterial,  99. 

at  less  than  par  when  restrictions  omitted  from  prospectus,  53. 

placed  on  market  by  trustee,  298. 

from  pledgee,  may  obtain  clear  title,  98. 
of  guaranty  of  bonds  without  notice  of  failure  to  petition  117. 

whether  unauthorized  guaranty  valid  to  bona  fide,  122. 
of  stolen  and  non-negotiable  coupon  acquires  no  title,  109. 
of  commercial  paper  passing  by  delivery,  95,  n.  3. 
of  land  certificates  when  preferred  to  bondholders,  267. 
bona  fide  without  notice,  from  one  who  took  with  notice,  53,  n.  3. 

not  bound  by  equities  between  original  parties,  83. 


942  INDEX. 

The  figures  refer  to  pages. 
PURCHASER  —  continued 

no  defence  against,  that  bonds  were  diverted  from  statutory  pur- 
pose, 92,  197. 
not  affected  by  misapplidation  of  proceeds,  91,  197. 
consent  of  original  holders  to  misappropriation  of  proceeds,  effect, 
92. 
in  open  market  and  usual  course  of  business,  154. 
not  obliged  to  inquire  about  "  indoor  management  of  company,"  56. 

right  of,  to  assume  performance  by  directors  of  conditions  precedent, 
86,  n.  1. 
resolution  of  general  meeting  of  company,  ib. 
innocent,  protected  from  effect  of  omissions,  127. 
recitals  in  instruments  when  notice  to,  88. 
smallness  of  price  as  notice  to,  89. 
long  series  of  unpaid  coupons,  ib. 

how  far  back  puts  him  on  inquiry,  95. 
fraud  of  person  intrusted  with  negotiation  of  bonds,  93. 
bona  fide,  not,  when  aware  of  conditions  qualifying  rights,  88. 

relations  of  to  company  as  affecting,  ib.  and  n.  4. 
when  takes  subject  to  existing  liens,  268. 
when  subject  to  obligations  of  contracts,  ib. 
transferee  of  bona  fide,  with  notice  of  prior  equities,  83. 
at  foreclosure  when  judgment  for  personal  injuries  enforceable  against, 

627,701. 
at  forclosure  sale,  not  liable  for  receiver's  negligence,  701. 
(See  After-acquired  Property;  Chattel  Mortgage;  Foreclosure 
Decree;  Holders  of  Certificates  ;  Notice;  Purchasers'  Rights 
AT  Sale.) 

PURCHASERS'   RIGHTS   AND   LIABILITIES   AT   SALE, 

efil'ect  of  sale  as  regards  mortgagor : 

foreclosure  cuts  off  all  mortgagor's  interests,  780. 

surplus,  if  any,  goes  to  stockholders,  ib. 

cor])oratiou  not  dissolved  by  sale  of  property  and  franchises,  ib. 

forfeiture  of  franchises  for  non-user  must  be  judicially  determined, 

781. 
same  rule  though  statute  permits  purchasers  to  incorporate,  ib. 
though  invests  them  with  franchises  of  predecessor,  ib. 
liability  of  mortgagor  company  ceases  with  sale,  ib. 
presumption  that  purchasers  in  possession,  ib. 

company's  possession  must  be  shown  by  positive  proof,  782. 
creditors  may  continue  to  enforce  claims,  ib. 

against  corporation  debtors  by  garnishment,  ib. 
incapacity  of  company  to  execute  conveyance,  783. 
rigJds  and  liabilities  : 

rights  determined  and  prescribed  by  decree,  783. 

wliere  property  mentioned  neither  in  decree  nor  advertisement,  ib. 
where  not  described  with  sufficient  particularity,  784. 
when  covenant  in  favor  of  mortgagor  does  not  pass,  ib. 
when  iiimiicipal  ap]iropriation  does  not  pass,  ib. 
earnings  acoiiniulated  during  receivership,  ib. 
during  senior  mortgage  receivership,  rights  at  junior  sale,  785. 


INDEX.  943 

The  flgurea  refer  to  pages. 

PURCHASERS'   RIGHTS   AND  LIABILITIES   AT   SALE  — continued. 

takes  subject  to  prior  income  mortgage,  785. 
lands  not  lost  to  purchaser  by  non-user,  ib. 
statutory  right  to  regulate  tolls,  ib. 
exemption  from  taxation,  when  does  not  pass,  7S6. 

intention  of  mortgagor  must  be  express  and  clear,  ib. 

where  purchaser's  rights  defined  by  statute,  same  principle  applies,  ib. 

reason  of  rule  of  strict  construction,  ib. 

rule  relaxed  in  Florida,  7.S7. 

■whether  use  of  word  "  immunities  "  includes  exemption  from  taxa- 
tion, ib. 

decisions  on  subject  reviewed,  ib. 
rights  of  purchaser  vested  at  sale  cannot  be  impaired,  790, 
purchasers  not  incorporated,  mere  joint  owners,  ib. 

with  usual  liability  of  joint  owners  of  railroad  property,  ib. 
immunities  of  corporate  members  does  not  pass,  ib. 
takes  free  from  liens  subsequent  to  mortgage  record,  791. 

liens  held  by  persons  not  actual  parties,  ib. 

persons  having  constructive  notice,  ib. 

liens  which  purchaser  had  a  right  to  suppose  discharged,  792. 

tax  liens,  when  purchaser  takes  free  from,  ib. 
liens  paramount  by  statute,  purchaser  takes  subject  to,  ib. 

to  statutory  obligations  as  to  operating  road,  793. 

to  obligations  and  restrictions  of  charter,  ib. 

obligations  to  preserve  creditors'  rights  on  sale,  ib. 

restriction  as  to  right  to  fix  tolls,  ib. 
contracts  of  company  not  binding  on  purchaser,  ib. 

miless  secured  by  lien,  ib. 

or  where  contract  runs  with  the  land,  794. 

or  where  purchaser  has  adopted  it  as  to  benefits,  ih. 
when  purchaser  liable  for  rental  claim  of  leased  line,  ib. 
where  decree  provides  for  payment  of  liens  prior  to  mortgage,  ib. 
trusts  binding  on  purchaser,  binding  on  his  assignee,  795. 
vendor's  lien,  purchaser  takes  subject  to,  ib. 

not  lost  by  purchasing  company  consolidating,  ib. 
assumption  of  obligations  inferred  from  purchase  under  decree,  ib. 

purchaser  not  liable  beyond  decree,  ib. 
confirmed  sale,  a  contract  between  court  and  purchaser,  796. 
court  cannot  direct  payment  of  claims  adjudicated  after  confirmation,  ib. 
decree  will  not  be  materially  modified  by  court,  ib. 
where  decree  provides  that  purchaser  may  abandon  all  contracts,  ib. 

lease,  may  be  disclaimed  under  such  decree,  ib. 
deci'ee  vesting  title  free  of  liens  for  receiver's  debts,  ib. 

effect  on  previous  order  making  certificates  paramount  lien,  ib. 
cannot  question  claims  subject  to  which  he  takes  title,  ib. 

decree  should  state  such  claims  with  reasonable  certainty,  797. 
liability  established  by  implication,  ib. 

where  creditors  receive  stock  in  new  company,  ib. 

where  decree  does  not  foreclose  junior  mortgage,  ib. 
purchaser  affected  with  notice  of  all  proceedings,  798. 
compensation  for  appropriation  of  land,  purchasers'  liability  for,  ib. 

until  compensation  paid  new  company  may  be  enjoined,  799. 


944  INDEX, 

The  figtires  refer  to  pages. 

PURCHASERS'   RIGHTS   AND   LIABILITIES   AT   SALE  —  continued. 
rule  where  company  has  given  statutory  bond,  799. 
suing  for  damages,  how  far  concession  of  purchaser's  title,  ib. 
liability  for  predecessor's  omission  to  make  improvements  on  land,  800. 
for  rental  of  depot  under  contract  made  after  mortgage  executed,  ib. 
not  liable  for  judgment  in  action  for  damages,  ib. 
purchasing  company  may  assume  liabilities,  lb. 

new  company  bound  by  liens  assented  to  by  purchasing  committee, 
801. 

agreement  that  unsecured  creditors  may  come  in  as  stockholders,  ib. 

effect  of  principle  that  property  a  trust  fund  for  creditors,  ib. 
at  junior-mortgage  sale  when  entitled  to  redeemed  first-mortgage  bonds,  ib. 
purchasing  company  not  liable  for  damages  resulting  from  mortgagor's 
negligence,  802. 

nor  for  predecessor's  trespass,  ib. 
liability  for  damages  caused  by  trustee  operating  road,  ib. 
claim  for  damages  from  fire  caused  by  locomotive,  ib. 

considered  as  part  of  running  expenses,  ib. 

equitable  lien  on  funds  of  trustee,  ib. 

funds  pass  to  new  company  of  bondholders,  subject  to,  ib. 
liability  for  damages  caused  by  receiver's  operating,  ib. 

■where  receiver  has  diverted  income  to  permanent  improvements,  ib. 

where  confirmation  order  directs  such  claims  paid,  803. 
■where  action  arises  and  improvements  made  subsequent  to  sale,  ib. 
purchaser  not  liable  until  after  confii-mation,  ib. 
purchasers  reorganizing,  not  liable  for  mortgagor's  debts,  ib. 
where  property  not  purchased,  in  possession  of  new  company,  ib. 
(See  Foreclosure  Sales  ;  Purchaser.) 

RAILROAD, 

not  a  thing  indivisible,  232. 

may  be  separated  from  its  rolling-stock,  ib. 

diiiers  from  railroad  company,  233. 
considered  as  an  entirety,  248,  251. 

qualifying  necessity  for  specific  description  of  property,  248. 
question  ot  over-valuation  of,  when  consideration  bond-issue,  17,  22. 

RAILROAD   COMPANIES, 

ordinary  franchises  of,  134. 
terra  "  franchises,"  meaning  of  in  plural,  135. 
powers  of,  express  and  implied,  2. 
implied  powers,  to  contract,  3. 
to  ac(iuire  lands,  15. 
to  borrow,  7. 

whether  limited  by  charter,  ib. 
to  issue  bonds,  bills,  and  notes,  1-3. 

for  work  done  and  materials  furnished,  14. 
officers,  salaries  of,  may  be  paid  in  bonds,  15. 
for  lauds  acquired,  ib. 

such  lands  may  be  mortgaged  to  secure  all  bonds,  ib. 
authority  to  borrow,  implies  authority  to  mortgage,  176. 
not  its  prerogative  franchise,  ib. 


INDEX.  945 

The  figures  refer  to  pages. 

RAILROAD   COMPANIES  —  continued. 

right  to  mortgage  as  affected  by  statute,  164. 

power  to  mortgage,  implications  from  express  grants,  166. 

express  grant  to  mortgage  "  property  and  income,"  ib. 

express  grant  for  a  particular  purpose,  1G7. 

■whether  intention  to  augment  or  declare  common-law  powers,  ib. 

power  to  execute  "  such  securities  in  amount  and  kind,"  104. 
after-acquired  property,  power  to  mortgage,  178. 

inferable  from  use  of  word  "  property,"  179. 

from  use  of  word  "  personalty,"  ih. 

stronger,  from  use  of  words  "property  and  income,"  180. 

Ohio  statute,  respecting,  ih. 

implication  from  power  to  pledge  franchises,  ib. 
"property  and  francliises,"  182. 

railroad  not  yet  built  and  property  not  acquired,  181. 

uncalled  capital,  power  to  mortgage  in  England,  ib. 

not  inferable  from  power  to  mortgage  "  property,"  ib. 
under  Companies  Act  of  1862,  ib. 

statutory  limitations  of  power,  182. 

effect  of  statute  limiting  bonds  to  paid-in  capital,  181. 

effect  of  consolidation  on  mortgage  of  after-acquired  property,  184. 
may  not  mortgage  what  cannot  hold,  182. 

power  to  acquire  lands  "  necessary  and  convenient ''  restrictive,  183. 

property  acquired  without  observing  statutory  conditions,  ib. 

when  court  may  restrict  on  grounds  of  State  policy,  ib. 

extensions  not  authorized  at  date  of  mortgage,  184. 

where  not  authorized  to  accept  grant  from  United  States,  ib. 
power  of,  to  mortgage  future  earnings,  64,  67. 
unpaid  stock  subscriptions,  power  to  assign,  164. 
not  to  mortgage,  ih. 

rule  in  England,  ib  ,  n.  1. 
mortgage  of  purchased  road  within  chartered  limits  valid,  184. 
circumstances  rendeiing  mortgage  void  ordinarily,  not  of,  198. 
insolvent  company,  ih. 

containing  provision  for  retaining  estate  until  bonds  mature,  ib. 

provision  for  disposing  of  property  not  necessary  for  use,  199. 

mortgage  to  secure  bonds  to  pay  debts  and  current  expenses,  ib. 

where  income  received  before  foreclosure,  is  left  with  mortgagor,  ib. 
power  of,  to  guaranty  bonds  of  cities  and  counties,  118,  126,  n.  2. 
power  of  one  to  guaranty  obligations  of  another,  123. 

from  what  inferred,  124. 

consideration  for,  123,  124. 
lessor's  power  to  guaranty  bonds  issued  in  foreclosure  proceedings,  119. 
lessor  company's  rent  secured  by  guaranty  of  bonds,  ib. 
guaranty  of  bonds  of,  by  adjunct  lumber  company,  122. 
road-bed  and  fixtures  not  salable  under  execution,  165. 

not  so,  as  to  abandoned  road-bed,  165,  n.  3. 
right  to  prefer  creditors  does  not  include  directors,  199. 
rights  of  persons  dealing  with,  87. 

to  assume  restrictions  upon  powers  have  been  observed,  ib. 
having  same  directors  or  stockholders  as  construction  company,  28. 
when  not  an  "  undertaking,"  509,  n.  2. 

60 


946  INDEX. 

The  figures  refer  to  pages. 

RAILROAD   COMPANIES  —  continued. 

empowered  to  run  steamboats,  may  employ  those  of  others,  123. 
(See    Corporations;    Franchises;    Guaranty   of    Bonds;    Income 
Bonds;  under  different  States.) 

RAILWAY.     (See  Railroad;  Words  and  Phrases.) 

RATIFICATION, 

by  corporation  of  acts  of  agent,  187. 

laches  effective  as,  205. 

of  unauthorized  issue  of  bonds,  27. 

of  unauthorized  mortgage.  If) 6. 

of  mortgage  authorizing  payment  of  counsel  fee,  what  insufficient,  613. 

of  mortgage  by  legislature,  169. 

inferred  from  acts  and  circumstances,  ih. 
of  trust  deed  differing  from  that  authorized,  when  possible,  190. 

when  not,  ih. 
of  guaranty  when  not  absolutely  ultra  vires,  126. 

applies  to  indorsement  of  bonds,  ib. 

where  given  without  statutory  petition,  117. 
by  receiver  of  company's  contracts  from  what  implied,  695. 

by  shareholders,  otherwise  void,  121  and  n.  6. 
intervening  rights  cannot  be  displaced  by,  197. 

resolution  authorizing  execution  of  mortgages  subject  to  previous  ones,  ib. 
proportion  of  stockholders  necessary  to  authorize  act  ratified,  ih. 
(See  Officers.) 
RECEIVER, 

appointment  of.,  generally: 
definition  of  term,  506. 

appointed  for  benefit  of  all  persons  interested,  ib. 
appointment  of  special,  to  take  charge  of  exceptional  assets,  ib.,  n.  1. 
courts  of  equity  executes  its  decrees  through,  506. 
appointment  of,  an  equitable  execution,  ib. 
appointment  of,  gives  no  advantage  to  applicant,  ib. 
may  be  appointed  before  or  after  decree,  507. 
reluctance  of  court  to  appoint  receiver  of  railroad,  ib. 
quad  public  character  of,  a  strengthening  I'eason,  ib. 
view,  that  appointment  of,  to  manage  railroad,  against  public  policy,  508. 
contrary  and  accepted  view,  ib. 
power  of  court  of  equity  to  appoint,  inherent,  509. 

exercisable  by  trial,  not  Appellate  Court,  510. 
jurisdiction  to  appoint  where  national  bank  plaintiff,  ib. 
court  of  primary  jurisdiction  amongst  several  State  courts,  ib. 
•who  should  be  appointed,  511. 

general  rule  as  to  who  ineligible,  512. 

how  far  overcome  by  creditors'  consent,  513. 

consent  of  creditors  and  integrity  of  candidate  must  concur,  ib. 

candidate's  familiarity  with  estate  a  consideration,  ib. 

attorney  for  plaintiff  should  not  be  receiver's,  514. 

essential  personal  qualities  and  characteristics  of,  ih. 
necessity  of  notice  to  affected  parties  on  appointment  of,  ib. 

except  when  delay  would  cause  irreparable  injury,  515. 

ex  parte  application  for,  what  sufficient  grounds,  ib. 


INDEX.  947 

The  figures  refer  to  pages. 
RECEIVER  —  continuerl. 

must  be  set  forth  in  petition,  515. 

defendant's  non-residence,  ground  for  failing  to  notify  him,  516. 

but  lessee  of  non-resident  lessor  must  be  notified,  ih. 

ex  parte  appointment  of,  where  corpoiation  defunct,  ib. 

on  ex  parte  application,  court  will  not  hear  merits,  ib. 

clear  right  to  foreclose,  when  must  be  shown,  ib. 

plaintiff's  claim,  need  be  only  a  probable  right,  ih. 

defence  of  fraud  will  not  affect  probable  right,  ih. 
but  will  be  reserved  for  final  hearing,  517. 
postponement  of,  to  make  defence  good,  ib. 

laches  of  defendant  discountenanced,  ih. 
appointment  of,  precluded  by  full  and  fair  denial,  ib. 

unless  other  evidence  than  allegations  in  bill,  ib. 
at  whose  instance  appointed,  ib. 

when  corporation  may  obtain  appointment  of,  518. 

when  appointed  at  suit  of  general  creditors,  519. 

extension  of  receivership  in  successive  applications,  520. 
when  applications  not  in  same  suit,  ih. 

appointed  at  instance  of  bondholders  of  entire  system,  ib. 

regarded  as  custodian  of  divisional  interests,  ib. 

■when  general  mortgagor  junior  to  divisional,  521. 
have  no  authority  beyond  jurisdiction  of  appointment,  522. 
reappointment  in  other  jurisdictions  as  matter  of  comity,  ib. 
circmnstatices  under  ivhich  receiver  will  or  will  not  he  appointed: 
appointment  of,  rests  in  discretion  of  court,  523. 
special  considerations  of  propriety,  may  prevail  against,  ib. 
reluctance  to  appoint  when  State  officers  in  charge,  524. 
principles  curtailing  discretionary  powers,  ih. 

not  appointed  on  grounds  of  mere  convenience,  525. 

if  other  parties  should  suffer  injustice,  ib. 

if  more  harm  than  good  would  result,  ib. 
nor  unless  effectual  relief  will  result,  ih. 
whether  danger  to  fund  exists,  the  test  question,  526. 

legal  remedy  inadequate,  ih. 
where  no  irreparable  injury  threatened  and  defendant  solvent.  526.  527. 
when  railroad  in  hands  of  operating  company  pending  suit,  526. 
not  appointed  on  mortgagor's  default  alone,  526,  535. 

officers,  faithful  and  competent,  preferable  to  stranger,  527. 
where  default  excused,  ih. 

not  excused  by  large  expenditure  to  reach  commercial  centre,  ih. 
where  plaintiff  estopped  from  relying  on  default,  ih. 
not  appointed  till  default  complete,  ih. 

to  prevent  fraud,  where  bonds  redeemable  according  to  numbers,  ib. 
where  directors  have  secured  themselves  by  mortgage,  532. 
to  prevent  waste  when  security  insufficient,  527. 

though  debt  not  yet  matured,  528. 
insolvency,  hopeless  and  long  continued,  as  ground  for.  529. 

*  evidences  of  such  insolvency,  520,  530. 
where  current  expenses  have  exhausted  earnings  continuously,  530. 
where  duties  as  public  carrier  impossible  of  performance,  ib. 
misapplication  of  revenues,  as  ground  for,  529,  531. 


948  INDEX. 

The  figures  refer  to  pages. 
RECEIVER  —  continued. 

where  company  fails  to  pay  debts,  though  able,  530, 
dissensions  among  corporate  officers  as  ground  for,  ib. 
mismanagement,  endangering  fund,  as  ground  for,  531. 
extravagant  outlay  by  directors  for  political  ends,  ih. 

in  stockholder,  bondholder,  and  trustee's  suit  against  directors  for  em- 
bezzlement, 532. 
where  officers  of  railroad  and  improvement  company  same,  ib. 
in  suit  to  redeem,  mismanagement  by  mortgagee  only  ground  for,  ib. 
to  prevent  sales  under  numerous  executions  or  attachments,  ib. 

where  difficulty  in  determining  property  to  levy  on,  533. 
judgment  creditor  entitled  to,  when,  ib. 

that  equity  discountenances  laches,  applicable  to  appointment  of,  ib. 
in  action  to  avoid  reorganization  when  petitioner  seemed  to  acquiesce,  ib. 
not  appointed  where  mortgage  provides  for  entry  by  trustee,  534. 

contrary,  where  income  expressly  pledged  in  mortgage,  ib. 
appointment,  where  trustee  has  neglected  to  take  possession,  ib. 
where  mortgagee  has  rightfully  waived  right  to  possession,  535. 
appointment  of,  in  specific  performance  and  foreclosure,  distinction,  ib. 
appointment  of,  after  decree,  536. 

grounds  for,  ib. 
removal,  substitution,  and  final  discharge : 

cases  in  which  removal  asked  for,  division  of,  536. 
court's  implied  power  to  remove,  ib. 

power  discretionary,  ib. 

appellate  court  will  not  review  exercise  of,  ib. 

except  where  defendants  right  to  restoration  has  accrued,  537. 

refusal  is  then  judicial  error,  and  appealable,  ib. 

so,  when  appointment  without  notice  to  defendant,  ib. 
power  to  remove  ancillary  receiver,  in  court  appointing  him,  537,  538. 

extraordinary  grounds  for  exercising  power,  538. 
questions  not  to  be  considered  in  application  for  removal,  ib. 
that  appointee  was  an  improper  person,  ground  for  removal,  539. 

his  relationship  to  parties,  ib. 
where  appointed  on  notice  concealed  from  company  by  officer,  ib. 
where,  on  mistaken  belief,  of  his  unanimous  selection,  ib. 
where  material  facts  were  withheld  when  appointed,  540. 
when  appointed  through  collusion  between  applicant  and  company,  539. 

mere  desire  of  directors  for  appointment,  not  collusion,  540. 
when  company  estopped  from  objecting  to  appointee,  539,  541. 
removal  where  appointment  was  ez  parte,  540. 

on  grounds  of  personal  interest,  ib. 

where  under  agreement  to  deliver  stock,  ib. 
when  application  made  out  of  court  to  forestall  attacks,  541. 
laches,  right  to  object  to  appointment  of,  lost  by,  ib. 
removal  of,  for  misconduct  in  office,  ib. 

allowing  rebates  in  favor  of  business  associates,  ib. 

or  in  favor  of  company  in  which  he  is  stockholder,  ib. 

furthering  interests  hostile  to  company's,  512. 

unju.st  discrimination  amongst  shippers,  ib. 
where  two  or  more  cease  to  act  harmoniously,  543. 
■where  trust  in  hands  of  different  receivers  of  different  courts,  ib. 


INDEX.  949 

The  figures  refer  to  pages. 

RECEIVER  —  continued. 

grounds  held  insufficient  for  removal  of  : 

making  misleading  reports  but  following  director's  methods,  542. 

fniudulent  conduct  of  agent,  liimsclf  blameless,  ib. 

becoming  a  member  of  reorganization  scheme,  ih. 

or  aids  and  encourages  scheme,  ib. 

charging  low  rate  for  certain  freight,  ib. 

yielding  to  construction  of  agreement  adverse  to  company's  inter- 
ests, ib. 
termination  of  receivership  generally  : 

where  no  limit  fixed  on  apitointment,  543. 
termination  of  judgment  creditor's  receivership,  544. 
receivership  should  be  closed  at  earliest  moment,  ib. 
no  formal  discharge  necessary,  when,  545. 
cannot  be  heard  in  opposition  to  his  discharge,  ib. 
order  discharging,  duly  entered,  cannot  be  altered,  ib. 
action  cannot  be  maintained  against,  after  discharge,  etc.,  ib. 
ex  parte  order  of  State  court  appointing,  rescinded  in  federal,  544. 
lessee's  rights,  how  affected  by  discharge  of,  545. 
title  and  possession  of,  generally  : 

title  vests  from  date  of  order  appointing  him,  547. 

as  also  title  of  party  ultimately  prevailing,  ib. 
formal  assignment   to,  unnecessary  to  enable  him  to  make  sale,  ib. 

practice  on  making  sale,  ib. 
existing  rights  not  changed  by  appointment  of,  ib. 

enforcement  of,  stayed,  merely,  ib. 
possession  of,  does  not  disturb  priorities,  ib. 
assumption  of  control  by,  is  a  sequestration  of  earnings,  501. 

unless  otherwise  provided  in  mortgage,  ib. 
only  property  embraced  in  mortgage  passes  to,  when,  548. 
not  earnings  in  hands  of  mortgagor  before  ajipointment,  ib. 
and  only  property  in  possession  of  company,  at  appointment,  ib. 
officer's  duty  to  deliver  corporate  property  to,  551. 
possession  of,  not  interfered  with  by  other  courts,  415. 
interference  with  possession  of,  a  contempt  of  court,  549. 

by  proceeding  in  co-ordinate  court,  565. 
property  acquired  after  appointment,  does  not  pass  to,  549. 
property  illegally  in  custody  of,  subject  to  court's  jurisdiction,  ib. 
judgment  lien,  on  lands  not  embraced  in  mortgage,  ib. 
after  appointment  of,  corjjoration  may  continue  exercise  of  franchises,  551. 

calling  meetings  and  election  of  officers,  ib. 
possession  by,  not  allowed  to  interfere  with  public  improvements,  550. 
territorial  limits  of  court's  jurisdiction  : 

process  of  court  ineffective  beyond  territorial  jurisdiction,  552. 
receiver  not  entitled,  as  of  right,  to  recognition  beyond,  ib. 
rule  extends  to  courts  of  same  State,  when,  ib. 

applies  to  railroad  property  extending  into  other  States,  553. 

control  of  property  once  assumed,  though  removed  beyond,  552. 
principle  of  comity  extended  by  other  States  to,  when,  ib. 

may  sue,  when  not  in  conflict  with  citizens'  rights,  ib. 

nor  against  policy  of  State  laws,  ib. 
appointed  in  foreclosure  suit,  may  sue  in  other  States,  ib. 


950  INDEX. 

The  figtires  refer  to  pageSi 
RECEIVER  —  continued. 

intervention  by,  in  attachment  suits  pending  in  other  States,  553. 
appointed  in  ancillary  proceedings,  removable  by  appointing  court,  tb. 

practice  on  such  removal,  ib. 
whether  principal  or  ancillary  coui-t  will  enforce  certain  claims,  554. 
general  rule  qualified  by  power  of  equity  in  personarn,  555. 
for  entire  property  in  several  States,  court  may  appoint,  ib. 

appointment  effective  through   court's  personal  control  of  corpora- 
tion, ib. 
court  may  compel  execution  of  assignments,  ib. 

practice,  where  property  beyond  jurisdiction  under  seizure,  ib. 
office  and  duties  of  receiver  : 

custody  of  property  pending  litigation,  primary  duty,  556. 
"the  hand  of  the  court,"  557. 
distinction  between,  and  "  manager,"  556,  n.  1. 
appointed  for  benefit  of  all  parties  in  interest,  557. 

no  personal  interest  in  distribution  of  funds,  ib. 
derives  authority  from  court,  not  from  parties,  ib. 
should  not  be  a  partisan,  ib. 
may  aid  and  encourage  organization  schemes,  ib. 
may  act  as  selling  agent  of  mortgage  trustees,  ib. 
defence  to  bondholder's  suit  begun  years  after  appointment  of,  ib. 
represents  creditors  in  litigation,  558. 
judgment  against,  binding  on  bondholders'  interests,  ib. 
mortgagees  and  bondholders  when  estopped  to  question  authority  of,  ib. 
fiduciary  position  of,  559. 

cannot  use  trust  for  private  gain,  ib. 

precluded  from  making  profit  out  of  trust  property,  ib. 

but  may  supply  material  out  of  own  stock  at  fair  price,  ib. 
of  railroad,  a  common  carrier,  ib. 

must  facilitate  exchange  of  traffic  with  connecting  lines,  ib. 

must  not  discriminate  against  any  road,  ib. 
duties  and  powers  of,  as  to  employees,  560. 

conclusiveness  of  receiver's  acts,  ib. 

employees  may  apply  to  court  on  substantial  grievances,  ib. 

petition  for  rescission  of  order  of,  reducing  wages,  ib. 

not  interfered  with  unless  he  abuses  his  discretion,  ib. 

not    bound    by   stipulation   of   oificers,    respecting   discharging   em- 
ployees, ib. 

may  enforce  a  company  rule  against  union  men,  ib. 

absolved   from   obligations  to   employ,   preferentially,   sympathetic 
strikers,  ib. 

court  will  not  direct  to  contract  with  union  members,  561. 

should  not  rearrange  company's  rules  without  hearing  employees,  ib. 

nor  renounce  old  schedule  of  wages,  ih. 

when  court  will  not  approve  reduction  of  wages,  ib. 
accounting  by : 

duty  to  make  full  report  and  file  accounts,  yearly,  562. 
review  of  master's  report,  on  account  of,  by  court,  ib. 

account  passed  before  master  not  subject  to  re-examination,  ib. 
must  keep  fund  separate  from  individual  account,  ib. 
cannot  escape  accounting  by  showing  that  judgments  will  absorb  fund,  563. 


INDEX.  951 

The  figures  refer  to  pagea. 
RECEIVER  —  continued. 

or,  being  a  State  receiver,  that  governor  satisfied,  563. 
but,  mere  desire  for  information  not  grounds  for  accounting,  ib. 
cannot  be  asked  to  account  but  in  court  a])i)ointing  him,  ib. 
federal  court  sliould  not  onk-r,  to  disregard  State  law,  504. 
asking  advice  from  court,  563. 
when  advice  decisive,  ib. 
when  not,  ib. 

advisability  of  referring  to  court  in  money  transactions,  563,  654,  655. 
actions,  during  I'eceiversliiji : 

rights   of    action,    coextensive   with    those   whose   estates    they   admin- 
ister, 564. 
may  maintain  action  to  determine  validity  of  bonds,  ib. 
or  to  recover  money  due  company,  ib. 

but  cannot  go  into  foreign  court  without  appointing  court's  author- 
ity, ib. 
permission  of  appointing  court  necessary  to  bring  suits  affecting,  ib. 
interference  with,  by  proceedings  in  co-ordinate  court,  contempt,  565. 
permission  of  court  to  establish  that  mortgage  invalid,  when  necessary,  ib. 
injurious  orders  during  receivership  should  be  cancelled  on  motion,  ib. 
proceedings,  ineffectual  without  control  of  property,  subject  to  rule,  ib. 
property  in  hands  of,  not  subject  to  execution  or  attachment,  ih. 
protection   of   court   extended,  though  property  not   reduced   to  posses- 
sion, 566. 
permission  of  court,  in  garnishment  proceedings,  ib. 
federal  court  will  not  surrender  to  State  receiver,  when,  ib. 
being  already  appointed,  second  application  in  co-ordinate  court  will  be 

dismissed,  ib. 
federal  courts,  when  subject-matter  in  hands  of  State  receiver,  ib. 

petition  to  have  State  court  judgment  declared  paramount  lien,  ib. 
fractions  of  day  considered  in  determining  priority  of  appointment  of,  567. 
court  will  not  appoint,  when  property  already  under  control  of,  ib. 
though  receiver  appointed  by  sister  court  unfaithful,  ib. 
though  questions  raised,  not  raised  before,  ib. 
application  should  be  made  to  appointing  court,  ib. 
possession  of,  cannot  be  affected  save  by  appointing  coui't,  ib. 

unless  prior  appointment  was  a  nullity,  5G8. 
cannot  be  dispossessed  by  assignee  in  bankruptcy,  ib. 
unless  title  subject  to  impeachment  under  bankrupt  act,  ib. 
suits  maintainable  against,  in  other  courts,  if  possession  not  disturbed,  ib. 

by  bondholders  in  federal  court  to  foreclose  and  remove,  5G9, 
where  only  personal  judgment  against  corporation  sought,  ib. 

or  against  receivers,  570. 
property  attached  before  appointment  of,  ib. 

modifying  injunction  to  let  creditor  enforce  judgment  against,  ib. 
termination  of  receivership  divests  appointing  court  of  exclusive  jurisdic- 
tion, ih. 
ordinarily  after  completion  of  sale  and  final  conveyance,  ib. 
jurisdiction  reserved  by  court  after  discharged,  purpose  of,  ib. 

suits  against  receiver,  proceedings  in  rem,  ib. 
where  no  reservation  of  jurisdiction,  ih. 
where  receiver  illegally  deprived  of  property  placed  in  his  charge,  571. 


962  INDEX. 

The  figures  refer  to  pages. 

RECEIVER  —  continued. 

suits  against,  generally,  571. 

must  be  prosecuted  in  appointing  court,  ib. 

not  amenable  in  suit  begun  without  leave  of  that  court,  ib. 

rule  applies  to  suits  for  damages  fur  injuries,  572. 
objection  to  jurisdiction  must  be  taken  by  plea,  573. 
may  set  up  any  defence  in  pursuance  of  right  reserved,  571. 

all  defence  available  to  company,  may  be  pleaded,  ib. 

rights  as  to  pleading  Statute  of  Limitation,  ib. 
not  permitted  to  do  unlawful  act,  572. 
right  of,  to  disaffirm  leases,  ib. 
procedure  to  enforce  claims  against  property  in  hands  of,  573. 

court  may  call  a  jury,  574. 
of  federal  court,  suit  against,  for  damages  for  injuries,  57.5. 
whether  triable  with  or  without  jury,  question  for  court,  574-576. 

where  party  has  constitutional  right  to  jury  trial,  575. 
federal  court's  control  of,  not  affected  by  State  legislation,  579. 
employees  protected  from  evasion  of  exemption  laws,  577. 
suing  without  leave,  receiver  alone  can  object,  ib. 
general  license  to  sue,  in  any  court,  ib. 
federal  act  of  1887,  dispenses  with  leave  of  court,  578. 

applicable  to  suits  in  State  courts,  578,  579. 
where  judgment  in  action  under  act  of  1887,  conclusive,  575. 
of  federal  court,  taxes  levied  by  State  against  property  of,  577. 
when  court  will  direct  interest  paid  on  arrears,  578. 
when  appointment  of,  equivalent  to  removal  of  trustee,  378. 
security  must  be  furnished  by,  to  protect  earnings  from  levy,  501. 
power  of,  to  pay  and  reissue  bonds,  62. 
order  appointing,  when  admissible  in  evidence,  572. 
when  estopped  to  dispute  his  certificates,  682. 
when,  may  question  validity  of  mortgage,  208. 
when,  sufficiency  of  consideration,  ib. 

cannot  question  constitutionality  of   act,  discriminating   against  claim- 
ants, 613. 
whether  court  can  authorize  creation  of  car  trust  by,  354. 
injunction  at  suit  of,  356. 

appointed  to  represent  company  only,  operating  expenses  preferred,  583. 
Hen  of  expenses  incurred  before  appointment,  ib. 
power  of  court  on  appointing,  to  require  back  claims  paid,  599. 
replacements  by,  of  worn-out  property  covered  by  mortgage,  246. 
(See  Compensation  of  Receivers  ;  Expenses  in  Suits,  etc. ;  First- 
Lien    Certificates  ;    Holders   of    Certificates  ;    Liability  of 
Receiver;  Power  of  Court  and  its  Receiver;   Receiver  and 
Manager.) 

RECEIVER   AND   MANAGER, 

of  railroad  company  in  England,  370,  n.,  509. 
office  and  duties  of,  556,  n.  1. 

appointment  of,  though  debt  not  due,  where  security  in  danger,  506,  n.  2. 
receiver  appointed  manager  for  a  limited  period  which  has  expired,  ib. 
(See  Receiver.) 

RECEIVERSHIP   DEED.     (See  Derknture-iiolders.) 


INDEX.  953 

The  figures  refer  to  pages. 

RECITALS, 

notice  of,  implied  from,  88. 

(See  Bonds;  Debentures;  Estoppel.) 
RECORDING   STATUTES, 

instruments  duly  recorded  under,  as  notice,  158. 
deed  of  trust  properly  so  recorded,  ib. 
not  unless  properly  executed,  ih. 

except  where  junior  mortgage  made  subject  to  prior,  ib. 
or  where  junior  mortgagee  has  actual  notice,  ib. 
State  not  prejudiced  by  non-registration,  159. 

(See  ItKGisTKATioN  Laws.) 
REDEMPTION, 

equity  of,  in  grantor  of  trust  deed,  211. 

salable  under  execution,  (7*. 

agreement  to  create  fund  for,  when  does  not  imply  power,  73. 

of  pledged  bonds,  77. 

after  foreclosure  of  mortgages  securing  bonds,  ib. 

REDEMPTION,    RIGHT    OF, 

incident  to  every  instrument  or  transaction  intended  as  security,  805. 

exists  independently  of  agreement,  ib. 

barred  by  foreclosure,  generally,  ib. 

statute  impairing,  unconstitutional,  ib. 

right  lost  by  laches,  ib. 

State  statutes  regulating  right  after  sale,  ib. 

federal  court's  recognition  of,  as  a  rule  of  property,  ih. 

not  applicable  to  mortgage  of  property  in  different  States,  806. 

in  suit  to  redeem,  jurisdiction  in  personam,  necessary,  ib. 

sale  of,  under  execution,  362. 

rights  of  purchaser,  ib. 

sale  while  company  in  possession,  494. 

rights  of  purchaser  at  execution  sale,  362,  806. 

when  purchaser  entitled  to  possession,  ib. 
junior  mortgagee,  when  his  right  cut  off,  806. 

when  barred,  ib. 

when  waived,  750. 
in  redemption  suit,  stockholders  should  not  be  joined  with  corporation, 

807. 
should  appear  that  defendant  in  possession  held  mortgage  title,  ib. 
bill  should  aver  offer  to  pay,  ib. 

REFEREE, 

appointment  of,  to  sell,  effect  upon  rights  of  trustee,  292. 
report  of  silent,  as  to  certificates  when  no  adjudication,  680. 

REFUNDING, 

by  means  of  certificates  of  indebtedness,  36. 

as  effecting  substitution  for  old  obligation,  ib. 

REGISTRATION   LAWS, 

determines   priority  between   judgment   creditors,  without   notice,    and 

others,  261. 
which  leave  judgment  creditors  to  common-law  rights,  ih. 
which  treat  them  as  subsequent  purchasers  without  notice,  ib. 


954  INDEX. 

The  figures  refer  to  pages. 

REGISTRATION  LAWS  — mntinued. 

necessary  effect  upon  judgmeut  lien  attaching  after  mortgage  recorded, 
260. 

(See  Recording  Statutes.) 

RELATION  OF  TRUSTEE  TO  CORPORATION.    (See  Possession  of 

Trustee;  Trustee.) 
RELEASE, 

of  statutory  lien  (which  see). 
REMEDIES   OF   BONDHOLDERS, 
division  of,  into  three  classes,  371. 

those  which  they  have  in  common  with  all  creditors,  ib. 

those  incident  to  mortgage  contracts  generally,  ib. 

those  specially  provided  by  instrument,  ib. 
several  remedies  may  be  pursued  concurrently,  372. 

except  where  Statute  of  Limitations  bars  action  on  bonds,  ib. 
sequestration,  374. 

power  of,  generally  inserted  in  State  lien  statutes,  ib. 
remedies  peculiar  to  bond  and  to  mortgage,  380. 
action  on  bond  by  single  bondholder,  ib. 

where  bond  imports  absolute  promise  to  pay,  ib. 

when  provision  for  sale  by  trustee  no  defence,  ib. 

maintainable  though  mortgage  void,  38i. 

demand  whether  necessary  to  be  shown,  38.5. 

may  be  brought  in  holder's  name,  ib. 

execution  sale  on  judgment  recovered  in,  38L 
passes  companies'  interest  only,  ib. 

mortgage  provisions,  effect  of  on  right,  381. 

where  restricted  by  bond  and  mortgage  provisions,  ib. 

where  only  remedy  is  through  trustee  upon  majority  request,  ib. 

right  not  suspended  by  mere  implication,  382. 
illustrations,  383. 

when  money  lent  on  credit  of  undertaking,  ib. 

special  powers  conferred  on  trustee  not  available  in,  388, 
though  trustee  refuses  to  act,  ib. 
Buits  for  possession  by  trustee,  386. 

where  right  to  bring,  implied,  388. 

depending  upon  business  being  "  unprofitable,"  ib. 

when  maintainable  though  principal  not  in  default,  387. 

not  maintainable  by  junior  against  senior  mortgage  trustee,  388. 

when  action  of  ejectment  may  be  maintained,  ib. 
provision  that  trustee  may  take  possession  on  default,  389. 

remedy  at  law  not  adecjuate  as  to  railroad  mortgages,  ib. 

what  law  governs  in,  390. 
by  trustee  of  divisional  mortgage  after  receiver  of  whole,  386. 
when  trustee  may  enter  without  foreclosing,  ib. 
special,  cumulative  upon  foreclosure  and  sale,  396. 
provision  excluding  remedies  not  enforceable,  when,  897,  n.  4. 
after  rendition  of  decree,  490. 

action  to  set  aside  decree,  ib. 

by  intervention  for  that  purpose,  ib. 
(See  Equity;   FoKKcr.osuuE;    Foijeclosure    and   Sale;   Right   of 
E.ntky;  Strict  Foreclosure.) 


INDEX.  955 

The  figures  refer  to  pages. 

REMEDY, 

of  creditors,  with  claim  for  "  running  expenses,"  358. 
of  bondliolders  to  prevent  sale  under  execution,  360. 

special,  to  enforce  statutory  Ilea.     (See    Kemkuiks   of   Bo^uholdeks; 
Statutouy  Liens.) 
REMOVAL   OF   CAUSES, 

right  must  exist  when  suit  begun  and  petition  filed,  437. 
jurisdiction  attaches  as  of  date  of  original  service,  423. 
right  not  affected  by  State  legislation,  437. 

statute  void,  which  provides  against  it,  lb. 
"controversy  "  within  meaning  of  act,  what  is,  438. 

involving  exercise  by  State  of  eminent  domain,  ib. 
amount  involved  as  ground  for,  439. 
who  may  remove,  a  question  of  statutory  construction,  ib. 

right  restricted  to  defendant  by  act  of  1888,  ib.,  442. 
when  cause  cannot  be  removed  by  stipulation,  438. 

where  binds  parties  as  federal  injunction  would,  ib. 
removal  is  of  the  whole  cause,  445. 

though  effect,  to  bring  in  controversy  between  co-citizeus,  ib. 
federal  court  when  invested  with  full  jurisdiction,  ib. 
action  of  State  court  unnecessary,  ib. 
that  petition  and  bond  filed  in  vacation,  immaterial,  ib. 
service  by  publication  effected  in  State,  retained,  ib. 
after  application.  State-court  action  absolutely  void,  ib. 
progress  of  trial  in  State  court  bars  right,  446. 
ex  parte  orders,  as  lacking  hill  pro  confesso,  no  bar,  ib. 
when  petition  and  bond  must  be  filed,  ib. 
contents  of  application  —  not  necessary  to  allege  citizenship,  when,  ib. 

when  nature  of  defence  must  be  stated,  ib. 
State  court  may  examine  whether  conditions  for  removal  exist,  447. 
formal  requisites  of  record  and  petition,  ib. 
bringing  up  the  record,  ib. 
irregularities  in  removal  do  not  vitiate,  ib. 
what  secured  by  bond  in  removal  cases,  ib. 

State  court  has  no  discretion  as  to  bond,  ib. 

one  surety  sufficient,  ib, 
waiver  of  objections  to  removal  after  eighteen  months,  ib. 
when  citizens  where  suit  brought  should  compose  one  side,  439. 

rule  not  applicable  to  formal  or  unnecessary  parties,  438. 
when  defendants  joined  merely  as  officers,  440. 
corporation,  when  joined  pro  forma,  ib. 
citizen,  member  of  a  class,  suing  for  benefit  of  class,  ib. 
party  wrongfully  excluded  treated  by  federal  court  as  actual  party,  ib, 
when  non-resident  plaintiff  assignee  of  many  joint  litigants,  44L 
where  majority,  citizens  of  State  where  suit  brought,  ib. 
since  1875  matter  in  dispute  ascertained  and  parties  arranged,  ib. 
where  contending  sides  found  to  be  of  different  States,  ib. 
citizen  of  State  suing  consolidated  company  therein,  433. 
where  sole  controversy  between  plaintiff  and  receivers,  439. 
action  against  federal  court  receiver,  ib. 

when  removable  without  regard  to  citizenship,  ib. 
how  far  trustee's  refusal  to  act  affects  right,  441. 


956  INDEX. 

The  figures  refer  to  pages. 
REMOVAL   OF    CAUSES  —  continued. 

where  complainant  and  trustee  citizens  of  different  State,  441. 
introduction  of  new  party  will  not  divest  jurisdiction,  ib. 
w'here  State  party  in  interest  merely,  442. 
where  party  to  the  record  as  well,  ib. 
separable  controversies,  removal  to  Circuit  Court,  ib. 
intervener's  claim,  when  such  a  controversy,  ib. 
claim  for  professional  services,  443. 

proceedings  to  determine  validity  of  bonds  against  company,  ib. 
to  determine  whether  officers  guilty  of  breach  of  trust,  ib. 
when  controversy  did  not  exist  before  suit,  id. 
disputes  over  contracts  with  receiver,  ib. 
creditor's  bill,  when  not  a  separable  controversy,  ib. 
what  does  not  affect  right  to  remove,  ib. 

collateral  issues  connected  with  property  in  State  court,  ib. 
rights  of  judgment  creditors  in  bondholder's  foreclosure  suit,  444. 
fact  that  judgment  creditor  has  filed  cross-bill,  ib. 
that  sheriff  in  possession  of  subject-matter,  ib. 

possession  by  trustees  in  stockholder's  action,  as  affecting  bondhold- 
er's right,  ib. 
that  party  acquired  property  for  purpose  of  suing,  ib. 
motive  not  considered,  ib. 
objection  that  assignor,  real  party  in  interest,  valid,  ib. 
contest  by  removing  party  in  State  court,  not  a  waiver,  ib. 
(See  CiTizEXSHip  of  Corporations.) 
RENT, 

of  office  a  necessary  expense  of  a  railway  company,  33. 

may  be  secured  by  pledge,  ib. 
liability  of  receiver  to  pay  for  occupation,  698. 
(See  Lessor  AND  Lessee.) 
REORGAXIZATIOX, 

general  statutes  governing,  842,  n.  1. 
policy  of  statutes  respecting,  804. 

statutes  operate  not  as  a  revival  but  a  creation,  ib. 
authority  to  reorganize  "  as  new  corporation  "  under  same  name,  ib. 
use  of  term  in  authorizing  statute  creates  no  privity,  805. 
statutes  respecting  does  no  injustice  to  general  creditors,  ib. 
a  mode  of  securing  performance  of  public  trust,  843. 
must  be  subject  to  existing  constitutional  provisions,  ib. 
distinction  between  and  "  consolidation  "  and  "reincorporation,"  845,  n.  1. 
effect  of  statute  declaring  purchasers  a  body  corporate,  846. 
effect  of  omitting  to  follow  directions  as  to  subsequent  organization,  ib. 
special  statutes  governing,  ib. 

as  affected  by  United  States  Constitution,  ib. 

minority  bondholders  not  compellable  to  come  in  under,  ib. 

conclusive  presumption  of  assent  of  minority,  ib. 

principle  underlying  such  presumption,  ib. 
rule  wh'jre  no  provision  against  impairing  obligations  of  contract,  847. 
statute  providing  that  minority  may  be  bound,  valid,  ib. 
principle  underlying  such  legislation,  //;. 
such  statutes  binding  upon  I'nited  States  citizens,  ib. 
statutory  provisions  respecting,  must  be  strictly  complied  with,  ib. 


INDEX.  957 

The  figures  refer  to  pages. 

REORGANIZATION  —  conibiuecl. 

where  scheme  of,  provides  for  stockholders  assenting  within  six  months, 

818. 
statutes  prohibiting  fictitious  increase  of  stock,  27;. 

no  application  to  purchased  rights  of  old  company,  ih. 
statutes  fixing  rate  of  interest  on  loans,  849. 
English  debenture-holders,  statutory  powers  of  majority  of,  ib. 

{)0\ver  construed  strictly,  ih.     (See  England.) 
mortgage  provisions  governing  reorganizations,  850. 
as  to  distribution  of  stock  in  new  company,  ih. 
effect  of  contract  entered  into  while  mortgage  in  force,  851. 

on  distribution  of  capital  stock  where  interest  guarantied,  ih. 
where  mortgage  authorizes  majority  to  define  conditions  of  reorgan- 
ization, ih. 
decree  embodying  majority's  wishes,  ih. 
concession  therein  of  subordinate  interests  to  junior  incumbrancers,  ih. 
to  stockholders  in  old  company,  ih. 
agreements  governing  reorganization,  852. 

bondholders  and  stockholders  uniting  to  purchase,  ih. 
where  object  is  to  reorganize  in  pursuance  of  scheme,  ib. 
effect  of,  upon  issuing  bonds,  4,  n. 

non-assenting  creditor,  rights  of,  852. 
where  guilty  of  laches,  ih. 

court  has  no  power  to  fix  basis  of  agreement,  ib. 
reorganization  decree,  treated  as  contract  between  parties,  ib. 
consideration  for  reorganization   agreement,  preventing  costly  liti- 
gation deemed  sufficient,  ih. 
consideration  for  stockholders  in  old,  becoming  such  in  new   com- 
pany, ih. 
surrender  of  bonds  for  others  in  new  company,  853. 
not  an  extinguishment  of  lien  thereof,  ih. 
agreements  favorably  viewed  by  court,  ib. 
as  preventing  sacrifice,  851. 

no  reason  against  bondholders  causing  sale  to  buy  cheap,  ih. 
pendency  of  scheme,  a  reason  for  refusing  possession  to  divisional 
trustee,  ib. 
non-assenting  creditors  as  to  agreement,  ih. 

extent  of  rights  of  —  not  to  be  prejudiced,  ih. 
agreement  not  binding  unless  carried  out  as  made,  855. 

English  Companies  Act  of  1870,  ib.,  n.  2. 
when  right  to  share  in  benefits  of  scheme  terminates,  857. 
those  who  seek  to  share  must  come  in  on  time,  ih. 
extending  benefits  of,  to  late  comers,  effect  on  sale,  823. 
usual  clause  permitting  minority  to  come  in  after  purchase,  857. 
court  will  not  revise  decree  from  which  clause  omitted,  ib. 
standing  of  stockholders,  not  parties  to  scheme,  ih. 

where  they  neglect  to  perform  conditions  of  receiving  shares,  858. 
agreement  between  stockholders  and  bondholders'  committee  not  binding 
on  company,  8.57. 
stockholders  should  look  to  committee,  ib. 

bondholder  has  not  absolute  right  of  property  in  new  corporation,  859. 
when  relegated  to  ordinary  right  to  share  in  proceeds,  ib. 


958  INDEX. 

The  figures  refer  to  pages. 
REORGAXTZATION  —  continued. 

committee  bound  by  acts  of  its  secretary,  859. 
rights  of  parties  to  agreement,  when  complete,  ih. 
trust  company's  control  of  scheme,  860. 
not  lost  by  unauthorized  acts  of  officers,  ih. 
committee  may  reserve  right  to  pay  bonds  before  maturity,  ib. 
trustee's  discretion  as  to  issue  of  stock  in  new  company,  861. 

stockholders  not  entitled  to  notice  of  trustee's  deliberations,  ib. 
discharge  of  liens  of  assenting  creditors,  when  inferred,  862. 
bondholders  accepting  preferred  stock  in  new  company,  effect  of,  ib. 

how  far  it  affects  their  rights  as  creditors,  ib. 
when  interest  on  income  bonds  regarded  as  dividends,  863. 
priority  of  i:)referred  stockholders'  dividends  based  on  specific  lien,  ih. 
upon  what  such  lien  depends,  ib. 
.   restoration  of  bondholder  as  creditor  when  properly  refused,  ib. 
who  estopped  to  object  to  scheme,  864. 

bondholders  exchanging  old  bonds  for  new  company's,  ib. 
bondholders  acting  as  if  acquiescing,  ib. 
court  will  further  fair  arrangement,  ib. 

passing  over  mere  technical  defects,  ib. 
where  to  interest  of  all  bondholders  to  reorganize,  865. 

decree  will  not  be  avoided  though  principal  not  due,  when,  ib. 
when  unsecured  creditors  may  have  scheme  set  aside,  ib. 
bondholder  using  security  to  obtain  property  at  lowest  price,  ib. 
officers  seeking  profit  at  expense  of  creditors  and  others,  ib. 
officers'  duty  to  obtain  highest  price  for  mortgaged  property,  ib. 
creditors,  court  will  scrutinize  resolutions  of,  ib. 

when  court  will  refuse  to  sanction  reconstruction  by,  ib. 
unsecured  creditors,  arrangement  to  detriment  of,  when  annulled,  866. 

where  arrangement  does  not  tend  to  their  detriment,  ih. 
rights  of  old-company  stockholders  after,  ib. 
agreement  withdrawing  voting  power  from  stockholder,  conferring  it  on 

trustee,  ib. 
earnings,  right  to  enjoin  diversion  of,  ib. 
old  company  liabilities,  effect  of  reorganization  upon,  867. 
reorganized  company  paying  taxes,  not  entitled  to  reimbursement,  637. 
when  purchasing  committee  must  make  up  deficiency  on  resale,  853. 
priority  between  bondholders  and  guarantors  of  intei-est,  129. 
New  York  railroad  acts,  existing  companies  may  purchase  under,  853. 
England,  costs  on  reconstruction  in,  867. 
REPLEVIN, 

to  recover  property  seized  under  execution,  held  wrongful,  359,  n.  1. 
RES  AD.JUD1CATA, 
in  foreclosure,  187. 

(See  Foreclosure  Decrees.) 
REVENUES, 

appropriated  to  State  loan,  injunction  to  restrain  levy  upon,  364. 
(See  Income;  Ixcome  and  Revenue.) 
RIGHT   OF   ENTRY, 

without  foreclosure  by  trustee,  386. 

cannot  be  impaired  by  subsequent  legislation,  301. 
a  property  right  surviving  voluntary  dissolution,  387. 


INDEX.  959 

The  figures  refer  to  pages. 

RIGHT   OF   E'^TRY  — continued. 

must  be  exercised  strictly  according  to  mortgage  provisions,  387. 
request  from  bondholders,  when  essential,  ih. 
when  both  default  and  request  must  concur,  ih. 
when  interest  has  been  paid  but  not  out  of  profits,  388. 
by  trustee  as  ground  against  appointment  of  receiver,  534. 
RIGHT   OF   WAY, 

an  easement  appurtenant  to  railroad  in  its  nature  perpetual,  234. 

position  of  land  never  sole  test,  ib. 

when  land  may  be  outside  of,  ib. 

not  necessarily  the  one  first  located,  ib. 

"when  it  will  extend  to  substituted  route,  ib. 

■when  passes  under  mortgage,  ib. 

depends  upon  whether  acquired  for  railroad  purposes,  235. 
abandoned,  reverts  to  owner  and  not  included  in  mortgage,  ib. 
when  may  be  sold  on  foreclosure,  ib. 

where  company  takes  by  agreement,  mortgagee  of  road  bound  by,  269. 
(See  Mortgage.) 
ROAD   AND   PROPERTY.     (See  Words  and  Phrases.) 
ROAD-BED.     (See  Words  and  Phrases.) 
ROLLIXG-STOCK, 

as  personalty,  opposing  considerations,  341. 

treated  as  personalty  for  taxation  purposes  in  certain  cases,  ib. 

whether  a  fixture,  authorities  conflicting,  336. 

doctrine  of  federal  courts  uncertain,  340. 

not  subject  to  mechanics'  liens  in  Iowa,  ib. 
when  rent  or  price  of,  becomes  prior  charge  on  corpus,  353. 
rent  for  hire,    included   in    "working   expenses"    under   English   act, 

ib.,  n.  4. 
instalments  payable  on  conditional  sale,  when  a  charge  upon  income,  353. 

inferior  to  mortgage  debt  on  distribution  of  estate,  ib. 
vendors  have  no  lien,  unless  reserved  expressly.  344. 
vendor's  rights  as  a  general  creditor  after  reclaiming  under  lien,  354. 
when  passes  under  mortgage  of  after-acquired  personalty,  240. 
passing  under  divisional  mortgages,  241. 

(See  FiRST-LiEN  Certificates;  Power  of  Court  and  its  Receiver; 
names  of  States.) 

SALE, 

under  power,  effective  to  divest  title  without  foreclosure,  302. 

provision  for,  on  default  of  interest,  74. 

prevented  by  payment  of  interest,  when  may  be,  ib. 

of  entirety,  may  be  decreed  by  ancillary  court,  423. 

bids  at,  assertion  of  right  to  avoid  must  not  be  delayed,  750. 

receiver's  certificates  need  not  be  presented  for  payment  before,  683. 

lien  acquired  after,  but  before  confirmation  of,  666. 

of  pledged  bonds,  when  allowable,  77. 

pledgee's  right  to  buy  pledged  property,  ib. 

of  bonds,  no  vendor's  lien  on,  46. 

(See  Bailment  for  Hire;  Conditional    Sale;   Foreclosure   and 

Sale;   Injunction;   Purchaser;   Purchaser's   Rights  at  Sale; 

Sales   of   Moktgaged    Pkoperty;    Setting   aside  Foreclosure 

Sales.) 


960  INDEX. 

The  figures  refer  to  pages. 

SALES   OF   I\IORTGAGED   PROPERTY, 

power  and  duty  of  court  to  supervise  judicial  sales,  765. 

supervision  extends  to  purchasers,  ib. 
court  may  order  sale  by  sheriff  or  receiver,  vphen,  ib. 

by  commissioners,  wlien,  ib. 
where  cash  sale  for  sufficient  amount  cannot  be  had,  ib. 
decree  for  strict  foreclosure,  ib. 
sale  for  benefit  of  all  who  choose  to  participate,  ib. 
objections  to  both  methods,  766. 
reorganization,  obviating  necessity  of  sale,  ib. 
sale  of  property  as  entirety,  ib. 

considerations  determining  propriety  of,  ib. 

where  railroad  property  of  extremely  composite  character,  ib. 

general  rule  when  mortgaged  as  a  whole,  767. 

Ohio  rule,  ib. 

where  total  value  of  entirety  greater  than  demand,  ib. 

rule  laid  down  by  early  cases,  ib. 

tendency  of  more  recent  decisions,  768. 

reasons  for,  ib. 

where  no  bids  for,  separate  sales  of  realty  and  personalty,  769. 

where  road,  partly  constructed  by  mortgagor,  completed  by  succes- 
sors, ib. 

sale  of  section  partly  within  and  without  jurisdiction,  766,  n.  3. 

by  entirety,  of  consolidated  system,  770. 

by  entirety,  under  execution,  ib. 

enjoining  separate  execution  sales  and  directing  sale  by  entirety,  ib. 
postponement  by  court  to  await  better  times,  771. 
whei'e  by  statutory  operation  part  cannot  be  sold,  ib. 

no  postponement  on  appeal  taken  sixty  days  after  decree,  ib. 

adjournment  of  sale  in  progress  by  officer  to  prevent  sacrifice,  ib. 
sale  under  express  power  in  mortgage,  772. 

power  must  be  strictly  followed,  ib.,  773. 

power  to  sell  "  as  provided  by  law,"  ib. 

rule  as  to  selling  by  entirety  applies,  769. 

bars  right  to  redeem,  772. 

no  postponement,  to  ascertain  bonds  due,  ib. 

distinction  between,  and  ordinary  foreclosure  sale,  ib. 
debenture-holders,  right  of  liquidator  to  enjoin  sale  by,  ib.,  n.  1. 
p)lace  of  sale,  rule  in  Maryland,  773. 
advertisement  of  sale  under  power,  contents  of,  ib. 
where  term  of  default  and  of  notice  are  successive,  ib. 
compliance  with  decree  as  to  newspajters,  what  sufficient,  ib. 
place  of  sale,  sufficient  description  of,  ih. 
English  practice  as  to  reserving  bids,  774. 

not  followed  in  United  States,  //;. 
bids,  validity  of  sale  as  determined  by,  ib. 

rules,  same  as  those  at  common  law,  ib. 
deposits  l)y  bidders  ordered  as  security,  775. 
considerations  determining  amount,  ih. 
vendor's  lien,  reserving  as  security,  ib. 

where  property  leased  to  pay  interest,  security  required,  ib.,  n.  3. 
liability  of  bidders  for  loss  upon  resale,  775. 


INDEX.  961 

The  figures  refer  to  pages. 

SALES   OF  MORTGAGED   PKOrERTY  —  continued. 

where  bidders  a  reorganization  connnittee,  775. 
right  of  bondholders  to  pay  purchase-money  in  bonds,  776. 

when  bonds  receivable  at  par,  to  pay  bid,  ih. 
when  unnecessary  to  fix  value,  prior  to  confirmation,  ib. 
waiver  by  general  creditors  of  exchisive  right  to  fund,  776. 
purchase  generally  by  committee  of  bondholders,  777. 

validity  of  such  association  fully  recognized,  ib. 
purchase  by  solicitor  of  committee,  validity  of,  778. 
stockholders,  also,  may  combine  to  purchase,  ib. 
confirmation  of  officer's  report,  ib. 

right  of  objection  of  parties  and  purchaser,  ib. 
Circuit  Court's  exclusive  right  to  confirm  or  reject,  ib. 
effect  of  confirmation  to  render,  invalid  sale,  valid,  ib. 
setting  aside  for  inadequacy  of  price,  775. 

(See  Foreclosure  and  Sale;  Sales,  Setting  aside  Foreclosure 

Sales.) 

SCRIP, 

when  bondholder  may  recover  in  money  though  bond  provide  for,  71. 

SECRET   LIENS, 

in  Illinois,  vendor  must  conform  to  Chattel  Mortgage  Act,  349. 
name  given  to  transactions  not  conclusive,  ib. 
(See  Bailment  for  Hire;   Conditional  Sales;   Lease.) 

SEQUESTRATION, 

bondholder  not  entitled  to,  though  conferred  on  trustee,  388. 
of  earnings,  effect  of  assumption  of  control  by  receiver,  501. 
(See  Remedies  of  Bondholders.) 

SERVANT   AND  EMPLOYEE.     (See  Words  and  Phrases.) 

SERVICE, 

by  publication  under  act  of  Congress,  436. 
agent  for  service  upon,  of  foreign  corporation,  ib. 

SETTING  ASIDE   FORECLOSURE  SALES, 
under  equity  rules  of  federal  courts,  811. 
by  appeal,  ib. 

bill  of  review  charging  error  in  record,  ib. 
original  bill  charging  fraud  or  newly  discovered  evidence,  ib. 
practice  where  bondholders  seek  to  annul  decree  for  fraud,  812. 
where  right  to  make  further  orders,  reserved  in  confirming  order,  ib. 
who  may  except  to  sale,  ib. 

any  one  interested  at  time  of  sale  and  confirmation,  ib. 
not  one  who  has  acquired  his  bonds  thereafter,  ib. 
one  having  mere  right  to  appear  at  accounting,  813. 
right  as  affected  bj'  laches,  ib. 

analogy  of  Statutes  of  Limitations,  ib. 
equitable  principles  apart  from  such  statutes,  ib. 
when  right,  based  on  fraud,  barred  by  laches,  ib. 

where  stockholders  aware  of  director's  misconduct,  no  bar,  814. 
fatal  results  of  laches,  instances  of,  ib. 
assent  to  decree  and  delay,  effect  on  company's  right,  ib. 

61 


962  INDEX. 

The  figures  refer  to  pages. 

SETTING   ASIDE   FORECLOSURE   SALES —  continued. 

bill  of  review,  laches  in  filing,  814. 

laches  as  affected  by  appeal,  ib. 
errors  in  decree  not  reviewable  on  motion,  815. 
where  proper  remedy  is  resale,  ib. 
declaring  purcliaser  trustee,  equivalent  to  annulment,  816. 

a  frequent  form  of  relief,  ib. 
where  director-purchaser  entitled  to  recoupment  on  surrender,  ib. 
where  purchasing  director  a  bondholder,  bonds  must  be  paid,  ib. 
where  president  purchases  in  individual  name,  ib. 
fraudulent  sale  cannot  be  validated  by  legislature,  ib. 
how  far  State  estopped  by  legislation,  ib. 
effect  of  declaring  sale  void  for  fraud,  817. 

corporation  continues  though  sale  of  franchises  otherwise  would  dis- 
solve, ib. 

suit  by,  against  new  purchasing  corporation,  ib. 

where  old  corporation  has  actually  consented  to  sale,  ib. 
declaring  void  as  to  creditors,  effect  on  mortgage,  ib. 

invalid  as  to  bondholders  rejecting  reorganization  scheme,  ib. 

as  to  attacking  creditors,  ib. 

not  as  to  bondholders  taking  stock  in  new  company,  ib. 

various  effects  upon  rights  of  purchasing  bondholders,  818. 

effect  on  purchasing  creditor  who  has  cancelled  judgment,  ib. 
re-establishing  lien  of  judgment,  ib. 
grounds  for  vacating  sale: 

inadequacy  of  price,  when  insufficient,  ib. 

must  amount  to  conclusive  evidence  of  fraud,  ib. 

or  must  combine  with  other  circumstances  of  fraud,  819. 

where  price  exceeds  that  fixed  by  court,  ib. 

setting  aside  for  advance  of  price  before  confirmation,  ib. 

actual  fraud,  facts  and  circumstances  constituting,  how  considered,  ib. 

collusion  between  trustees  and  purchasers,  820. 

affords  ground  of  action  for  actual  fraud,  ib. 

at  suit  of  mortgagor-company  which  has  assented  to  agreement,  ib. 
character  of  relief,  ib. 

collusion  between  trustee  and  corporate  officer,  821. 

between  corporate  officers  and  combinations  of  bondholders,  ib. 

motives  of   directors  immaterial  where  collusion  with  trustee  not 
shown,  822. 

preventing  active  competition  in  bids,  821. 
agreement  between  creditors  to  combine  and  purchase,  how  far  ground, 

822. 
relief  on  ground  of  surprise  and  mistake,  823. 
attorney,  breach  of  duty  by,  as  a  ground,  ih. 
where  same  person  trustee  in  two  mortgages  foreclosed,  ib. 
extending  benefits  of  reorganization  to  bondholders  after  time  passed,  ib. 
sale  before  principal  matures,  when  will  stand,  824. 

SHERIFF'S   FEES, 

where  execution  plaintiff  becomes  purchaser,  718. 

SINKING   FUND.     (See  Words  ani>  Piirasks.) 

SIX  MONTHS'  RULE.     (See  Pkkfekred  Dkbts.) 


INDEX.  963 

The  figures  refer  to  pages. 

SOUTH   CAROLINA, 

statutory  provisions  as  to  issuing  bonds,  40,  n. 
action  on  bond,  no  demand  necessary  in,  :^85. 
constitutional  restriction  upon  consolidation,  4,  n. 
statute  relating  to  trustees  of  railroad  companies,  322. 
judgment  for  personal  injuries,  when  alien,  G27. 

enforceable  against  purchaser  at  foreclosure,  ih. 
code  provision  respecting  judgment  for  damages  against  corporation,  760. 
rule  against  issuing  first-lien  certificates,  ex  parte,  HHH. 
reorganization,  statutes  respecting,  842,  n.  1. 
guaranty  of  bonds  of  connecting  line,  129,  n.  3. 

SOUTH  DAKOTA, 

statutory  provisions  as  to  issuing  bonds  and  borrowing,  40,  n. 
constitutional  restriction  upon  issuing  stocks  and  bonds,  4,  n. 

upon  consolidation,  ib. 
rolling-stock  constitutionally  declared  personalty,  ib. 
STATE, 

holding  majority  of  stock  not  trustee  of  earnings,  373. 
authority  of,  to  guaranty  railroad  bonds,  21, 
may  be  trustee  of  railroad  bonds,  when,  287. 

i-esult  of  statutes  creating  liens  to  indemnify,  ib. 

acts  which  do  not  make  State  trustee,  ib. 
purchase  by,  of  property  securing  bonds  indorsed  by,  valid,  ib. 
statute  declaring  lien  of,  not  restrictive  of  right  to  mortgage,  1G8. 
when  lands  granted  to  company  to  raise  money,  included  in  lien  of,  220. 
corporation  empowered  to  mortgage  in  one,  carries  power  to  others,  when, 

166. 
power  of,  to  order  bonds  paid  in  legal-tender  notes,  72. 
fraudulent  issue  of  bonds  in  exchange  for  State  bonds,  26,  31. 

not  void  as  to  company,  ib. 

(See  State-Aid  Bonds;   Statutory  Liens.) 
STATE-AID   BONDS, 

authority  of  State  to  indorse  railroad  bonds,  21. 
remedies  enforceable  by  State  only,  39. 

effect  as  between  purcliaser  of  road  and  bondholders,  ib. 
over-issue  in  hands  of  bona  fide  purchasers,  59. 
subject  to  constitutional  limitations  existing  when  act  passed,  129. 

governor's  certification  of  guaranty,  ineffective  against  rule,  ih. 

when  act  partly  unconstitutional,  333. 

no  bar  to  enforcement  of  bondholder's  lien,  ib. 

(See  Bondholders;  State;  Statutory  Liens.) 
STATUTE    OF   FRAUDS, 

delivery  to  receiver's  agent,  647. 

STATUTES, 

against  issue  of  bonds,  except  for  money,  labor,  or  property,  60. 
limiting  issue  to  paid-in  stock,  84. 

violation  of,  ib. 
funding  under  provisions  of,  113. 
legal-tender  statutes,  unconstitutionalty  of,  72. 
void,  not  constructive  notice  of  anything,  157. 
conferring  power  to  mortgage  effective  in  other  States,  when,  166. 


964  INDEX. 

The  figures  refer  to  pages. 

STATUTES  —  continued. 

declaring  lien  of  State,  not  restrictive  of  right  to  mortgage,  168. 

of  New  York  restricting  common-law  power  to  mortgage,  174. 

authorizing  mortgages  of  railroad  property  enumerated,  209. 

creating  liens  of  mechanics  and  material-men,  varied  phraseology  of,  273. 

two  classes  of,  ib. 
construction  of  that  creating  mechanics'  liens.  277. 
creating  liens  for  operating  claims,  liens  binding,  279. 
creating  liens  to  indemnify  State  for  lending  its  credit,  287. 

effect,  to  make  State  trustee  for  bondholders,  ib. 
relating  to  trustees  of  railroad  companies,  322. 

regulating  election  of  trustees,  292. 

cannot  override  provisions  of  deed  previously  executed,  ib. 

prescribing  duties  of,  effect  of  on  deed,  296. 

imposing  duties  on  companies,  trustee  in  possession  within  purview 
of,  320. 
declaring  non-residents  ineligible  for  trusteeship,  284. 
respecting  compensation  of  trustees,  705. 
affecting  remedies  only,  constitutional,  376. 

varying  modes  of  foreclosure  as  to  existing  mortgages,  ib. 
providing  that  bonds  not  to  mature  for  specified  period,  409. 
statutes  governing  reorganization,  842,  n.  1. 
of  State,  federal  courts  bound  by  State  court's  construction,  745. 

possible  exception  as  to  constitutionality,  ib. 
of  Congress,  March  3,  1887,  as  to  suing  receivers,  578. 
(See  Mechanic's  Lien;  Recording  Statutes;  names  of  States.) 
STATUTORY   LIENS, 

where  State  indorses  company's  bonds,  323. 

where  issues  its  own  to  company,  ib. 

provision  for  deposit  of  equal  amount  of  company's,  ib. 

eifect  to  make  State  guarantor  or  principal  debtor,  ib, 

not  deemed  created  without  clear  language,  324. 

cannot  be  created  by  implication,  ib. 

from  fact  that  otherwise  clause  merely  declaratory  of  law,  325. 

other  cases,  showing  clear  intention,  must  be  expressed,  ib. 
direct  words  not  necessary,  mere  effect  of  contract  amounts  to,  327. 
construed  like  trust  deeds  as  regards  property  covered,  ib. 
release,  when  company  not  entitled  to,  till  coupons  paid,  328. 
waiver  by  State,  what  amounts  to,  ib. 

authorizing  company  to  issue  bonds  secured  by  mortgage,  ib. 
release,  when  not  prevented  by  constitutional  provisions,  329. 
when  presumed  for  benefit  of  bondholders,  ib. 
whether  can  be  enforced  by  bondholders,  depends  on  statute,  323,  332. 

when  bondholders  may  apply  to  be  subrogated,  324. 

when  may  not,  ib. 

wide  signification  of  term  as  applied  to,  331. 

no  subrogation  except  as  to  bonds  indorsed  by  State,  332. 
where  some  indorsed  and  others  not,  ib. 
where  State  bonds  issued  to  company,  ib. 

State  principal  debtor,  ib. 

company  becomes  liable  as  guarantor  of  genuineness,  ib. 

doctrine  of  subrogation  not  applicable,  ib. 


INDEX.  9C5 

The  figures  refer  to  pagea. 

STATUTORY   LIENS  —  coniinue,!. 

remedies,  special,  can  be  used  by  State  alone,  330. 
bondholder  may  jiroceed  in  ecjnity  when  State  fails,  330. 
when  coexistent  with  guaranty  of  improvement  company,  ib. 

remedy  of  bondholder,  ih. 
unconstitutionality  of  part  of  act  authorizing,  333. 

no  bar  to  bondholder's  lien,  ih. 
subsequent  legislation,  effect  of  upon,  334. 

(See  Liens  ;  State-Aid  Bonds  ;  Vendor's  Lien.) 
STATUTORY   PHOVLSIONS, 

when  presumed  known  to  bondholder,  157. 
forfeitui-e  to  Stale  on  default  of  completion,  ib. 
right  of  corporation  to  mortgage  as  affected  by,  164. 

principle  applied  to  railroad  companies,  ih. 
as  to  petition  of  stockholders  for  guaranty  of  bonds,  117. 
as  to  meetings  of  stockholders,  substantial  compliance  with,  191. 
as  to  issue  of  bonds,  13. 
as  affecting  validity  of  issue,  85. 
the  consideration,  13,  16. 

must  be  money  labor  and  property,  17. 
not  dependent  on  marketable  value,  ib. 
complied  with  when  issued  for  construction  expenses,  ib. 
the  purposes,  13. 

by  railroads  under  New  York  statute  of  1850,  15. 
the  amount,  13. 
the  limit,  18. 

where  must  not  exceed  capital,  17. 
as  to  issue  in  various  States,  40  and  n. 
the  rate  of  interest,  13. 

authority  to  borrow  on  terms  "to  be  agreed  upon,"  20. 
restricting  rate  not  applicable  to  reorganization  agreement,  21. 
authorizing  sale  of  bonds  at  price  deemed  expedient,  20. 
(See  Bonds;  Property;  Overvaluation.) 
STEAM-HEATING   COMPANIES, 

power  of,  to  mortgage  franchises,  171. 
STOCKHOLDER, 

preferred  relative  rank  with  bondholders,  758. 

preferred,  have  same  privileges  and  liabilities,  759. 

priority  over  creditors  must  be  based  on  specific  lien,  758. 

common  to  two  or  more  companies,  28  and  n. 

character  of  holding  as  entitling  him  to  injunction,  33. 

right  of,  to  maintain  action  against  directors,  54. 

consent  of,  requisite  to  mortgage,  191. 

charter    requirement    of    concurrence    for    consolidation,    as    affecting 

mortgage,  ib. 
substantial  compliance  with  statute  requiring  two-thirds  concurrence,  ih. 
two-thirds  consent  under  New  York  manufacturing  act,  192. 
reauthorization  by,  unnecessary  through  company's  change  of  estate,  191. 
may  ratify  unauthorized  mortgage,  196. 
when  may  question  validity  of  mortgage,  203. 
when  estopped  to  deny  validity  of  mortgage,  205. 
effect  of  laches  of,  ib. 


966  INDEX. 

The  figvires  refer  to  pages. 

STOCKHOLDER  —  continued. 

right  to  intervene  when  corporation  fails  to  plead  defence,  417. 
right  when  directors  refuse  to  defend,  467. 

petition  of,  for  guaranty  of  bonds,  117. 

guaranty,  when  court  disposed  to  uphold  as  against,  127. 

assent  of,  to  accommodation  indorsenaent,  1'2(). 

of  construction  company,  when  entitled  to  lien,  279. 

wlieu  not  prejudiced  by  fiduciary  omitting  to  record  lien,  262. 

right  to  question  validity  of  consolidation  after  years,  22. 

right  of,  to  dividend,  when  complete,  498. 

may  combine  to  purchase  at  foreclosure  sale,  778. 

presumed  citizens  of  State  creating  corporation,  in  federal  court,  432. 

(See  Action;  Constitutional  Restrictions;  Corporation;  Income 
Bonds;  names  of  States.) 
STOCKS, 

issued  for  money,  labor  done,  and  property  actually  received,  146. 

subscriptions  unpaid,  held  assignable,  but  not  proper  subject  of  mortgage, 
164. 
rule  in  England,  ib.,  n.  1. 

(See  Conversion   of    Bonds  into  Stock;   Injunction;  Preferred 
Stock;  Words  and  Phrases.) 
STOLEX   BOXDS, 

title  of  innocent  purchaser  of,  before  maturity,  95. 

election  under  mortgage,  to  determine  title  to,  75. 

change  of  numbers  upon,  not  notice  of  larceny,  156. 
(See  Bonds;  Mortgage.) 
STREET-RAILWAY   COMPANY, 

appointment  of  receiver  of  assets  of,  507,  n.  5. 

mortgage    of,    covering  contemplated   extension,   effect  of  transfer    by 
mortgagor,  229. 

chattel  mortgage  on  property  purchased  by  purchaser  of  franchises,  241. 

court's  power  to  continue  receiver  in  possession  of  streets,  645,  n.  1. 

receiver's  right  to  withhold  payment  for  paving,  where  no  lien,  696. 
STRICT   FORECLOSURE, 

meaning  of,  410. 

decree  for,  provisions  of,  ib. 

statutory  regulations  must  be  complied  with,  ib. 

imsuitability  in  case  of  railroad  mortgages,  ib. 
STRIKERS, 

interference  with  receiver's  possession  by,  549. 

rights  of,  to  apply  to  court,  ib. 

sdbro(;ation, 

"equality  is  equity,"  underlying  principle  of,  332. 
bondholders'  right  to,  based  on  natural  justice,  331. 
principle  underlying  bondholders'  i-ight  to  redeem,  ib. 
wide  signification  of  term  as  applied  to  statutory  liens,  ib. 
not  affected  l)y  rule  against  State  being  party  in  federal  suit,  ib. 
of  bonilholilcrs  to  State  rigiits,  169. 
of  bondliolder  who  has  paid  company's  taxes,  637. 
when  lenders  to  pay  for  rolling-stock  not  entitled  to,  633. 
guarantors  of  interest  not  subrogated  to  rights  of  bondholders,  129. 
(See  Statutory  Lien.) 


INDEX.  967 

The  figures  refer  to  pages. 

SUBSTITUTION, 

as  distinguished  from  novation,  :56. 

preserving  lien  of  old  obligation,  ib.,  61. 

(See  Payment.) 
SUPERINTENDENT.      (See  Offickks.) 
SURRENDER   OF   BONDS.     (See  Exchange  of  Bonds.) 

TAXES, 

levied  by  State  against  property  in  federal  receiver's  hands,  577. 
when  court  will  direct  interest  paid  on  arrears  of,  .578. 
fir.Nt-lien  certificates  to  pay.  superior  to  all  liens,  072. 
(See  Words  and  Phrases.) 
TENNESSEE, 

statutory  provisions  as  to  issuing  bonds  and  borrowing,  40,  n. 
aiding  companies  by  purchasing  bonds,  129,  n.  3. 
as  to  after-acquired  property  passing  under  State  lien,  225. 
rule  preferring  claim  for  damage  caused  operating  road,  626. 
reorganization,  statutes  respecting,  8i2,  n.  1. 

TERMINAL  FACILITIES, 

when  covered  by  mortgage  of  road,  235. 

TERMS,    CONDITIONS,    AND    LIMITATIONS.       (See    Words    and 
Phrases.) 

TEXAS, 

statutory  provisions  as  to  issTiing  bonds  and  borrowing,  40,  n. 
constitutional  restriction  upon  issuing  stocks  and  bonds,  4,  u. 

as  to  releasing  State  liens  on  railroads,  ib. 

upon  consolidation,  ib. 
reorganization,  statutes  respecting,  842,  n.  1. 
execution  against  railroad  personalty,  statutes  affecting,  357. 

rolling-stock  constitutionally  declared  personalty,  4,  n. 

TRAFFIC   AGREEMENT, 

when  not  a  lien  though  so  stipulated,  265. 

TRANSFER   OF   MORTGAGED   PROPERTY, 

effect  on  mortgagee's  rights,  229. 
TRUST, 

termination  of,  general  rule,  continues  till  bonds  paid,  292. 
devolution  of,  on  death  of  trustee,  296. 

on  death  of  all  trustees,  ib. 
to  secure  debt,  validity  of,  under  Illinois  statute,  285. 
enforceable  in  federal  courts,  286. 

(See  Breach  of  Trust  ;  Trustees.) 
TRUST   COMPANIES, 

power  to  act  deemed  to  extend  beyond  State  granting  charter,  286. 

TRUST  DEED, 

in  effect,  a  contract  between  company  and  bondholders,  211. 

true  consideration  of,  ib. 
effective  as  a  de  facto  mortgage,  ib. 
mortgage  in  form  of.  when  deemed  aiithorized,  210. 
maxim,  "  once  a  mortgage  always  a  mortgage,"  applicable  to,  211. 


968  INDEX. 

The  figures  refer  to  pages. 

TRUST    DEED  —  continued. 

grantor  of,  has  equity  of  redemption,  211. 
provisions,  prevail  over  statute  subsequently  passed,  292. 
(See  Mortgage;  Trustees.) 
TRUST   FUND.     (See  Investment  of  Trust  Fund;  Trustees.) 
TRUSTEES, 

appointment,  removal,  and  substitution  of,  287. 
inherent  power  of  equity  as  to,  288. 

not  defeated  by  special  legislation,  ib. 

by  formation  of  new  company  by  majority  bondholders,  288,  n.  3. 

by  foreclosure  and  sale  to  new  corporation,  ib. 

by  creation  of  new  debt,  with  new  mortgage,  for  extension,  ib. 
delicate  and  onerous  duties  of,  282. 

requiring  administrative  capacity  and  technical  knowledge,  283. 
legal  capacity  to  be,  ib. 

wlioever  capable  of  taking  legal  title,  ib. 
mortgagee  need  not  be  designated  as,  284,  n.  1. 
selection  of,  for  railroad  mortgage,  282. 

trust  corporations  now  generally  selected,  283. 

duties  of  railroad  trustees,  generally  same  as  others,  308. 

good  faith  required  of,  ib. 

must  guard  against  waste,  ib. 

against  diversion  of  income,  ib. 

to  take  possession  of  trust  property  when  necessary,  ib. 
foreign  corporations,  eligibility  of,  for  trusteeship,  285. 

non-resident's  eligibility  secured  by  State  constitutions,  284. 

disqualification  on  ground  of  non-residence  not  against  public 

policy,  ib. 
State,  when  may  be,  287. 

sometimes  result  of  express  language  of  act  granting  State  aid,  ib. 

State  as  trustee,  equity  will  execute  trust,  when,  469. 
difEerence  between  eligibility  for,  and  power  to  execute  trust,  283. 

not  observable  where  trustee's  domicil  and  property's  situs  the 
same,  ib. 

where  domicil  and  situs  in  different  States,  284. 
eligibility,  acquiring  bonds  to  effect,  does  not  impair,  ib. 

nor  will  resale  after  election  disqualify,  ib. 
grounds  for  removal  of,  288-290. 
becoming  non-residents,  288. 

may  be  enjoined  by  State  court  from  suing  in  federal,  ib. 
acquisition  of  hostile  interests,  289, 

whether  disfiualified  from  representing  more  than  one  class,  ib. 
substitution  for  absence  construed  to  mean  permanent  absence,  ib. 
discharge  of,  cannot  be  by  his  own  act,  287. 

how  effected,  ib. 
not  removable  from  part  only  of  trust,  288. 
when  removable  though  not  served  with  process,  ib.,  294,  n.  1. 
when  appointment  of  receiver  equivalent  to  removal  of,  378. 
vacancies  in  office,  filling,  under  mortgage  provisions,  200. 
notice  to  mortgagor  when  necessary  and  when  not,  291. 
notice  that  will  secure  full  and  fair  representation,  sufficient,  ib. 
vacancy,  when  may  be  filled  by  survivors,  ib. 


INDEX.  969 

The  figures  refer  to  pages. 

TRUSTEES  —  continued. 

acts  void  till  filled,  291. 

trustee  dying  after  bill  filed  for  possession,  ib. 

corapauy  may  act  on  failure  to  fill  vacancy,  ih. 

appointment  of,  by  coinjjany  where  power  reserved,  ib. 

new,  cannot  be  substituted  by  legislature,  for  mortgagee,  292. 
on  death,  estate  devolves  on  survivors,  296. 

on  death  of  all,  court  will  execute  trust,  ih. 

or  it  will  devolve  on  personal  representatives,  ib. 

or  it  will  result  to  company,  297. 

where  trustee  a  public  functionary,  estate  devolves  on  successor,  ib. 
estate,  interest  and  powers  of,  293. 

where  by  trust  deed  defeasance  accrues  on  payment  only,  ib. 
scope  of  usual  form  of  trust  deed,  ih. 
natm'e  of  trust,  what  trust  instrument  makes  it,  294. 

takes  an  estate  sufficient  to  execute  trust,  295. 

takes  fee  though  no  words  of  inheritance,  ib. 
deemed  clothed  with  entire  estate  when  empowered  to  convey,  ib. 

effect  on  subsequent  mortgagees  and  creditors,  ih. 
powers  of,  impliedly  limited  to  administration  of  trust  property,  297. 

not  a  general  but  a  sjiecial  agent,  ih. 
assumption  of  control  by,  generally  left  to  discretion  of,  283,  300. 
duties  of,  owed  severally  as  well  as  collectively  to  bondholders,  311. 

not  warranted  in  following  advice  of  majority,  ib. 
acts  of,  when  binding  ou  bondholders,  487. 

orders  and  decrees  in  suits  by  or  against,  ib. 

discretionary  acts,  489. 

illustrations,  ih. 
acts  of,  when  not  binding  on  bondholders,  ib. 

application  to  invest  trust  fund,  contrary  to  mortgage,  ib. 

in  action  against  trustee  alone  to  adjudge  mortgage  void,  490. 
right  to  defend  bond's  validity  personal  to  bondholder,  ib. 

cannot  alter  bondholders'  rights,  without  consent,  298. 

cannot  bind  them  to  scheme  of  reorganization  postponing  mortgage,  ib. 

cannot  assent  on  behalf  of,  to  prefer  floating  debt,  ib. 
authorized  to  buy  at  foreclosure  with  view  to  reorganization,  308. 

rights  of,  on  abandonment  of  purchase  for  faults  of  bondholders,  ib. 
authority  to  purchase  and  convey  to  new  corporation,  299. 

no  power  to  sell  at  request  of  majority  of  bondholders,  ib. 

exceeding,  may  not  be  taken  advantage  of  by  assenting  bondholder,  ih. 
release  of  mortgage  not  included  in  implied  powers  of,  298. 

power  conferred  by  instrument,  must  be  conformed  to,  ib. 
when  authorized  to  warrant  title  on  sale  of  lands,  295. 
without  authority  to  place  bonds  on  market,  298. 

purchaser,  put  upon  inquiry,  ib. 
quality  of  estate,  how  affected  by  statute,  296. 

duties  prescribed  by  statute  may  be  omitted  from  deed,  ih. 
how  powers  affected  by  appointment  of  referee  to  sell,  292. 
power  to  declare  principal  due,  299. 

power  of,  to  waive  default  in  interest  not  readily  inferred,  301. 
power  of  sale  effective  to  divest  title  without  foreclosure,  302. 
power  irrevocable,  ib. 


970  INDEX. 

The  figures  refer  to  pages. 
TRUSTEES  —  continued. 

power  of,  to  take  possession  and  sell  "  at  option,"  effect,  302. 
right  of  entry  cannot  be  impaired  by  subsequent  legislation,  301. 

may  be  enforced  by  bill  for  specific  performance  or  ejectment,  302. 
not  confined  to  exercise  of  single  power,  803. 

duties  of,  become  active,  critical,  and  delicate  after  forfeiture,  309. 
through  him  both  corporation  and  beneficiary  deal,  ib. 
positive  duty  to  resist  unjust  claims  and  unnecessary  expenditures,  ib. 
on  refusal  to  act  after  default,  bondholder  may  take  action,  310. 
must  comply  with  request  to  take  possession,  ib. 
when  may  proceed  without  request,  ib. 
when  must  proceed  without  request,  311. 
in  case  of  neglect,  bondholder's  rights,  ib. 
request,  from  whom  necessary,  477. 
what  amounts  to,  3(H). 

right  of  trustee  to  decide  on  sufficiency  of  bondholder's  claim,  302. 
whether,  may  continue  suit  based  on  insufficient  request,  477. 
special  powers  of,  not  available  in  action  by  bondholder,  388. 
right  to  deposit  of  bonds  and  indemnity  preliminary  to  action,  300. 
notice  to,  of  everything  arising  in  litigation,  binds  bondholder,  303. 

especially  when  trustee  a  State  official,  303. 
notice  to,  as  to  matters  not  arising  in  litigation,  effect,  304. 
where  held,  not  notice  to  bondholder,  ih. 

when  invested  with  merely  naked  trust,  ih. 
doubtful  State  of  law  as  to  effect  on  bondholders,  307. 
where  held,  notice  to  bondholders,  305. 

where  trust  administrative  and  trustee  regarded  as  agent,  306. 
commencement  of  action  by,  stays  running  of  limitation  statutes,  590. 

in  favor  of  bondholder,  ib. 
in  possession,  315. 

new  duties  and  corresponding  liabilities  of,  315. 

right  of,  to  exercise  corporate  franchise,  ib. 

right  to  operate  road,  ib. 

must  account  to  bondholders  for  income,  316. 

claims  of  bondholders  against  trustee  personally,  ib. 

right  of  each  to  proportionate  share  of  all  moneys,  ib. 

bondholders'   remedy  for   accounting   after  foreclosure   not   merely 

intervention,  ib. 
when  not  held  responsible  for  highest  skill,  317. 
agent  for  company  as  well  as  bondholders,  when,  ib. 
must  account  to  company  and  those  claiming  under,  ib. 
must  manage  property  with  reasonable  care,  etc.,  ib. 
not  bound  as  assignee  of  lease,  made  after  mortgage,  318. 
liability  to  third  persons  based  on  his  certificates  on  bonds,  ib. 
as  common  carriers,  319. 
when  liability  is  personal,  ib. 
when  statute  limits  liability  of,  ih. 
stands  in  place  of  company  with  same  rights  and  liabilities,  ib. 
liability  as  for  negligence  and  nuisance,  ih. 

within   purview  of   statutes  imposing  duties  and  liabilities  on 
companies,  320. 
company  exempt  frfini  liability,  when,  ib. 


INDEX.  971 

The  figures  refer  to  pages. 
TRUSTEES  —  continued. 

view  that  trustees  are  agent  of  company,  321. 
fiduciary  position  of,  ib. 

both  as  to  debtor  and  creditor,  ib. 

must  not  antagonize  others  against  interests  of  company,  ib. 
must  account  for  profits  as  to  securities  purchased  by  liim,  ib. 
cannot  lease  road  to  corporation  when  he  is  director,  322. 
cannot  be  compelled  to  issue  bonds  at  creditor's  suit,  ib. 
after  possession  perfected,  rights  of,  to  earnings,  500. 

application  of  earnings  in  possession  of,  at  foreclosure,  ib. 
apportionment  between  attaching  creditor  and,  ib. 
riglit  of,  to  earnings  of  road,  independent  of  situs,  247. 
surrender  of  possession  by,  318. 

where  possession  to  prevent  foreclosure  and  company  ready  to 
pay,  ib. 
when  should  consult  court,  312. 
when  should  report  to  court,  ib. 
investment  of  trust  funds  by,  313. 

when  instructions  of  instrument  obligatory  upon,  ih. 
departure  from,  by  direction  of  court,  ib. 
of  more  than  one  mortgage,  duties  of,  312. 
when  liable  for  misfeasance  of  co-trustees,  313. 
cannot  delegate  his  authority,  312. 
becoming  permanent  resident  abroad,  ib. 
money  coming  into  hands  of,  application  of,  314. 
should  be  made  to  diminish  indebtedness,  ib. 
accounting  by,  when  action  for,  not  maintainable,  312. 
diversion  by,  of  moneys  applicable  to  bonds,  rights  against,  55. 
directors  as  trustees,  53. 

diversion  by,  enjoined  at  suit  of  bondholders,  53,  n.  3. 
breach  of  trust,  what  amounts  to,  290. 

proper  remedy  for,  removal  by  bondholders,  ib. 
when  cannot  question  validity  of  mortgage,  208. 
character  and  reputation  as  affecting  bond  sale,  282. 
forgery  of  his  certificate  on  bonds,  92. 
duties  of,  not  terminated  by  foreclosure,  292. 

continue  until  discharged  by  court,  or  unanimous  consent,  293. 
functions  cease,  when  property  disposed  of  and  duly  applied,  ib. 
(See  CoMPEXSATiON  OF  Tkustke;    Expenses  in  Suits,  etc. ;  Fraud; 
Pakties;  Remedies  of  Bondholders;  Right  of  Entry.) 
TURNPIKE   COMPANY, 

road-bed  and  fixtures  of,  not  salable  under  execution,  165. 

ULTRA    VIRES, 

may  not  be  pleaded  by  company  to  avoid  bonds,  26,  n.  29. 
bona  fide  holder  without  protection  in  consequence  of,  84. 
issue  may  be  enjoined  at  suit  of  stockholder,  33. 
where  issue  beyond  limit,  to  stockholder's  knowledge,  30  and  n.  2. 
where  transactions  acquiesced  in  by  stockholders,  122. 

action  for  damage  resulting  from,  not  maintainable  against  officers, 
ib.,  n.  1. 
guaranty,  whether  valid  to  bona  fide  purchaser,  122. 


912  INDEX. 

The  figures  refer  to  pages. 
UL  TRA    VIRES  —  continued. 

by  transportation  company  to  brewing  company,  121. 
by  brewing  company  of  customer's  lease,  124. 
by  brewing  company  of  hotel-keeper's  rent,  ib. 
of  obligations  of  one  corporation  by  another,  in  England,  114,  121. 
(See  Guaranty  of  Bonds.) 

UNCALLED   CAPITAL.     (See  Capital.) 

UNDERTAKING, 

English  construction  of  use  of  word,  257. 

where  mortgage  covering,  held  not  to  entitle  mortgagee  to  possession, 
256. 

operates  as  pledge  of  tolls  and  property,  ih. 
pledge,  when  does  not  pass  uncalled  capital,  ib. 
when  rights  of  debenture-holders,  secured  by  pledge,  attach,  258. 
pledge  of,  effect  as  to  English  debentures  thereby  secured,  257. 
ceasing  to  be  a   going   concern,  floating  security   enforceable,  258, 
n.  1.  ^ 

mortgage  of,  to  secure  debentures  of  steamboat  company,  257. 
of  a  railway  company,  ib. 

USURY, 

when  issue  of  bonds  is  usurious,  20. 

■when  not,  ib. 

court  not  empowered  to  disregard  laws  against,  683. 

when  statute  repealed,  bonds  negotiated  at  less  than  par  valid,  20. 

UTAH, 

statutory  provisions  as  to  issuing  bonds,  40,  n. 

constitutional  restrictions  upon  issuing  stocks  and  bonds,  4,  n. 

upon  consolidation,  ib. 
statutes  respecting  mortgaging  after-acquired  property,  258. 
reorganization,  statute  respecting,  842,  n.  1. 

liabilities  rising  out  of  franchises  preserved  from  effect  of  alienation,  4,  n. 
rolling-stock  constitutionally  declared  personalty,  ib. 

VENDORS.     (See  Vendor's  Lien.) 

VENDOR'S  LIEN, 

same  as  when  property  parted  with  through  false  representations,  271. 

effected  either  by  reserving  title  or  fixing  lien,  345. 

unaffected  by  prior  general  mortgage,  ib. 

reserving  at  sale  of  mortgaged  property.  775. 

mortgage  lien  generally  postponed  to  rights  reserved,  345. 

when  sui)erior  to  mortgage  of  after-acquired  property,  270. 

extends  to  persons  advancing  money,  346. 

director,  when  entitled  to  benefits  of  rule,  ib. 
as  to  personalty,  271. 

on  sale  of  rolling-stock  no  lien,  unless  reserved,  344. 

none,  on  sale  of  lionds,  46. 

priority  of,  where  property  sold  is  a  fixture,  271. 

where  fixtures  become  part  of  real  estate,  ib. 

where  readily  detachable,  ib. 
on  sale  of  machinery,  272. 


INDEX.  973 

The  figures  refer  to  pages. 
VENDOR'S   LIEN  —  continued. 

when  defeated  by  vendor's  acts,  ib. 

where  not  asserted  till  after  foreclosure,  272. 
where  vendee  records  deed  placed  in  his  hand  by  vendor,  ib. 
after-acquired  property  chaise  as  affecting,  342. 

devices  to  secui'e  priority  over  lien  of  clause,  343. 
lease,  ib. 

conditional  sale,  ib. 
reservation  of  lien,  ib. 
effect,  where  vendor  turns  a  conditional  into  an  absolute  delivery,  273. 
where  lost  by  rejection  of  bond-consideration,  753. 
lien  declared  by  statute  in  favor  of  creditors,  34.5. 
preference  of,  over  prior  general  mortgage,  ib. 
after  reclaiming  property,  rights  of  vendor  remaining,  Sol. 
recognized  by  return  of  property,  645. 
by  payment  out  of  proceeds  of  sale  of,  646. 
acquired  after  sale  in  foreclosure,  but  before  confirmation,  666. 
(See  FiRST-HEN  Certificates.) 
VERMONT, 

statutory  provisions  as  to  issuing  bonds,  40,  n. 
right  of  railroad  to  mortgage  all  personal  property,  595,  n.  5. 
statute  giving  preferences  over  railroad  chattel  mortgages,  617. 
statute  relating  to  trustees  of  railroad  companies,  322. 
reorganization,  statutes  respecting,  842,  n.  1. 

non-assenting   bondholder,  a  tenant  in   common  with   reorganized 
company,  46,  n.  3. 

VIRGINIA, 

statutory  provisions  as  to  issuing  bonds  and  borrowing,  40,  n. 
reorganization,  statutes  respecting,  842,  n.  1. 

VOTING, 

power  should  be  used  for  advantage  of  all,  not  majority,  312. 
by  proxy.     (See  England.) 

WAIVER, 

of  statutory  lien  by  State,  328. 

(See  Default.) 
WASHINGTON, 

constitutional  restrictions  upon  issuing  bonds  and  stocks,  4,  n. 

guaranty  of  bonds,  129,  n.  3. 

mechanics'  liens  in,  276. 

rolling-stock,  mortgage  of,  void  unless  recorded  as  chattel  mortgage,  340. 

constitutionally  declared  personalty,  4,  n. 
liabilities  arising  out  of  franchises  preserved  from  effect  of  alienation,  ib. 
rule  as  to  title  paramount  in  foreclosure,  not  changed,  396. 

WASTE, 

to  prevent,  as  a  ground  for  receivership,  527. 
mere  disuse  not  waste,  ib. 

WATER   COMPANIES, 

whether  subject  to  doctrine  of  preferential  claims,  593. 
distinction  between,  and  railroad  companies,  ib. 


974  INDEX. 

The  figures  refer  to  pages. 
WATER   COMPANIES  —  continued. 

power  of  court  to  authorize  first-lien  certificates  by,  670. 

when  plant  of,  salable  under  execution,  165. 
WEST   VIRGINIA, 

statutory  provisions  as  to  issuing  bonds,  40,  n. 

guaranty  of  bonds,  129,  n.  3. 

constitutional  restriction  upon  consolidation,  4,  n. 

rolling-stock  constitutionally  declared  personalty,  ib. 

reorganization,  statutes  respecting,  842,  n.  1. 
WINDING-UP  PROCEEDING, 

unpaid  creditor  entitled  to  ex  dehilo  justitice,  459. 

mortgagees  may  maintain,  though  entitled  to  receivership,  506,  n.  2. 

in  England,  378,  842,  n.  1. 

WISCONSIN, 

statutory  provisions  as  to  issuing  bonds,  40,  n. 

hypothecation  of  bonds  held  to  be  an  issue  under  statute  of,  16. 

stipulation  upon,  as  to  accounting,  17. 
rolling-stock  treated  as  personalty  for  taxation  purposes  only,  341. 
reorganization,  statutes  respecting,  842,  n.  1. 
WORDS    AND   PHRASES, 
*'  all  other  property,"  130. 
"apparatus,"  131. 
"  appurtenances,"  ib. 
"charge,"  ih. 
"claims,"  132. 
"compromise,"  ib. 
"consolidation,"  ib. 
"  corpus"  133. 
"earnings,"  ib. 
"first-mortgage  bonds,"  ih. 
"franchises,"  134. 
"fuel,"  135. 
"  going  concern,"  136. 
"  income  and  profits,"  ib. 
"  income  and  revenues,"  ib. 
•*  in  such  case,"  ib. 
"labor  and  supply  creditors,"  137. 
"laborer,"  ib. 
"  lien,"  ib. 
"materials,"  138. 
"  maturity,"  ib. 
"  moneys,"  ib. 
"  net  earnings,"  ib. 
"operating  expenses,"  140. 
"past-due  interest,"  141. 
"  preferred  stock,"  ib. 
"profits  used  in  construction,"  ib, 
"property,"  142. 
"  protected,"  ib. 
"railway,"  ib. 
"road-bed,"  143. 


INDEX.  975 

The  figures  refer  to  pages. 
WORDS    AND   PHRASES  — con/mwed 
"road  and  property,"  143. 
"  servant  and  employee,"  ib. 
"  sinking  fund,"  144. 
"  stock,"  ib. 
"  tax,"  ib. 

"  terms,  conditions,  and  limitations,  145. 
"  written  assent,"  ib. 

WRITTEN  ASSENT.     (See  Words  and  Phrases.) 

WYOMING, 

statutory  provisions  as  to  issuing  bonds,  40,  n. 
constitutional  restriction  upon  consolidation,  4,  n. 


/ 


CO 

CO 

en 


o 


"^/SiUAINaiftV^ 


5    1     <^— '    ^ 


so 


^.\liL  uimiiiJ//^ 


5 


"^XiUDNVSOl^ 


^10SANCEI% 
o 


.\WEUNIVERS/A 


^TJUDNVSOV^^ 


^tfOJIWDJO'^ 


^5jaEUNIVER% 


"^UDflVSOl^ 


v^UKANCEl^y.  ^^tUBRARYO/^       ^^IIIBRARY 


%aaMNn3ftv 


\oi\mi^^    \Qi\m'i 


^.OFCAllFORij^ 


^^WE•UNIVER%. 


^lOSANCEl^^ 


^•OFCAllFOft^      ^OFCAllFOff^ 


^lOSANCEl^K 
o 


v/^a3AJNn-3ttv 


<5^-UBRARYa^. 


%odnv3jo=^ 


-^V\EUNIVE1?% 


^LOS-ANCEl/ 

i 


■^/Sa3AINil3ViV 


imANCEUr^ 


^OFCAUFOI?^      ^OFCAUFO^/' 


j*3.i)iv)iHn.iv!^ 


.5WEUNIVERS//i 


^lOSANCElf.^ 


rt  i?,5      .rf»*». 


^. 


''>>rwi»iMf»  -wi^  ^ 


i^-UBRARYO^, 
Iff 


4^1-UBRARYar 

u3  i     <  z""'  'S 


'/0.iuwM«in-«>' 


<    &    r  I  r=r 


}*e      I      ■  1  J* 


\imm((tf^      ^mm/^    ^mumcj, 


JBRARYO^^ 


•CAllFOff^ 


<     g 


aOFCAIIFO% 


5^        '  I    ^  5* 

^^<?Aavaan# 


.5jt\EUNIVER%. 


5,MEUNIVER% 


*^i:?uDwsoi^ 


a***- 


UC  SOUIHI  UN  fil  lillJNAI  I IIIHAHY  f  ACII  |[Y 

AA    000  918  698    2 


<$         

o  r      /T c: 

CO 


"^/smiHM^ 


s 


I  Jl  Ig    %. 


m\ms//j 


m\ms/h 


IINVW"^ 


o  _ 

09 


3 

%a3AINa-3ViV^ 


v^lOSANCflfX^ 

s 


£=      .< 


^tUBRARYQc^ 


^>Nt-UBRARYQ^. 


^^OJITVJJO^ 


^OFCAUFOftij, 

o 
>     V/_  /^ 


^^OJIIVJ-JO"^ 


^.OFCAIIFOM^ 


^''^AMVHfln-^^'^     "^^/?i.HVHan-v^'^ 


,5!i\EUNIVETJSy4 


^TiUDNVSOV'^'^ 


jr        =3 


.^WEUNIVER% 
-•    '-    g 

aa  -- 


;i>^^ 

^ 


IIBRARYO^^ 


5,SNtUBRARY(3A 


^5>IEUNIVER%       ^lOS-ANCfUr^ 


►JITVJJO'^      ^^OJIWDiO'^         "^XilJDNVSOV^       "^/JdaAINfl  3ftV^ 


CAllFOft^      ^OFCAllFOftjk 


.5jl\EI)NIVER%. 


MVNPn^N^ 


%;(iAiMn.iv\\ 


§  1  ir^  %   3 


^mivDiO^      ^tf( 


^lOSAKCEUr^        ^OFCAUFORi^      ^OF 


"^/^tHVXJinaV^     "^'^01 


UNIVERJ//) 


I 


o,lOSANCEl£j;> 

gc     ■>'*S.         s  "Sri 
O 


%aaAiNft-3\<v^ 


"^^OJIIVJJO^      '^^OJIIVJJO'^  '^J^'UDNVSOl^ 


I  i( 


UNIVERS//) 


^lOSANCElfj^ 


> 

■v/cjijAiwn.JuN:^ 


aOFCAIIF0%       ^OFCAUFOftjk. 


=0        ~ 


^JOiHVHQIUV^        i^a>iv)iiin-^>J^ 


«^^^\E•UNIVER£'4       ^l( 


'^rjn«wv«m>^       "^/o 


[JBRARY<?A       -j^lUBRARYd?,^^ 


>- 


^j<J\E  UNIVERSE/) 


5j.       ^lOSANCEl^  ^UBRARYO^,       ^' 


